Throughout this year we have focused on changes to the property development and investment landscape, with a particular focus on the growing and important non-bank lending sector. Although this sector remains largely unregulated, changes made in 2018 to both the Financial Sector (Collection of Data) Act and the Banking Act have opened the possibility of more regulation in the future.
The looming Federal and NSW State Elections, and the potential for a change of Government at the Federal level (and possibly even state level), combined with a very volatile and uncertain global geo-political environment point to 2019 being a year of greater challenges across all investment sectors, including the property sector.
In this Newsletter we briefly touch on some issues which may need to be considered in the property development and financing markets in 2019.
POSSIBLE ISSUES FOR 2019
1. Greater regulation of non-bank lending
As mentioned above, 2018 resulted in the laying of regulatory groundwork for possible further regulation of the non-bank lending sector.
Care needs to be taken to ensure that enforcement of non-bank lender’s rights in respect of problem loans does not lead to community backlash or horror stories such as those which have been aired at the Hayne Royal Commission as this could result in excessive regulation of the sector.
As the non-bank lending sector is essentially the life blood of development finance in the current market, any over regulation of the sector could have broad community and economic consequences.
2. Potential for more onerous provisions being included in finance documents
We have recently seen changes in lender attitude towards certain matters found in development and investment finance documents which are adverse to the interests of borrowers.
As markets become more uncertain, lenders tend to tighten up their contractual terms which may further impede financing of property in 2019.
We have seen default rates of interest calculated by banks at margins over overdraft rates (rather than the normal base rate applicable to the loan) and default margins increase from the usual 3% to 4.5%.
We have also seen lenders not agree to certain qualifications of their rights which previously were agreed to as a matter of course.
Borrowers need to be very careful in identifying such changes and endeavour to negotiate out of them.
3. Interest in new asset classes
It is clear that housing affordability remains a key issue on which both sides of politics want to make inroads. As a result, it is likely that there will be a push to develop structures which facilitate the development of housing which is more affordable to buy and rent.
The recent announcement by the Australian Labor Party as to the provision of incentives to developers of this type of property is an example of why developers who invest in this type of housing will get government support.
Build to rent
There is also more focus on progressing the development of the build to rent sector, although the changes to government regulation as well as taxes and duties necessary to really push this sector along still need to be discussed and implemented.
Student accommodation and aged care
Student accommodation and aged care facilities should continue to be seen as important and growing real estate asset sectors.
The trade war between the US and China may push more Chinese students into the Australian education system.
The upcoming Federal Inquiry into the aged care sector may lead to better regulation of that industry and make aged care more affordable for families, thereby driving further growth. The increasing number of baby boomers who will need to consider aged care facilities will also drive a new way of thinking as to what these facilities look like and the services and types of accommodation they need to offer.
The popularity of developments which provide communal facilities for tenants who pay for small individual premises but have the use of the communal facilities on offer is likely to increase due to affordability and lifestyle considerations.
4. The conflict between regulation and community concerns
Congestion and overdevelopment have been raised as significant concerns by the community, particularly in Sydney and Melbourne. Notwithstanding this, certain policies have been put forward by the Labor Party (limiting negative gearing to new property and providing financial incentives to develop affordable rental properties) which are likely to promote more development of new housing thereby potentially making congestion and overdevelopment worse.
Given community concerns, the location and nature of such development will need to be carefully regulated at local council and State level to avoid inflaming negative community and voter concerns.
ALL THE BEST FOR 2019
While the above may be matters to think about in 2019, for now we want to wish you a happy and healthy Festive Season and 2019.
Enjoy your well-earned break and come back fresh in 2019 energised to deal with what will no doubt be a challenging year but one in which new opportunities are sure to arise.
We will be available during the Xmas/New Year period to discuss any urgent matters you may wish to consider and look forward to catching up with you in 2019.
I look forward to introducing you to my new publication in the first quarter of 2019.
Peter Faludi Consulting
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The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.
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