A forecast by a top broker that off-the-plan apartment values could plummet up to 20% on settlement in the coming months could knock the Mirvac Group (ASX: MGR) share price off its perch at around a near 11-year high.
The MGR share price has surged around 20% over the past year and is one of the best performing listed property stocks. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has only gained around 4% over the period.
But the stock could struggle to make new headway after UBS warned that the risks of defaults are rising given the expected widening in the bank valuation for these properties and the amount that buyers have agreed to pay during the height of the property boom in 2016 and 2017, according to a report in the Australian Financial Review.
Mirvac most exposed
Many of these apartments are coming up to their settlement deadlines and UBS believes banks won't be willing to lend as much as these buyers were led to belief when they committed to the purchases a few years ago.
This means buyers will have to turn to other sources of financing or cough up the extra dough to make up the short-fall. If they can't do either, they will likely have to default on the purchase.
Mirvac is most exposed to this risk as it's sold more apartments in Sydney during the peak of the boom than its other listed peers like Lendlease Group (ASX: LLC) and Stockland Corporation Ltd (ASX: SGP).
Why Mirvac's share price is still going strong
The scale of the default remains unclear but this issue hasn't hurt the Mirvac share price so far as the company reported very low default rates during last month's reporting season, while its office property business turned in a booming result due to tight market in Melbourne and Sydney.
However, UBS pointed out that Mirvac and Stockland have been particularly flexible with settlements to give buyers more space to raise funds compared to private developers. The pain in the apartment market seems to be coming from the unlisted space at the moment.
Day of reckoning?
This can't last though and the chickens will have to come home to roost. UBS believes that the negative impact from the apartment market will hit Mirvac's bottom line in around two years.
It's not just falling property values that is crimping borrowers' ability to raise financing. Banks like Commonwealth Bank of Australia (ASX: CBA) are scrutinising borrowers' living expenses closer than they ever have in living memory following the Banking Royal Commission.
This means households are can't borrow as much as they have before and those most at risk of getting knocked back by the banks are property investors – particularly those with multiple property loans that exceed their income by a significant margin.
UBS believes the worse is yet to come given that completions of new apartments is just peaking with 100,000 units under construction in Sydney and Melbourne.
