Kubrick
and me
Get your inheritance early
Rewards and pitfalls
John le Carre’s
Hollywood
dramas
Asset protection to pension traps | Smart Investor p22
Weekend Fin p32
Weekend Newspaper of the Year
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The Australian Financial Review www.afr.com | 1-2 October 2016
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Western Bulldogs
president Peter
Gordon and
Andrew Pridham,
Sydney Swans
chairman. PHOTOS:
The resurgence of the Western
Bulldogs, who battle the Sydney
Swans today, is a remarkable
comeback in an era when
sport has become
big business.
JESSE MARLOW,
PETER BRAIG
States’ improbable
green targets
News p3, Perspective p11
Coopers
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The pub with
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News p3
Batteries that
change lives
왘 Perspective p12
왘 Joe Aston back page
Simon Hackett on
new boom ahead
Lunch with The AFR p37
PLUS:
RUGBY LEAGUE
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The entrepreneurs
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Melbourne Storm
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Why Germany’s
big bank is
in deep trouble
World p8, Companies p21
plus Karen Maley p23
Report p4
More than
chicken feed
Hayden
Cox surfs
success
Super at risk from high
return property lending
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He runs a surfboard
empire based on
breakthrough
technology, but he was
only 15 when he decided
he was going to take
the global surfing
industry to a
new high point.
왘 Weekend Fin p30
Robert Harley and Joanna Mather
Self-managed superannuation fund
investors who are now being lured into
funds that offer high returns by lending
to property developers, risk major financial losses, according to experts.
Bank lending for property development is tightening and for many
developers the funding gap is being
filled by a shadow banking sector that
raises money from investors with the
promise of returns of 12 per cent or
more.
Credit Suisse equity strategist Hasan
Tevfik, has estimated the $622 billion
SMSF sector was now a significant
lender to property through senior debt,
mezzanine debt and preferred equity.
‘‘Over the last few months, we have
had numerous discussions with people
in the business of channelling money
towards resi-developers from investors
like SMSFs,’’ Mr Tevfik said, citing lawyers, accountants and specialist intermediaries who create unlisted trusts.
For some property veterans, that is a
reminder of the money that surged into
property lending, and was then lost,
through funds such as City Pacific and
Australian Capital Reserve in the last
boom, and through Estate Mortgage in
the boom before that.
‘‘It’s the same old, same old, and it’s
about to happen again,’’ says Michael
Holm, a 35-year veteran of property
lending and the executive chairman of
Australia’s oldest and largest commercial mortgage originator, Balmain Corporation. ‘‘It will crash and burn and
Continued next page
$1b Inghams
float about
plucking costs
Companies Vesna Poljak p20
Elements
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Dinosaur
Designs’
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Plus:
Patrizia
Moroso’s
furniture
Life &
Leisure
liftout
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왘 On the road to Lorne p4
왘 Christopher Joye Housing, hybrids p24
왘 Smart Investor Airbnb hosting p25
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News
2
1-2 October 2016
The Australian Financial Review | www.afr.com
Inside today
World
Perspective
Major pitfalls to check in
private property lending
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SMSFs
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Robert Harley
Beauty and the beast
Questions loom
Former Miss Australia tells of her
shock encounter with a sexist and
rude Donald Trump. p8
Banking inquiry to raise memories
of a humiliating experience for MPs
at the hands of Kerry Packer. p14
SmartInvestor Life&Leisure
AFR
SMSF investors can avoid disasters in
private real estate lending, and gain
reasonable returns, if they follow well
established rules.
Michael Holm, a 35-year veteran of
property lending and the executive
chairman of Australia’s oldest and
largest commercial mortgage originator, Balmain Corporation, has three
key commandments.
‘‘Don’t lend money you don’t have;
don’t lend on end value; and don’t lend
to related parties,’’ he said.
Mr Holm said inexperienced
investors were often attracted by the
promises of high rates and low LVRs
(Loan to Value ratios.)
‘‘Typically, to provide the high rates
and low LVRs, promoters of these new
‘lenders’ are resorting to some of the
oldest deceits in the property finance
book,’’ he said. ‘‘These new ‘lenders’
have very little lending infrastructure,
are not regulated or licensed, have very
limited credit experience, no servicing
capacity, extremely limited recovery
experience, and usually a massive conflict of interest as the only payment that
are receiving is from the borrower.’’
Mr Holm said that investors in shortterm loans on commercial, not development, property, with terms of one to
Don’t lend money
you don’t have; don’t
lend on end value;
and don’t lend to
related parties.
Michael Holm, Balmain Corporation
executive chairman
two years and low leverage, could
expect returns of 7.5-8.5 per cent a year.
He said investors should work with a
professional loan manager with a
proven credit track record and with full
licences both for credit and for a managed investment scheme.
Steve Howes, a director of Archerfield Capital Partners, a corporate
advisory business that specialises in
real estate, also has a checklist for
assessing the strength and capacity of
the manager, when the market is
becoming crowded with new entrants.
He said investors should check the
skill and experience of the manager;
the compliance and governance systems in place, the due diligence on the
loans, the spread of loan risk and the
loan management process.
‘‘Risks in development finance are
dynamic and change throughout the
life-cycle of the transaction,’’ he said.
Mr Holm said investors should
remember that construction loans can
go wrong with cost and time overruns
and even the collapse of the builder. He
said investors should have a manager
and an investment structure that can
deal with such issues.
Mr Holm said many of the new
entrants did not have a clear separation
between the critical but different functions of those who originate the loans
and those who check the credit.
From previous page
Strength in division
Simply red
How to split your DIY super fund
to make the most of proposed
budget rules. John Wasiliev, p26
The essence of Naples is contained
in the San Marzano, royalty of the
tomato world. Liftout
Companies
WeekendFin
Korea steels itself
A peculiar review
South Korea’s heavy industry is
being squeezed by China and Japan.
Can its economy be remade? p19
John McDonald reviews Tim Burton’s
strangefest, Miss Peregrine’s Home for
Peculiar Children. p36
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The Australian Financial Review Issue Number 15617
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Super at risk from
high return lending
people will lose billions.’’ The risk is to
the investors, not to broader banking
institutions. Mr Tevfik said that unlike
the ‘‘infamous shadow banks of the US
sub-prime crisis’’ Australia’s shadow
development lenders would not
become a risk to the country’s financial
system, largely because they would be
losing their own equity.
Economist Saul Eslake acknowledged the point but warned there was
no firm data on the extent of SMSF
investment in residential property
developers. Nor was it clear how
SMSFs would react if there were widespread losses on their debt exposures
to residential developers.
Of course, if the losses are big
enough they become a political issue.
In the 1990s, Victoria had to bail out
those who lost money – lending to
property – in the Pyramid Building
Society. More recently the losses
suffered by SMSFs in Trio Capital led to
calls for government compensation.
Commercial property lending in
Australia, around $250 billion worth, is
dominated by the big four banks.
Unlike the US, Australia has very little
institutional lending, and very little
securitised commercial mortgage debt.
In response to concerns about the
surge in new apartment towers on the
east coast, and increasing restrictions
on investors and offshore buyers, the
banks have slowed lending to the sector.
New business is not being chased, loanto-valuation ratios have been cut and
more is being demanded from
developers on key issues like the level of
pre-sales and soundness of the builder.
The slowdown does not yet show up
in official figures. Total commercial
property exposures for Authorised
Deposit-taking Institutions – which
includes banks, building societies and
credit unions – rose 9 per cent in the
year to June. In the development sector, loans committed some time ago
are still being topped upped as construction proceeds, but bank lending
for new projects is much harder.
Steve Howes, a director of Archerfield Capital Partners, a corporate
advisory business that specialises in
real estate, said developers now need to
contribute more of their equity to fund
a project and some developers and projects may not get bank funding at all.
‘‘This is the ‘gap’ many new financiers
Balmain Corp’s executive chairman Michael Holm. PHOTO: RYAN STUART
see as an opportunity,’’ he said. ‘‘And an
opportunity it is, for those that understand risk, structure and price their
facilities accordingly and closely manage their loans through the life-cycle of
the development projects they finance.
‘‘Unfortunately, however, some are
just focused on doing the deal quickly
and moving on to the next opportunity.
For those that have managed property
finance businesses through cycles,
signs are emerging that there is an accident waiting to happen.’’
The non-bank sector has a legitimate
role to play in development financing
and so far this cycle has delivered very
good returns, including 20 per cent and
better on some mezzanine property
products. But as the cycle turns, so will
those returns, just as a new generation
of unsophisticated lenders are lured in.
Balmain Corp’s executive chairman
Michael Holm said he was seeing ‘‘five
new offerings a week’’.
Archerfield’s Mr Howes noted the
regular arrival of emails announcing
the establishment of new property
lending business.
‘‘Offers of high loan to value loans,
mezzanine finance and development
loans with no pre-sale requirements
are becoming common place at a time
when the major banks see increasing
risk,’’ he said.
‘‘Sound familiar? If it does, it’s
because it is. The history books are full
of examples.
‘‘Lending businesses set-up to capitalise on the deals that the major banks
wouldn’t fund, or to provide finance on
better terms than the banks [which
roughly translated, means looser covenants or none at all]. Unfortunately, a
number of those businesses failed to
make it through the downturn that
inevitably followed the boom.’’
One adviser to the financial services
sector, Rice Warner chief executive
Michael Rice, said the surge in SMSF
investment in property finance was not
a systemic problem because, at $2 billion to $4 billion, it was only half a per
cent of all assets in the SMSFs.
‘‘Nevertheless, individuals could lose
out, particularly because the ATO [the
SMSF regulator] did not have any risk
guidelines,’’ he said.
SMSF Association managing director Andrea Slattery, said the ATO statistics showed SMSFs had been a
consistent investors into property with
little or no evidence of a rush.