Investing in Australian real estate: Financing options – Lexology (registration)

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While debt from Australian banks remains the primary source of finance for investment in Australian real estate, the trend in recent years has been for investors to diversify their capital base by incorporating mezzanine finance and debt from foreign banks (such as Singapore and Japan).

While the leverage ratios that banks are willing to accept remain at current levels or continue to decrease – and in the case of residential developments, the required level of presales remain at current levels or continue to increase – we expect to see an increase in the use of mezzanine and offshore financing in Australian real estate transactions.

Usual terms of financing

Australian financiers will only finance the acquisition or development of property once certain conditions have been satisfied. At a minimum, financiers will require the following conditions to be satisfied:

  • obtaining a valuation of the subject property
  • confirmation that the amount the financier is prepared to lend as a proportion to the value of the real estate complies with the financier’s “loan to value ratio” (LVR) requirements.

The LVR required depends on the purchaser of the property, the nature of the property being acquired and the purchaser’s relationship with the financier (if any). Where the purchaser is a REIT and the property being acquired is commercial real estate, it is common to see an LVR in the range of 50-60%:

  • security (preferably first ranking) is granted in favour of the financier
  • the property and any improvements on it are insured by an insurance policy which notes the financier’s interest
  • the financier is satisfied with its legal due diligence with respect to the property (typically comprising a title analysis and investigations as to any pre-sales or rental income).

In the case of residential developments, the financier will want to be satisfied that there is a certain level of pre-sales, and that those pre-sales are arm’s length transactions which achieve certain commercial terms and are enforceable under consumer protection legislation that applies to residential real estate acquisitions at the federal and state levels.

It is common for a financier to also place a restriction on the level of pre-sales to foreign purchasers, given the additional cost and procedural risk associated with attempting to enforce contracts of sale in other jurisdictions.

Personal Property Securities

Security interests in personal property are governed by the Personal Property Securities Act 2009 (PPSA). The PPSA is directed at personal property and covers securities such as retention of title, bailments, sales of receivables and intangible assets, but there are cross over impacts on real estate transactions and financing.

Not registering security interests under the PPSA, or failing to register them in time, they may risk serious, costly and inconvenient consequences.

The PPSA applies to security interests in personal property and sets up a system of registration, priority and enforcement. The priority of a security interest can be perfected by registering the interest on the new PPSA register or by having control or taking possession of the relevant property. Without this perfected interest, a security holder will be vulnerable to the claims of other parties who, although they may have obtained an interest later in time, have a better claim because they have perfected their interest.

The PPSA will not apply to a lease of land or fixtures. However, to the extent that a lease of land also includes a lease of goods (or unfixed items of plant and equipment), that lease will be a PPSA security interest which must be registered in order to protect the secured party’s interest. Otherwise, a person with a security interest registered against the tenant, or a liquidator of the tenant, may have a superior interest in those goods or items of plant and equipment even though the landlord is the owner of the goods.

PPSA issues also arise in any financing transaction where a financier is taking security over rent accounts, goods located on the property or intellectual property connected with a business conducted from real property.

This is an edited extract of Investing Down Under: A Guide for Global Real Estate Investors. For a complete overview of the initial legal, tax and structuring issues that foreign investors should consider before investing in Australian real estate, download the full publication in English or Chinese (中文).

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