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The Risk Management Tool Developers Can’t Afford to Ignore
In a volatile market, transaction risk management sits at the top of the agenda for every developer and investor.
It is a priority that title insurance has been quietly addressing in the US and UK for years.
First Title is an Australian leader in title insurance, a one-off policy which shields property buyers and owners from financial losses caused by title defects and other ownership issues, plugging a critical gap in real estate risk mitigation.
At a roundtable hosted by The Urban Developer last month, First Title national sales director, commercial property Billy Dent said it is already used in most transactions across the UK, US and Canada—and Australia is catching up fast.
“Australia has a relatively straightforward title system” Dent said. “While we cover many of the risks reflected on title, we also provide protection against off-title and transaction-related risks.
“What asset owners haven’t realised is that title insurance goes a whole lot further than the title itself.”
The Torrens title system has historically protected asset owners in Australia, reducing the perceived need for Title Insurance.
But times, and risk appetites, are changing.
Rise of non-bank lending
Non-bank lending has plugged a major funding gap as banks pulled back, and those lenders are becoming increasingly sophisticated in how they protect deals from day one.
“Investment committees are becoming far more stringent in what they approve,” Dent said.
“They’re commissioning additional reports and pushing their due diligence further than ever before.”
MinterEllison partner Adrian Rich, who also spoke at the roundtable, said that transactional due diligence can quickly become an expensive exercise.
“If you’re buying a shopping centre with 200 tenants and reviewing each lease individually, you’re already deep in costs before you’ve even decided whether the deal stacks up,” he said.
“Looking only at the top ten tenants by income leaves a significant amount of risk on the table. Something like title insurance can cover that gap while you’re still assessing and pricing the deal.”
Saying yes to the deal
Beyond standard coverage, First Title offers bespoke solutions tailored to complex transactions.
“Clients can come to us with problems that have arisen mid-transaction and we can assess those on their merits, transferring the risk via policy endorsements in some cases,” Dent said.
“Or it can be used as a forward-looking risk mitigation strategy, covering an unknown issue discovered after settlement if the purchaser takes out a policy.”
The result is that lenders have greater confidence to proceed.
“They know there’s something sitting behind the deal as a risk management strategy,” Dent said.
With commercial non-bank lenders facing greater scrutiny from regulators and institutional investors, First Title is receiving a growing number of inquiries from lenders wanting title insurance embedded in their transaction process.
“As these lenders grow and attract more sophisticated institutional backing, those investors are asking about best practice, and title insurance is one of the first things they raise.”
Market volatility, market opportunity
Australia’s property market is running at two speeds, with prime and secondary assets performing very differently.
But demand from developers remains strong, according to Colliers director Brendan Hogan.
“It’s a very interesting time. We’re still seeing significant demand from developers across the board,” Hogan said.
Whether it’s encroachments, easements, survey errors, legal discrepancies or any number of issues that can surface during a transaction, title insurance offers a solution, Dent said.
And crucially, the policy lasts for the lifetime of ownership.
“Individually, these issues might seem manageable, but together they can be deal-breaking,” Dent said.
“When you consider the cost of the policy and the fact that you’re covered for as long as you own the asset, title insurance becomes one of the most powerful tools in your arsenal.”
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