The development space in inner Melbourne and Sydney is set to be severely challenged. Conversations between Secret Agent and various developers over the past month have revealed their increasing anxiety about potential settlement issues. These developers, who have settlements due in the next 18 months, are worried that many of their apartments may not be able to settle due to the restrictions placed on foreign buyers by local banks. This is likely to have substantial implications.
For some time now, developers have used successful business models to sell their projects directly to Asia. Sales companies who specialise in selling unseen apartments to the Chinese market have made large financial gains. These apartments, many of which are tiny by local standards, have been purposely designed for the overseas market. Committed contracts, once thought to be rock solid, are now on shaky ground.
To understand the problem at hand, let us consider a hypothetical situation. An investor group, on behalf of a developer, sells a small two bedroom CBD apartment to a buyer based in Shanghai. The buyer pays $714,000 for the 68sqm apartment, which is $10,500 per square metre, and pays a 10% deposit. Since the transaction was entered into 12 months ago, the investor has no stamp duty to pay at settlement. It so happens that this purchaser defaults. The developer gets to keep the 10% deposit minus fees. The problem is that there is a need to sell the apartment to someone else.