If it’s not good enough for the banks, it’s not good enough for investors

As if there weren’t already enough reasons to steer well clear of niche apartment markets when investing in property, a new report has outed a blanket policy held by the big four banks with regard to stringent lending criteria for high density dwellings.

Essentially, if the property has been constructed as a part of the the government’s attempt to create more affordable housing in the form of the National Rental Affordability Scheme or falls short of other key investment fundamentals, forget about mortgage approval from the NAB, Westpac, ANZ or Commonwealth Bank.   

The Age reveals that the bank’s finance blacklist includes buildings considered “questionable” due to construction quality, take up and rapid turn over of stock by investors and the type of accommodation with restrictions on lending for serviced and student apartments as well as holiday resorts.

At least 146 Victorian high density developments, along with 100 in New South Wales and the ACT and an additional 127 in Queensland have found their way onto the list of unacceptable properties.

A Flinders Street office conversion into one-bedroom units in the Melbourne CBD found no favour with the banks “due to poor amenity” (the bedrooms had no windows) and the sub-standard location of a King Street project made it ineligible for residential loans, according to the banking document.

These stringent new criteria ring in some significant changes to lending practices for inner city apartments. Not so long ago, an apartment was deemed worthy or unworthy primarily on the basis of size, with restrictions on anything smaller than 50 square metres.

However with the population of many major cities growing significantly and household sizes shrinking, thereby placing greater strain on our capacity to accommodate everyone, the banks have become a bit more lenient as developers try to cater to an increasing demand for more compact spaces.

There are still provisions though, including the requirement for at least a 20 to 40 per cent deposit and any apartments with shared bathroom or kitchen facilities will not be considered, but some of the big boys have dropped their size restriction to 40 or 30 square metres.

Another hurdle that potential buyers of niche apartment accommodation face is the restriction lenders place on how much exposure they’re willing to take on in any given development. In other words, each bank will generally only provide finance for say 15 to 25 per cent of the total number of apartments, meaning some buyers might miss out on securing funding from their preferred lender.

My thoughts:

For me, the take home message in all of this is not necessarily that the banks are evil, rather investors should ask themselves; if it’s not good enough for the banks, is it really good enough for my property portfolio?

Lenders are restricting funding for these projects for a very good reason and that is, they see them as high risk projects that are more likely to lose value down the track and end up worth less than their original purchase price.

This is particularly true of instances where developers sell off the plan apartments at today’s prices – often over inflated due to the addition of their marketing and holding costs – and purchasers settle on them some time in the future when the market has moved on.

Worse case scenario is that buyers expose themselves to the risk of losing their deposit if they have to default on a contract of sale for one of the blacklisted apartments due to an inability to obtain finance.

I suggest you steer clear of these type of properties – there are plenty of other properties out there that the banks like and that make for better buying.

After all, why buy something risky when real estate has so many safe (and profitable) options?


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

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