Now, as Australia’s house prices fall, many of those investors we were so worried about a few years ago have gone. But not all. While some with designs on Australian real estate are content to wait until they can see a return, others are looking for alternative investments, mainly in the form of loans to developers.
For their part, developers are also looking for alternatives. In this week’s “State of the Land” report that showed a sharp decrease in green field construction, UDIA highlighted the “significant and mounting funding challenges” developers face.
“With the retreat of the major banks funding certain development projects (particularly for multi-unit projects in locations deemed risky), a range of alternative wholesale and retail funding sources continue to emerge, including crowd-sourcing funding platforms,” the report noted.
Those alternative platforms include private lending funded by Chinese money, especially that of sophisticated high net worth individuals and more recently mum and dad investors. Both groups are attracted by high promised returns – 8 per cent is not unusual and not out of reach, given a typical return on a project for a developer is around 20-25 per cent.
A recent message from the popular Chinese property group Jinding on the Chinese social media platform WeChat invited sophisticated investors – those categorised as “wholesale” with at least $500,000 to spend – to finance one of Jinding’s housing developments in the Melbourne suburb of Wollert. The investment is by way of secured bonds earning an annual return of 8 per cent over a three-year term.
While Jinding funds management managing director Peter Dedes declined to comment on the bonds, he said sophisticated Chinese investors, at least those still in Australia, were looking beyond apartment purchases.
“These investors are keen to diversify their portfolio … they understand diversified commercial funds, they understand these other opportunities,” Dedes said
“There is no doubt the restrictions in China have become harsher … but that motivation to diversify their investment portfolios is not going to go away.”
Another well-known private lender and syndicator in the Chinese circle is Australian-based Zank & Co. From its HQ in Melbourne, it has been gone from strength to strength. Its Zank Income Fund – which started in 2016 when the banks, spooked by the large numbers of new units coming on the market became wary of developer finance – has delivered investors an annual return of 10 per cent for lending to a pool of development projects.
Only wholesale investors could invest in that fund but in July, Zank & Co will debut a retail fund that will be open to those with less than $500,000 to invest.
Jinding and Zank & Co are not the only ones appealing to Chinese investors but they are more transparent than many others.
One lender, who didn’t want to be named, says there are an increasing number of “loose” syndicates seeking money in suburbs with large Chinese populations such as Hurstville and Eastwood. This lender called for regulators to keep an eye on the sector.
“I was very surprised that there were some groups from Double Bay who put together a brochure to raise $10 million from Chinese investors to lend to a developer in Hurstville,” she said.
Investing in these mortgage loans is vastly different to buying an apartment so some investors may miss the fine print, such as the ranking of their capital or capital exposure, warns Zank & Co principal Conghan Hu.
While such investments are often the highest-ranking creditor this is not always the case.
Hu says those who got in early, as the banks started to retreat from developer finance a few years ago, have secured the best projects. Those coming in now will get less appealing deals, he says.
But that won’t stop the rise of non-bank lending, said David Chin from private lending networking group Basis Point.
Chin said the appetite for investors to shift into private loans has grown quickly in recent months. In a soft housing market, such loans are a good option for those who have profited from unit sales or left their run too late in residential property. By his count, “official” private lenders within the Chinese circle – not including large institutional lenders such as Alceon or Qualitas – have doubled to about 30 in the past year. These include developers and real estate agencies with funds management expertise, and non-fund contractual arrangements with high net worth individuals.
Many of these products tend to be short-term, two to three-year arrangements, that attract capital from traditional apartment investors, wealth manager, according to BYMG’s Eric Gao. They allow investors to maintain flexibility with their capital, particularly for those keen to deploy it back into the housing market when it recovers.
“They are looking for as high a return as possible while remaining as liquid as they can,” he said.
Unlike foreign investment in residential real estate, private lending is not tracked by the FIRB so it is difficult to measure how much is being channelled in this way to developers. What is certain, however, is that it is only a fraction of the Chinese real estate investment boom that was so carefully tracked by FIRB.
Now interest in direct real estate investment has drained away, we may come to rue our decision to pull the welcome mat, according to James Laurenceson, deputy director of the Australia-China Relations Institute.
He notes less capital in housing development is both bad news for future supply and, more broadly, a balanced trade and investment relationship between Australian and China.
“The whole purpose of Australia’s foreign investment rules is to direct foreign capital into new housing to increase availability and put downward pressure on prices,” he said.
While some developers appear set to benefit from the shift in Chinese investment from real estate to private loans, it seems this reset could adversely affect the housing market in Australia in years to come.