Perth Apartment Market

Mitigating Settlement Risk

Corporate Finance & Restructuring | Real Estate

December 5, 2016

Perth Skyline

Market research shows there are approximately:

  • 1,110 apartments currently on the resale market;
  • 5,600 apartments selling off plan; and
  • 3,700 apartments under construction (64% subject to pre-sale contracts) compared to just over 2,100 in early 2014.

Furthermore, loan to valuation ratios and foreign lending criteria have tightened and we understand from anecdotal evidence that in excess of 30% of all apartment resales are transacting at below the original purchase price.

Settlement Risk is Real for Developers

FTI Consulting believes that these circumstances may lead to settlement risk for developers caught mid-construction and who are reliant on pre-sales to maintain their financial covenants.

Many economists considered the Global Financial Crisis (GFC) the worst financial crisis since the Great Depression of the 1930s. However, several property developers weathered the GFC by:

  • Employing bespoke design and construction contracts that included guaranteed maximum price conditions, restricted variation clauses and full novation of architect and sub-consultants provisions. These all helped to provide development margin protection;
  • Setting sale contracts with realistic sunset clauses to minimise the ability for purchasers to exit the contracts;
  • Remaining attentive to detail during construction with timely and compliant written notification to buyers of ‘change events’ to the apartments design and or size. (as failure to do so provides buyers with the ability to terminate their pre-sale contracts); and
  • Proactively monitoring construction progress against project timelines and sunset dates.

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