If embattled AMP Limited (ASX: AMP) wasn't under enough stress from the Hayne Royal Commission, news of falling valuation at its landmark Brisbane apartment development could see the stock slump to fresh 15-year lows.
The share price of our largest wealth manager crashed 41% since the start of the year when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 1%.
The stock could come under further pressure as the Australian Financial Review reported today that bank ordered valuations of its apartments in its Skytower project has fallen by as much as a quarter.
This could put many off-the-plan buyers in strife as they won't be able to borrow as much from the banks as they initially thought and will need to find extra capital to make up the difference.
Otherwise, many could forfeit their deposits and walk away (assuming the developers do not sue), which will likely trigger a slump in the value of the property when it's resold.
AMP Capital is one of the lead developers on Australia's third tallest building and it's threatening legal action to force valuers to upgrade their valuations on the project.
It's not unprecedented for off-the-plan buyers to take a circa 25% haircut in the Brisbane apartment market due to oversupply issues and reluctance by the banks to lend.
There are reports that just about all the banks have blacklisted Brisbane CBD projects.
I recently spoke to a Brisbane property investor and a property agent. The investor is trying to sell his apartment (not Skytower but a tenanted unit in inner Brisbane) and was willing to take a 25% haircut to get rid of it as the body corporate fee made this a poor investment.
It made sense if you were negatively geared and property prices were rising, but this strategy has lost its lustre.
The property agent for another established apartment block in East Brisbane told me that the body corporate fees and rates would shave-off around 35% from the expected rental return. This means the yield drops to a little over 2% (ignoring the bank loan).
Unless I am confident that property price will rise (I think it will fall further and so does the property investor I spoke with), I can't see why any investor would want to invest.
Falling property prices won't only impact on the share prices of the big banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ). AMP is also in for a rough ride.
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