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The prudential regulator has written to banks to clarify its position on presales requirements following a request from the federal Treasurer.
The Australian Prudential Regulation Authority (APRA) has written to all authorised deposit-taking institutions to outline its position on presales for commercial construction loans, after being urged to do so by the Treasurer.
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Specifically, APRA had been asked to clarify whether it requires lenders to only grant finance for the construction of new unit blocks if the developer can show that it has sold all unit blocks in the development.
On Thursday (13 February), APRA board member Therese McCarthy Hockey wrote to banks clarifying: “APRA’s requirements and guidance for prudent credit risk management relevant to commercial property lending are contained in APS 220 and APG 220. They include requirements that ADIs maintain prudent policies and sound credit assessment and approval criteria, which APRA continues to monitor as part of routine supervisory activities.
“While presales do have an important role to play in a sound credit risk management approach, APRA has not set minimum requirements or expectations for presales in these standards and guidance.
“APRA has already clarified its expectations with relevant ADIs through supervision. The intention of this letter is to support a consistent understanding of APRA’s expectations across the market more broadly.”
What caused the confusion?
In 2016, APRA undertook a thematic review of commercial property lending in response to market dynamics and indications that underwriting standards were under competitive pressure.
It came after several banks began implementing additional restrictions on the amount of presales developers can accept from foreigners and were frequently asking for 100 to 120 per cent of the debt coverage in presales.
In March 2017, APRA issued a letter to the industry outlining its high-level observations and conclusions from the review so that the industry “could benefit from insights gathered from across the sector”.
In it, APRA observed that, for residential development lending specifically, “some ADIs had tightened underwriting criteria for presales coverage following market concerns with regard to settlement risk”.
“ADIs are now generally requiring qualifying presales equivalent to at least 100 per cent of committed debt,” the letter outlined at the time.
Speaking earlier this week, federal Treasurer Jim Chalmers noted that some lenders had interpreted this as APRA saying it was requiring banks to have 100 per cent presales before committing to new loans.
“Some lenders have interpreted advice issued by APRA in 2017, that finance for construction of new unit blocks should depend on all properties being pre‑sold. Lenders have indicated this is a barrier to financing,” he said.
“The interpretation of this guidance as ‘100 per cent presales’ by some lenders has limited housing supply, as smaller developers often don’t have the capital to finance the start of construction without support from the banks,” Chalmers said on Wednesday (12 February).
In its letter to banks on Thursday, APRA said: “Consistent with APRA’s supervisory engagement in recent years, APRA clarifies that the reference to presales coverage in its March 2017 letter does not represent a minimum requirement or expectation of APRA. It was a reflection of industry practice observed at the time through the thematic review.”
The intervention from the Treasurer comes as the Albanese government also looks to make it easier for Australians with student debt to take out a mortgage and buy a home.
Chalmers confirmed he had instructed both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) to update their guidance regarding the way Higher Education Loan Program (HELP) debts are treated by lenders.
According to the Treasury, APRA will start consultation on the treatment of HELP debts in serviceability requirements and debt reporting.
ASIC has also confirmed it will move quickly to implement changes to guidance on the treatment of HELP debts after consultation.
“We’re tackling this housing challenge from every possible angle,” Chalmers said.
“These are commonsense changes that will help more Australians into a home.”
[Related: Major changes to HECS home loan rules]
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