'It's an ugly time' in property

The problems of property lender St Laurence have stoked fears that the meltdown in the residential property market could spread to the commercial property sector.

"Even the bold are sitting on their hands," said one industry source. "And most people are saying this is the beginning [of the crisis], not the end."

On Tuesday St Laurence, which borrowed money from the public and lent it to property developers, said it was withdrawing from the lending market because of liquidity problems which were likely to cause it to default on repayments to investors. It will ask investors to approve an instalment repayment plan next month.

That set alarms bells ringing because St Laurence lent to developers operating in both the residential and commercial property sectors.

"It's right across the board," St Laurence managing director Kevin Podmore said when asked which sectors had caused the company's problems.

On the residential side, developments of lifestyle subdivisions, where properties were often bought as a second home, had been particularly hard hit, he said.

Even developers with a good level of pre-sales had struck problems, because buyers were having difficulty raising the finance to settle their contracts. This in turn had caused the developers to default on their loans to St Laurence, Podmore said.

On the commercial side, St Laurence often lent money as second mortgagee to developers looking to refurbish existing buildings.

Those loans were typically refinanced by banks once a building was fully leased, allowing St Laurence to be repaid.

But a failure to lease would trigger a chain reaction where banks would not refinance, leaving the developer in default to St Laurence, Podmore said.

Seph Glew, who was a director of ill-fated property developer Chase Corp in the 1980s and went on to found Australia-based Pelorus Property Group, which has commercial property assets on both sides of the Tasman, said things were different this time around.

Before the 1987 crash there had been a speculative bubble of commercial office developments which caused a huge oversupply, he said. That had not been the case this time.

"But it's an ugly time we are going into for anything that needs development funding... getting financing is going to be very, very difficult."

Veteran investor Olly Newland, who saw his property investment company Landmark go down the gurgler after the '87 crash, said problems in the commercial property sector were likely to be restricted to new developments.

He blamed "reckless lending" by banks and finance companies for the current problems.

"I've been having long talks with my bank managers and other financiers for years and told them they were mad for giving these rolled up interest loans for developments with repayments in three years' time, and now it's coming unstuck," he said.

Property developer Rick Martin of Cornerstone Group thinks this could spell the end of private development companies taking a major role in the market.

"In Australia you have massive developers doing everything and the private guys are left doing a few units at the back of the suburbs and that's what I think you'll get here."

- © Fairfax NZ News