When getting prepared for the increase in settlement risks in 2019 there are a number of elements that need to be considered. Changing market conditions are having a strong effect on property prices and lending policies, driving this increase in settlement risk. With a comprehensive strategy put in place, settlement risk can be professionally managed to allow developers the best chance of success in 2019.
Here are a few reasons why it's important to examine your settlement strategies in 2019, and how using a settlement team can help mitigate external issues.
Market Price
The property market in Australia has previously seen a relentless five-year run of strong growth, especially across Sydney. 2018 marked the moment prices fell for the first time over a 12-month period since 2012.
Property prices have now fallen 7.2 per cent over the year to date from January 2018 - 9.5 per cent since the property price peak in July 2017. Homeowners should be anticipating further price drops as the year goes on.
With the market prices suffering a significant downturn, this puts a substantial amount of pressure for buyers purchasing off-the-plan. In most instances, off-the-plan property buyers put their deposit down at least 2 years before completion of the project. During that period, circumstances have changed as of the start of 2019. Whether this is through low valuations, access to funds or investment issues, the long-term consequences of not being able to settle can cause huge confidence and financial pressure.
Tighter Bank Lending
As a consequence of plunging house prices and a prolonged wage slump, banks are tightening their criteria for lending. It is stated that a 15 per cent nationwide drop in prices would cut about $1 trillion from the housing stock value.
Banks are trying to mitigate their risks leading to tighter lending regulations being put in place. Purchasers need to hit a high standard to be able to raise funds to settle on off-the-plan projects.
Australian authorities have deployed a range of macro prudential policies to slow credit growth. Other factors include a reduction of foreign buyer activity due to economic decline in a range of other countries. With tighter bank lending and interest hikes, leads to more debt causing significant issues for property developers if purchasers cannot settle due to lack of funds.
Property valuations are following suit and falling. When this happens settlement risk may occur. This could be due to the property having been slightly overpriced to start with, or having experienced a slower rate of growth than anticipated. In some cases where the valuation comes in low, in order to settle, your buyer will need to come up with the extra funds to cover the shortfall, putting pressure on all parties.
The need to have a comprehensive settlement strategy
Developers need to have a comprehensive settlement strategy in place to help mitigate risk, especially at the current time.
Communication with purchasers is key. It's vital that developers stay in touch with buyers all the way from exchange to settlement. Whether this is with project updates or settlement news, the more purchasers know the better the buyer’s experience and responsiveness, seeing properties settle on time and even seeing more repeat purchases from their buyers. When it comes to communication surrounding finance this should start at least four/five months before settlement date so your team can work with buyers. Traditionally, pre-approvement by lenders will happen 90 days ahead of settlement, starting the conversation earlier than this date will mean that they will be ready when the time comes about, it also allows developers to access information regarding whether buyers are cash purchasers, confident borrowers or if some may have potential financial problems ahead of settlement in which help may be needed.
Throughout the period, developers and their settlement teams need to have a valuation strategy put in place. Knowing your market position early is critical to managing your settlement risk. For valuers, a valuation pack that is short, clear and to the point is essential to identifying key areas of importance. Working with valuers to show properties helps to build strong relationships and positive outcomes.
Having a pre-settlement inspection event that is positive has a major impact on the settlement process. Not only do they show the developers level of care and accountability, they also allow for a supportive team member to walk them through their property for the first time. Having a strong relationship with the buyer means that if anything does go wrong, developers have a full understanding of a purchasers current position and it fosters trust and builds credibility which are foundations to repeat purchase and referrals.
If you would like to learn more about our settlement team and what we can do for you, get in touch now!
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