For the past decade and a half the property industry has relied on deposit bonds. Often these are referred to as deposit guarantee bonds.

What is a deposit bond? It is an insurance policy whereby the deposit bond corporation insures the deposit. If the purchaser does not settle on the property, this insurance policy can be cashed in by the developer and 10% of the purchase price will be paid directly to them. What usually happens in turn is that the insurance company will pursue the purchaser for the 10%.

Everyone loved this concept: first, the deposit was always payable and could never be withheld by the purchaser; secondly, purchasers are able to enter the industry without saving money upfront. Deposit bonds were therefore the cornerstone that supported the project marketing industry. A person could use a deposit bond to buy a property and save the deposit over the sunset period.

One of the leaders in this industry has been Deposit Power. Recently, Deposit Power has collapsed.

https://www.propertyobserver.com.au/forward-planning/investment-strategy/property-news-and-insights/82160-deposit-power-collapse-imperils-smooth-property-settlements.html

What caused it to collapse? The Government.

In 2015, the Australian Prudential Regulatory Authority (APRA) advised all banks that they were restricted to increasing their investment book by only 10%. In other words, the amount of investment loans they could give out per annum were restricted. One of the first casualties of this restriction was overseas purchasers. It is almost impossible under the current regime for overseas purchasers to get finance.

So, what do we have? An industry whereby deposit guarantee bonds are being used to purchase a number of properties by overseas investors. The overseas investor is unable to get finance and cannot settle the property. Instead of trying to find a means of buying the property, the overseas investors are merely walking away and allowing the insurance companies to pay the deposit. Deposit Power had no ability to then sue the individual investor because they are overseas in a country where expedition proceedings are prohibited.

Deposit Power makes it very easy for a purchaser to walk away from a contract where they can’t be sued for the 10%. In these cases, Deposit Power was essentially used for a holding deposit for that period. At the time the deposit guarantee bonds were handed out by Deposit Power, there was little risk in relation to the overseas investor getting finance. In many ways, Deposit Power is a victim of the change of government policies, where they had provided deposit bonds in a secure marketplace only to find that the government policy has made it insecure.

This is the first casualty of the governments tightening up through the Foreign Investment Review Board. What will happen to developments where there are primarily foreign investors and those investors just walk away? With the demise of Deposit Power, those insurance policies cannot be cashed in either. Therefore, not only is the developer’s safety net gone, they now have product which they must sell to the market without being able to take the deposit.

Deposit Power may be something the industry can do without. It is only symptomatic of problems to come if APRA do not reconsider their current policies.

This article was written by Bailey Compton, Principal Solicitor & Director at Leverage Group.

To get in touch with Bailey, please email info@leveragegroup.com.au