There are more reports surfacing that Chinese investors are struggling to settle on their Australian property purchases, hindered by tighter lending restrictions from Australian banks and a crackdown on capital outflows by Chinese regulators.
And that’s led to some investors forfeiting their deposits, or having to sell their property at a loss.
According to Ming Li, a real estate agent in Melbourne’s eastern suburbs who specialises in selling Australian property to Chinese investors, around 80% of Chinese buyers will not be able to settle on their properties because of trouble obtaining finance.
“The Melbourne apartment market is cooling down,” he told the Australian Broadcasting Corporation.
“It is kind of the oversupplied market, and the Chinese investors are losing their interest in buying an apartment in Melbourne. The capital gains return is so low.”
Li says that a major factor hindering settlements was the decision from Chinese regulators earlier this year to tighten restrictions on capital outflows from China, including for property purchases overseas.
“The Chinese government’s new policies only allow Chinese individuals to transfer about $US50,000 overseas, per head per year,” Li said. “If it is more than that amount, they need to submit [an] application to authorities, and it becomes harder and harder.”
Earlier this year, Li told The Australian that Melbourne’s off-the-plan apartment market was “the worst I have seen in the last 10 years”, citing problems with obtaining finance to settle to settle on their properties.
The stricter rules from Chinese regulators stress that Chinese citizens cannot purchase FX for overseas investment, including for buying houses. To enforce this, they have tightened scrutiny over large currency transactions leaving the country.
They have also banned individuals from lending their annual FX quota to another person, something that had been permitted in the past.
Clearly these restrictions are still having an impact on Chinese buyers, at least in Li’s opinion.
And he’s not the only person in the industry who is saying that.
Harry Triguboff, founder and owner of property developer Meriton Group, told the Australian Financial Review earlier this month that he is now assisting some Chinese investors who are having trouble settling on their apartments, providing about $200 million of the $1.4 billion worth of apartment sales he expects to make this year.
“Two years ago I didn’t lend anything,” Triguboff told the AFR. “Now, [I’m lending] maybe $200 million. It might go up to $400 [million].
“The Chinese government is making it hard for them. That is the biggest problem,” he said.
Triguboff also said that a reluctance from Australian banks to lend to foreign buyers was also contributing to the problem.
While Triguboff is providing a short-term solution to address the problem, it does raise concerns about Chinese demand for property in the medium-to-longer term should capital controls and local lending restrictions persist, potentially weighing on property prices and increasing the risk of financing problems for developers.
This concern is amplified by a still-enormous pipeline of apartments that are currently being built, largely concentrated in Australia’s eastern capitals, Sydney, Melbourne and Brisbane.
According to building activity data released by the ABS last month, there were 136,217 “other” residential dwellings under construction during the December quarter last year in New South Wales, Victoria and Queensland.
The vast majority of those would have been units.
To put that number into perspective, while fractionally below the 138,253 number built in the prior quarter, it was still 121% higher than the same quarter five years earlier.
A huge number that are yet to be completed, and which still need to be settled on by buyers.
It’s a large total, with many likely to have been bought by Chinese investors given recent trends.
According to research from Hasan Tevfik and Peter Liu, research analysts at Credit Suisse, foreign investors are buying residential property in New South Wales and Victoria at an annualised rate of $8 billion per annum based off figures released by state revenue offices, equating to 25% of new supply built in New South Wales and 16% in Victoria over the past 12 months.
In New South Wales alone, 80% of sales went to Chinese investors. The total for Victoria was only marginally lower.
Those figures marry-up with the latest quarterly residential property survey released by the National Australia Bank which revealed that overseas investors bought more than 10% of all new housing in Australia in the first quarter of 2017, and more than 7% of existing stock that was sold.
The survey also found that 53% of all property purchases made by foreign buyers last quarter were for apartments, with the vast majority located in New South Wales and Victoria.
As suggested by the Credit Suisse research, it’s likely that the majority of those were sold to Chinese buyers.
According to data released by the Australian Foreign Investor Review Board (FIRB) earlier this month, Chinese citizens were by far the most prevalent investor in Australian property of any nationality in the 2015/16 financial year, gaining approval to purchase $32 billion in mainly residential property.
The United States, at $8.2 billion, came in a distant second.
Given the number of Chinese buyers which have grown rapidly in recent years, underpinning a surge in residential property construction which still remains at elevated levels, is little wonder why some would be concerned about the outlook for prices and future construction activity in Australia should Chinese demand start to slow.
“Huge uncertainty prevails in this market,” said Bill Evans, chief economist at Westpac, in relation to what he was witnessing in some new apartment markets in September last year.
“A significant proportion of the buyers are offshore based, so-called FIRB buyers,” he said, adding that many were Chinese citizens.
Evans warned that tighter capital controls in China, inhibiting buyer demand, could lead to a sharper slowdown in housing construction that what many currently expect.
And with local Australian investors also being constrained by tighter lending restrictions implemented by Australia’s banking regulator, APRA, a drop off in Chinese demand could also lead to a softening in prices — or more — in some apartment markets .
According to Meriton’s Triguboff, this may already be occurring.
“Now, if anything, it’s going down a bit,” Triguboff told the AFR. “It went up in the beginning of the year. Now it’s gone down.”
That fits with recent data from CoreLogic which revealed apartment prices fell by 1.2% in Sydney in April, and by 0.9% in Melbourne.
While that may have been due to tougher restrictions on local investors, or simply that buyers are not chasing property as hard after years or relentless capital growth, it could also be due to a slowdown in Chinese activity in these markets.
It’s likely this will only garner greater attention in the months ahead, particularly should capital controls and financing restrictions be left in place.
By David Scutt