CHAIRMAN (Mr Ripoll) —I declare open this public hearing of the Joint Committee on Corporations and Financial Services. In doing so I welcome Mr Kreitals. This is the first of a series of public hearings that the committee is holding to inform its inquiry into the access of small and medium business to finance. The committee is to report by 30 April 2011. I remind everyone that witnesses giving evidence to the committee are protected by parliamentary privilege. Any act which may disadvantage a witness on account of their evidence is a breach of privilege and may be treated by the parliament as a contempt. It is also a contempt to give false and misleading evidence to a committee. Witnesses should be aware that if, in the giving of their evidence, they make adverse comment about another individual or organisation, that individual or organisation will be made aware of the comment and given a reasonable opportunity to respond to the committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer having regard to the ground claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. A request to give a particular answer in camera may also be made at any other time. The committee prefers to hear evidence in public but we may agree to take evidence confidentially. The committee may still publish confidential evidence at a later date but we would consult the witness before doing this. Mr Kreitals, I invite you to make a short opening statement before we go to questions.

Mr Kreitals —Thank you for the opportunity to be part of this process. The REIA welcomes that. The Real Estate Institute of Australia’s agents are certainly very much members of the small business community. Our professionals, of which there are about 77,000, work in agencies mostly with fewer than 10 employees and half of these are women.

The REIA submission addressed three aspects of this inquiry: firstly, competition; secondly, the impact of equity and security requirements on the amount of finance available; and, thirdly, the policies and practices that restrict access to finance. To supplement its submission, the REIA referred to a survey of real estate agents across Australia that it conducted last year. I would like to highlight some of the outcomes of that.

Whilst that survey was conducted about the middle of last year, our anecdotal information suggests that little has changed from then. In terms of the term of reference regarding competition in small business lending, our submission detailed the decreases in competition that have occurred in the small business sector. For example, the big four banks increased their share of the market from around 60 per cent in 2004 to around 75 per cent in 2009. This was certainly iterated in the survey response in which respondents indicated that decreases in competition in the finance market were having a debilitating effect on many real estate agencies. It is for these reasons that the REIA made recommendations aimed at improving the availability of finance, addressing the cost of finance for small businesses and increasing competition in that sector.

With regard to the term of reference about the impact of equity and security requirements on the amount of finance, the REIA survey found that four-fifths of respondents believe that the requirements of financial institutions—such as loan to valuation ratios and asset-backing mortgages over personal assets—were more stringent compared with those of the period before October 2008. Also, two-thirds of the respondents feel that the cost of finance for small businesses relative to official interest rates is more expensive than it was before October 2008.

With regard to the term of reference on policies and practices, respondents to the REIA survey stated in their comments that they feel that the financial sector does not understand the small business sector and, furthermore, tends to group all small businesses in the one basket without any differentiation as to the factors affecting a particular segment or the outlook for that segment. An example of this for the real estate industry is the treatment of rent rolls, which have been used as security against borrowings. A number of the respondents indicated that financial institutions did not recognise rent rolls as an asset despite low vacancies in the rental market and the cash flow stability offered by the rent rolls. Even when rent rolls were considered as an asset, the loan to valuation ratio had changed markedly since the global financial crisis. It had dropped from around 90 per cent before the GFC to around 65 per cent in more recent times.

The REI survey also indicated that three-quarters of respondents thought that access to finance was more difficult than it was before the global financial crisis. This was despite the fact that two-thirds of respondents thought that their financial position was either the same or better than it was 12 months earlier.

CHAIRMAN —Could you give us an indication in terms of financing. You are specifically referring to agents themselves—that is, the finance and the capacity for agents to borrow.

Mr Kreitals —Agents or small business people to borrow money. I am not talking about house buyers.

CHAIRMAN —Or their customers, in particular, in relation to doing business. Obviously a key point would be whether people can borrow to buy homes and therefore create business. There is a fair bit in your submission in relation to competition. In fact your first recommendation is that we do everything we can to increase competition. You say that there has been a decrease in competition in the finance market, which is having a debilitating effect on many agents. Could you give us a better idea of what that means? Where has that competition decreased and why has that come about?

Mr Kreitals —I think that the competition has decreased, as I said in my statement, because the major banks have increased their share of the total market. Before the GFC there were other lenders around. They seem to have vacated the market after the GFC. Certainly there are some indications that they might be coming back. But there was a gap left there.

CHAIRMAN —From your perspective as the industry body, would you determine that that is just a market effect of circumstances at the time and that these are parts of the ups and downs of being in business and that it is not particularly directed at either your sector or any other sector? It is just that fewer people want to be in that market, for whatever reason that might be.

Mr Kreitals —I never suggested that it was targeted at real estate agents. I was just saying that there is a lessening of competition for the availability of finance for small business in general. It is a comment I have got from other industry bodies as well.

CHAIRMAN —There is a fair bit of comment about the place that perhaps pre-GFC—and during and after the GFC was the turning point for the availability of finance—it was just too easy to get money and banks and others perhaps took too much risk and that has now reverted to a more balanced position. Would you agree with that?

Mr Kreitals —Do you say that from a the point of view of a business seeking money or from a person borrowing to buy a house?

CHAIRMAN —Strictly from the business perspective and the lender perspective, there is a fair bit of talk around the place, and certainly in submissions, that there might have been a long period pre-GFC where it was just too easy to borrow and people became accustomed to that. Now things have changed and it has reverted, maybe, to a more balanced position. So where people find themselves today maybe is the right setting. Do you get a sense from your own membership that some of them are saying, ‘Yes, it is a bit harder but maybe that is where it ought to be,’ in risk versus return type arguments?

Mr Kreitals —Certainly I think it is indicated by my examples that it is harder. I have not heard any comments from our constituency that it was a bit too easy before. If you were saying that there was a blip and we have returned to more normal times it is not a view that our constituents would share.

CHAIRMAN —Maybe these things tend to swing the pendulum too much and it is hard to get it settled right in the middle. Perhaps it was a bit easier, now it is a bit harder and the pendulum has gone too far and we need to bring it back a little bit. From our perspective, a regulatory perspective, I am wondering what we could do to either change any regulation or encourage lenders to be more compliant, to be a bit more generous.

Mr Kreitals —I do not know that I can add further comments. As I said, our guys, with better financial positions than before, are finding it a lot harder currently than they did before.

CHAIRMAN —Is that partly because their assets may not be valued as highly? Is one of the problems you are finding that for agencies and the agents their pool of assets is worth less?

Mr Kreitals —Using rent rolls as an example, I do not think their assets are worth less but the financial institutions are placing a lesser value on them, even though rent rolls are a highly regarded commodity, tradeable  between agents. There is no more risk associated with rent. As you well know, the rental market is very tight and getting tighter but the banks’ valuation has probably dropped one third.

CHAIRMAN —It would almost seem counterintuitive, that a real estate value might fall in terms of bricks and mortar but a rent roll is cash in.

Mr Kreitals —Yes, it is cash flow.

CHAIRMAN —You would wonder why they would go down that path. Of all the things of value, you would probably value that higher, not lower, because it is cash.

Senator BOYCE —And it is not based on the values of the underlying assets either.

CHAIRMAN —No, it is just whatever rent is the driving factor in any particular area and none of them are going down. Do you have any thoughts or explanation of that? That is something we would like to pursue.

Mr Kreitals —No explanation other than that our members certainly find that hard to explain because their underlying financial situation has not changed.

CHAIRMAN —As an association, obviously you are in contact with all of your members and work for their benefit. This is certainly an issue we have identified as a problem, as has your organisation. What is the institute doing in talking to lenders and banks collectively to find solutions for your members? Is there a particular course of action or strategy in dealing with banks and lenders directly?

Mr Kreitals —Early post GFC the then minister for small business did convene one meeting with the Australian Bankers Association to initiate a forum to discuss problems and seek solutions. As it turns out, it was a one-off meeting. Post that meeting, I have had some discussions with the Commonwealth Bank on their approach to housing, but there are no standing ongoing arrangements to seek solutions.

CHAIRMAN —But certainly it is within the realm of your capacity to organise meetings and to pursue these issues. Banks being the providers and your guys being the customers, they would want to look after them in some way. I am just trying to understand whether there is a possibility outside anything we might do for the industry itself to take a hold of this in some specific areas.

Mr Kreitals —From our perspective we would certainly welcome any opportunity to continue the discussions we had with the ABA. I thought they were an ongoing thing but only one meeting was ever convened.

Senator BOYCE —You mention that rent rolls are traded between agents. How do you value them for that purpose.

Mr Kreitals —The valuation would be very much dependent on the size of the roll, which is the number of properties and the cash flow they generate.

Senator BOYCE —So there would be no standard norm within the industry for how you go about that?

Mr Kreitals —There is a norm within the industry which is a multiple of that rent roll—say the rent roll is $100,000 a year, there would be a multiple of the valuation. If you want me to find you an answer for that, rather than give you a wrong one, I will take that on notice.

Senator BOYCE —That would be good. One of the issues which arose while we were beginning to undertake this inquiry was a number of people in the financial sector—accountants, real estate agents and businesses themselves—who were not happy with their current credit options but were concerned about how they might affect their relationship with their current lending institution if they were to speak publicly. Would that apply to any of your members?

Mr Kreitals —I cannot demonstrate that with a concrete example, but it is possible that it is the case.

Senator BOYCE —One of our other terms of reference is to compare the availability of credit options between urban and rural and regional areas. Do you have any evidence from your members in that area?

Mr Kreitals —This may not be answering your question, but if I could go back to the survey: the respondents to the survey were across all states and there was a good mix between metropolitan and non-metropolitan and there was not any difference between whether they were metropolitan or non-metropolitan.

Senator BOYCE —So on the basis of your survey, there is no more difficulty in rural and regional areas. You linked accessing finance and problems with staff employment levels. Could you tease out for us what you mean by that?

Mr Kreitals —If you have that impression, I have created the wrong impression. I did not actually say that there was a relationship between the difficulty of getting funds and the size of the enterprise.

Senator BOYCE —Sorry—that people simply had to lay off staff because they could not get finance for a particular enterprise.

Mr Kreitals —I did not say that either.

Senator BOYCE —I had understood your submission to be saying that. You say that small business finance costs of being penalised by the current lending provisions. What would you like to see happen there?

Mr Kreitals —The reason I say they are being penalised is that we know there is a margin between the cash rate and the current lending rates. The banks will say that is because of the cost of borrowings but the margin that small business borrows at has increased since pre the GST to current times. That is why I say they are being penalised, particularly as I indicated that the risk factors associated with the real estate business have not increased.

Senator BOYCE —Do you see any strong distinctions between real estate agents as small businesses and other small and medium businesses?

Mr Kreitals —As I said in my statement, I do not see any differentiation because one of the criticisms we have is that all small businesses are treated the same, that the banks would say that it is riskier lending now. I do not wish to keep harping back to the rent roll but the risk factor associated with that has not changed, yet the cost of funding for real estate businesses has increased, just as it has for other small businesses, which might have had a riskier future post GFC.

Mr ANTHONY SMITH —You made the point in your submission, which I think goes to the nub of some of the issues, that small businesses tend to be grouped and assessed the same—this lack of differentiation. Are you saying that that has obviously always been the case and with the challenges of the GFC everyone moved to a slightly more difficult position or you saying that that became more pronounced during the GFC—that is, was there any level of differentiation before the banks wiped away what they saw as increased risk?

Mr Kreitals —It had become more pronounced and I say that on the basis that the margin between lending and the cash rate has increased but it has increased right across the board so it has become more pronounced.

Mr ANTHONY SMITH —Do you see this as the key policy challenge because diversity and small business is obvious and is always going to be a policy challenge so it is a matter of trying to work within that? Do you see it as the major issue?

Mr Kreitals —I am not saying it is the major issue about it certainly is an issue from our perspective.

Mr ANTHONY SMITH —I mean from the perspective of how the banks assess their clients. What you seem to be saying is that when it really came to the crunch, your size or your scope did not seem to matter.

Mr Kreitals —Or what industry you were in.

Mr ANTHONY SMITH —Yes, your strength or your industry. You are a small business and therefore, whether Senator Stephens and I started this business yesterday with two or three clients or whether we had been going for 10 years, that would not have made any difference. That seems to be—

Mr Kreitals —Yes, I would agree with that.

Ms SMYTH —I want to turn back to employment because it was obviously very significant in the context of the GFC. Looking at page 6 of your written submission, I want to understand whether it is your opinion that the observations in the second paragraph on that page are not necessarily applicable to the real estate industry. I understand from the written submission that they are applicable to small business generally and the pressures on employment in the context of funding restrictions is significant in small businesses. If it is not what you have experienced in the real estate industry, that would be of interest.

Mr Kreitals —That paragraph is referring to some other studies.

Ms SMYTH —Small business generally?

Mr Kreitals —Rather than the real estate industry. My apologies if you misunderstood. That was a general comment as evidence of it rather than specific to the real estate industry.

Senator STEPHENS —Going back to your earlier evidence, in your submission where you reiterated what COSBOA has found in terms of lending practices towards small businesses, to what extent can you tell us that the practice of either withdrawing pre-approved loans and lines of credit is a feature of the real estate environment? Can you give us some examples around the issue of reassessment of already agreed loans and terms in the real estate industry?

Mr Kreitals —It is not a question that we asked in our survey. However, at the time of that survey, with what I will refer to as anecdotal evidence, there were certainly instances of people having had pre-approvals from their banks and then going back to their banks and finding that either the loans were no longer available or the terms had changed considerably. I cannot be more definitive and quantify that, but it was the case.

Senator STEPHENS —But it is happening in the real estate industry?

Mr Kreitals —It had happened in the post GFC period.

CHAIRMAN —I have heard anecdotally and I would like to know whether you have heard about this or whether any of your members have spoken to you about being pushed from one type of lending facility—say, an ordinary loan to perhaps an overdraft, or perhaps from an overdraft or credit card, scaling up the costs, fees, charges and interest, still getting the same amounts of money that they need to operate or grow but finding that they cannot do it through a traditional loan with the same lender and having to shift to other types of more risky and expensive lending, say mezzanine finances, that sort of thing.

Mr Kreitals —You said ‘being pushed’. I am not sure that they are being pushed.

CHAIRMAN —Pushed or encouraged?

Mr Kreitals —The reality is that lending has become more difficult and previously you were offered Y dollars and now were being offered only X dollars so you will seek the difference from other sources which generally means using your credit card and higher interest rates.

CHAIRMAN —I understand that and I can understand why people would do. More specifically I am asking where a borrower, after going to their ordinary bank, would tell you, ‘I just went to borrow what I would normally borrow and they said that they could not lend it to me in that form but if I took an overdraft they would give it to me or if I used a credit card they would still give me the amount I needed but in a different form.’ So rather than deciding by their own they will to say, ‘ I cannot get what I want so I will go elsewhere and use other forms.’ I am interested to see whether there are any institutional lenders who would say, ‘We will still give it to you but we are going to make you pay a higher interest rate.’

Mr ANTHONY SMITH —So someone might have accessed the credit line at a certain level and the lender could say, ‘We can no longer provide that but you have a MasterCard with a $10,000 limit which we are prepared to extend it to $100,000.’

CHAIRMAN —Yes, spot on.

Mr Kreitals —I understand that has happened but whether it has been suggested by the banks or whether it is—

CHAIRMAN —No, all I am asking is whether that has been raised with you by your members.

Mr Kreitals —Yes it has.

CHAIRMAN —You are saying that there are instances where your members had said to you that they were being forced from one type of loan to another more expensive loan?

Mr Kreitals —Yes.

CHAIRMAN —You are pretty happy that real estate agents themselves are not being treated differently from anyone else? Do you get the sense that banks are picking on you for any particular reason—a difference in market or anything you do which is different from what everyone else does?

Mr Kreitals —I certainly do not think that real estate agents are being picked on.

CHAIRMAN —Treated differently might be a better way to describe it.

Mr Kreitals —Certainly immediately post GFC and partly as a result of the government’s stimulus package, turnover in the real estate sector increased compared to what it had been for the previous 12 to 18 months. The assessment of that was not taken into account by the banks—they were being treated like everybody else. They were not being picked on but the underlying strength of the industry at that stage was not being taken into account either.

CHAIRMAN —In relation to rent rolls, I am assuming there are not too many other assets held by real estate agents that could be used as collateral equity or something else with banks. Is that right?

Mr Kreitals —It depends on the structure of the business. Some have their own offices. I used the instance of rent rolls because, as someone else remarked, they were cash—they were liquid—and that does not change with valuations.

CHAIRMAN —Mr Kreitals, is there anything else you would like to add?

Mr Kreitals —No, thank you.

CHAIRMAN —We thank you very much. The committee secretary will inform you of any proceedings from here.

[5.41 pm]