Why are foreign investors interested in Australian commercial property?

Australia has always been a popular place for foreign investors looking to invest in the property marketAustralia has always been a popular place for foreign investors looking to invest in the property market, particularly with Asian countries like China. The Foreign Investment Review Board (FIRB) found that Chinese buyers in Australia were approved to purchase $23.8bn of property in 2015-2016, an increase from $18.4bn in 2014-2015. Australia received the second largest share of outflowing capital from China after the United States.

Despite the regulatory restrictions, and the banks’ new curbs on lending to foreign property investors, many foreign investors remain undaunted when it comes to purchasing property in Australia.

Luckily for them, there are options outside of the banks to obtain finance for the purchase of property. While banks are primarily concerned with serviceability and proof of income, private mortgage lenders like Private Mortgages Australia approach the lending process quite differently. Usually the loan is secured by property equity so as long as a foreign borrower has property assets to use as collateral the lending process should go smoothly.

One space that is of particular interest to foreign investors is the commercial property market. There are many reasons for the growth in this sector, starting with the types of investors:

Two types of foreign investors

There are two main types of investors who are interested in Australian commercial property – corporate and institutional investors, or high net worth individuals. Each of these investors has different motivations for choosing to invest in Australia, as well as a varied perspective on what they hope to achieve from their investment.

Corporate or institutional investors choose to invest offshore for two main reasons. The first is the mandate to deploy large funds, and with many domestic markets slowing, this has driven them to look overseas. The second is to keep their investment assets diverse and spread out over markets and cities that are seen to be well supported by demand, with survival possible even in the event of a global downturn. These markets mainly include Australia, the USA and the UK. Further to that, the top tier cities are seen as the lowest risk and best understood and therefore are the main focal point of investment. These cities include San Francisco, New York, London, Sydney and Melbourne.

The second type of investors – those with a high net worth – are commonly seen to be motivated to invest for migration purposes. As with corporate investors, the places high net worth investors choose to invest are within the tier one cities. The reason for this is mainly due to the cycle of popularity of these cities. Investors with a high net worth choose to migrate to these regions, driving corporate investors to strategically target these cities as their buyers are planning on moving there.

Getting a piece of the foreign pie

With continued interest in Australia from foreign investors, brokers have an opportunity to assist them in accessing funding for property purchases. According to Juwai.com’s March Chinese Consumer Survey, 25% of respondents cited financing or transferring money to pay for overseas property as being difficult. By working with non-bank lenders like PMA, brokers can help foreign clients access cost-effective loans with quick turn-arounds and in the meantime earn a slice of the lucrative foreign investor pie.

Private Mortgages Australia is able to lend to foreign investors when they are borrowing using an established Australian company.

Banks now more lenient for SME loans, but still not as flexible as private lenders

Private lenders are more flexible for SME loansA recent article from Australian Broker stated that Australia’s major banks have introduced more lenient lending criteria to make it easier for small and medium-sized enterprise (SME) owners to purchase property.

Westpac announced it would increase its loan to value ratio (LVR) from 80% to 90% following similar changes from Commonwealth Bank earlier in the year. Westpac, CBA and St. George also all announced they would only require one year of financial records as income verification for self-employed borrowers. Previously they had required two years of financial records and tax returns.

SME loans need flexibility

While it’s great that SMEs now have more opportunities to access bank funding, they are still required to show serviceability which isn’t always possible. Similarly, for businesses that need quick turnarounds and short-term funding, a bank still isn’t going to be the right source for funds.

The difference between a bank and a private lender is that a bank focusses on serviceability while a private lender focusses solely on asset value and exit strategy. At Private Mortgages Australia all our loans come with a component or prepaid interest so we don’t need to worry about serviceability. This distinction is the main reason PMA is able to service so many SME loans for short-term finance.

If you have an SME client who can’t get funding from the banks, give PMA a call.

By Tony Barbone

Managing Director, Private Mortgages Australia

Borrower Case Study: A super loan for a supermarket

PMA settled a loan with a borrower for the purchase of a supermarket Private Mortgages Australia settled a loan with a very happy borrower who needed a quick turnaround on finance for the purchase of a supermarket in country Victoria.

One of the key benefits of a private mortgage for this borrower was that PMA was able to lend based on the valuation price of the property rather than purchase price, which was ideal for the borrower’s situation. The supermarket had previously been bought three years ago for $950,000 however the borrower had managed to pick up the building and the business for a deep discount from a motivated seller for $680,000. This incredible discount was made possible because he agreed to buy the property very quickly and therefore didn’t have time for a traditional bank to take 6-8 weeks to approve a loan. While a bank would typically only lend on the lower of the valuation or purchase price, as a Private Money Lender, we are happy to lend based on valuation.

The valuation of the building came back at $950,000 and based on our due diligence we were happy to offer him a loan for 70% of the valuation of the supermarket being $665,000. The borrower needed the funds for four months to give enough time to refinance the property with another lender and cash us out.

Loan details

Loan Amount: $665,000

Mortgage Type: Registered 1st Mortgage

Loan to Value Ratio (LVR): 70%

Term: 4 Months

Managing the loan

We made sure we managed the deal as it came closer to the repayment date by sending the borrower a friendly reminder at 60 days, 30 days, and 14 days to expiry. This helped keep the lines of communication open and we knew exactly where the borrower was up to and had a clear view of his situation.

The borrower had a few unexpected delays from the incoming lender, but because we had constant communication with the borrower he was able to provide us with evidence of the new loan coming in and so we were comfortable giving him a small extension of two weeks to finalise his refinance.

Win-win

This deal was a great success for the borrower. He managed to complete the deal and make a huge profit. The borrower was so impressed with our service that he has subsequently came back and borrowed from us again  for a different project.

We are proud to say that we have many repeat borrowers just like the one in the above example, and this is because PMA provides a good customer experience with flexible criteria and our win/win approach to private lending.

If you’d like to find out more about how we can help you or your business clients with quick  access to finance then please give us a call on 1300 856 683.

Foreign borrowers: Private lenders only option

PMA offers loans to foreign borrowersIn the last month all four major banks have made changes to foreign lending policies, making it difficult for overseas borrowers to access finance in Australia.

The Commonwealth Bank will no longer give mortgages to self-employed applicants using foreign income to service their loans and will no longer approve loans for temporary residents receiving foreign currency income. The maximum loan-to-value ratio for temporary citizens living and working in Australia and being paid in Australian dollars has been lowered from 80% to 70%.

ANZ tightened its rules around lending to foreigners, after the bank discovered that loans written in their network of offices throughout Asia were sometimes missing crucial documentation.

National Australia Bank lowered its loan-to-valuation ratios for foreign mortgage applications, and Westpac introduced tighter lending rules for foreign property buyers.

While the banks are making it virtually impossible for foreign borrowers to obtain finance for the purchase of property, there are still options available to overseas buyers in Australia.

Private lenders approach the lending process differently to the major banks. Usually the loan is secured by property equity so private lenders aren’t concerned with overseas income sources and serviceability. This means that as long as a foreign borrower has property assets to use as collateral the lending process should go smoothly.

Despite the changes to the lending practices of many of the major banks in Australia, it should come as a relief to foreign borrowers that there are still options available to access finance through private lenders.

 

By Tim Hart

Director, Private Mortgages Australia

Borrower Beware

Learn the tricks to avoid the dodgy lenders.A private mortgage is a great option if a borrower is having issues borrowing from a bank or if they are looking to have their mortgage application approved quickly. A private lender provides the loan with less red tape and processes the application in a timely manner, so you can access the funding you need sooner. Unfortunately though, there are some bad lending practices out there which can bring a borrower unstuck.  However, as with all industries, it’s a case of just a few bad operators making a bad name for the industry. If you know what to look out for and the right questions to ask your lender then a private mortgage can be a great option and deliver the best results for the borrower.

Here are five things to keep an eye out for when looking at a private mortgage:

1. Upfront Fees

The practice of lenders charging huge upfront fees is one of the biggest problems with the private mortgage industry. Some lenders can charge tens of thousands of dollars in upfront fees without the borrower even knowing whether or not they will be accepted for a loan. To ensure a borrower isn’t out of pocket and without a loan make sure you look carefully at the upfront fees charged by a lender and go for a company that charges minimal fees upfront. $550 – $1,100 is typical depending upon the size and complexity of the loan. You want a lender who makes their money by actually lending money not just charging upfront fees and rejecting the loan.

2. 24-Hour Loans

One of the major benefits of a private mortgage is the speed.  A private mortgage can be settled within a fraction of the time in which a traditional lender would require. This is because a private lender tends to focus on the security – the property to be used as collateral for the loan – rather than on ‘red tape’ processes and the applicant’s credit history, which a traditional lender might be more focused on.

A quick turnaround on a loan application is something that most private lenders will be able to offer, however, many lenders are now taking this one step further by saying they can have the loan settled within 24 hours. While in some cases this may be possible, there is still a phenomenal amount of work that needs to go into any lending decision and it would be very unlikely that every loan could be settled within this time frame. If you a working with a lender that claims 24-hour turnarounds then it may be wise to ask them exactly how many loans they have completed within a day. You may find it’s not something that happens very often. The lender knows that once the borrower is committed to them it will take too long to start again with another lender so they stay with them even if they take another week to do the loan.

3. Expensive ‘Forced Sale’ Valuation

Many lenders don’t offer loans based on market value but rather will do a ‘forced sale’ valuation which typically comes in well under market value. This means that when the Loan to Value Ratio doesn’t stack up they will come back to the borrower and make them pay the upfront fees and charges. Make sure you check with the lender what type of valuations they do.

4. Cancellation Fees

Lenders can also include a clause in their offer that if a borrower doesn’t proceed with the loan then they can be charged a cancellation fee. Usually this can be around two percent of the loan value. In some scenarios the lender can put a caveat over the property and hold the borrower to ransom until the fees are paid. To ensure this doesn’t happen, make sure you read all the fine print and ask about cancellation fees up front.

5. ‘From Rates’

A sneaky trap that some lenders use is advertising rates ‘from’ 1% per month, or a similarly low rate, in order to attract a borrower, however when it come to the actual loan offer the rate is much higher than this. The way they trap the borrower is by including the ‘from rate’ in the indicative letter of offer which the borrower signs without knowing the actual rate. Then, when the borrower gets the shock of the actual rate and wants to withdraw from the loan the lender can apply the cancellation fee and caveat the property. Obviously, this can cause a lot of disappointment and frustration so make sure to ask the lender up front for an estimate of the rate which will be applied to the loan. A good lender should be able to give you a pretty accurate interest rate based on the upfront information you provide.

 

While most private lenders have a transparent lending process and are genuinely trying to find the best loan option for the borrower, there are other lenders out there that can make the process a lot trickier.  Hopefully these five pointers have given you an idea of what to look out for and will help you to navigate your way through to a successful private mortgage deal.

 

By Tim Hart

Director, Private Mortgages Australia