Bank ‘Blacklists’: A Classic Case of Cutting off The Nose to Spite the Face

This week we have seen another example of shortsightedness in the banking sector with ANZ bank tightening its restrictions on lending to apartment buyers in 18 suburbs in Brisbane and seven in Perth due to “growing fears” of an oversupply in Australia’s capital cities.

ANZ’s red-flag comes a little over a month after Citi clamped down on lending in 90 ” blacklisted” suburbs around Australia. The big-four bank issued a list of 25 suburbs in which loan to value ratios will be capped at 80 per cent of the apartment’s value.

The Reality of the Situation

From the outset, it is prudent to acknowledge that there are indeed pockets of oversupply in nearly all capital city markets in the country.

Anyone with an ear to the ground would have realised this 12-24 months ago when the development boom was under way and every man and his dog was launching an apartment project.

It’s true. There will be some immediate, short-term pain for investors that are unable to complete transactions as a result of APRA-imposed lending restrictions, prompting a downstream ripple effect for developers, builders, subcontractors and product suppliers as money dries up and the cookie starts to crumble.

ANZ’s announcement mirrors the sentiments of the Reserve Bank assistant governor Luci Ellis last week that it was “crunch time” for Brisbane’s apartment market.

But this is the reality of a self-correction and, quite frankly, a move that will clear the decks and allow for the marketplace to sensibly recalibrate.

The Silver Lining is in the Data

In a recent research report prepared by Urbis for Realm Projects, the medium to long-term outlook for Brisbane suggests that every cloud does indeed have a silver lining.

Whilst it will take some time to absorb the stock that has been developed, there are several factors that suggest we won’t experience “blood on the streets”, as some punters would suggest.

According to Urbis, the data that matters lies within the settlement statistics.

In Brisbane, we saw 3,012 apartments settle in 2015 and 7,064 in 2016. To reiterate, these are the finished and completed stock.

Moving forward, the settlement of active apartment projects across inner Brisbane is projected to peak in 2017 with 7,624 apartment settlements.

And now, due to a lack of new project launches, future settlements will begin to decrease to 5,691 apartments in 2018, reducing to 2,352 in 2019 and only 396 settlements expected in 2020.

To give you some context, it is my belief that the underlying demand for new apartment stock in Brisbane lies somewhere between 3,000 and 5,000 new apartments per year.

Managing director of Realm Projects, Shane Foley said that Realm requested an analysis from Urbis to provide “the real numbers behind what we are seeing on the streets.”

The cranes are starting to come down and not being replaced. By 2019, the market will be a very different landscape with limited projects under construction and very limited new projects in pre-sales leading to an undersupply. What that means to potential purchasers, is that right now and for the next 12 months or so, it is a particularly good time to buy whilst there is some additional supply in some pockets of the market and developers compete for sales.”

It’s Like Giving Birth to an Elephant

For anyone that’s ever undertaken a development, they’ll know that they don’t happen overnight. As some say, it’s like giving birth to an elephant!

The gestation period, as it’s affectionately known, for a development project goes a little something like this:

  • Acquire the site                      1-2 months
  • Design the project                 2-3 months
  • Get an approval                     6-12 months
  • Obtain pre-sales/funding    3-12 months
  • Construction                          12-24 months
  • Settle the project                   1-3 months

The best-case scenario, then, is a two-year exercise for a small residential project – and five years or more for a large development.

To put it simply, if you can get a project established in the next twelve months, you’re likely bringing it to market in 2019 (best case!) and completing it in 2020-plus.

The competitive landscape will be very different by that stage, particularly given that apartment rentals are being absorbed better than expected, driven mostly by Gen Y’s preference for apartment living.

Oh, and Don’t Forget the Underlying Growth Fundamentals!

In true half-glass-full fashion, it is probably prudent to recognise that the underlying population measure (i.e. net interstate and net overseas migration) has started to turn around, along with a bounce in employment growth in inner Brisbane.

And finally, let’s not forget about the once-in-a-generation wave of infrastructure that is currently being built. Repeat … currently being built! These include:

  • Cross River Rail ($5.4B – commencing late ’17)
  • Queens Wharf Integrated Casino Resort ($3b – under construction)
  • Brisbane Airport Runway Duplication ($1.4b – under construction)
  • Kingsford Smith Drive Upgrade ($300m – under construction)
  • Howard Smith Wharves ($100m – under construction)
  • Brisbane Metro ($1b+ – 2019 commencement)

And, Might I Add, There’s a Serious Structural Shift Under Way Too!

What is it, might you ask? Well, it has to do with two things; demographics and urbanisation.

With respect to the demographics, we’re seeing an unprecedented wave of Gen Y’s (~4.4m nationally, the largest single demographic in our population distribution!) move out of home and into the urban centres.

You don’t need to be a demographer to realise that the apartments in Fortitude Valley, Newstead, South Brisbane and West End are being occupied by young (sub-35), Betoota Advocate-reading, Lululemon-wearing, Poke-bowl eating, Sea Deck-drinking hipsters. And the cheaper they are, the more popular they’ll be!

And don’t even get me started on the downsizers!

Secondly, our cities are densifying at an unprecedented rate. Apartments will represent a larger portion of the housing pie than ever before. And that’s not going to go the other way in my lifetime, that’s for sure.

So, What’s This all Mean?

Well, it means that most of us are simply getting caught up in the media hype and failing to observe the underlying data.

The very smart, local developers (think major player in South Brisbane!) are actually buying sites when others are running for the hills based on yesterday’s data.

They’re looking beyond their nose, despite others trying to cut it off.

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”  — Warren Buffett


Adam Di Marco is the founder and publisher of The Urban Developer. He is also the managing director of Di Marco Group, a Brisbane-based boutique property development business and executive chairman of CityShape, a disruptive big-data start-up for the property industry.

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