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Australia Feels A Capital Shift In Commercial Property Market

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The increasing presence of foreign branch banks and alternative lenders have shifted the face of Australia’s debt source in the commercial property market.

Offshore banks, life insurance companies, superannuation funds and private funds, such as Credit Suisse, ICBC, Cbus Property and Qualitas, are expanding their footprint in the nation’s capital investments pool, according to Colliers International’s latest Capital Markets report.

Colliers International National Director for research Anneke Thompson said commercial debt funding by Australian Deposit-Taking Institutions (ADIs), made up 83 per cent of property lending, while foreign branch banks accounted for 10 per cent of commercial property lending, up from five per cent in December 2013.

“Rather unlike any other major market around the world, Australian commercial property investors and developers have traditionally sourced debt from the major Australian banks,” she said.

“The turn-around in lending by foreign branch banks is particularly dramatic when you consider that their lending to commercial property borrowers actually decreased by almost $2 billion in the three years to 2013.”

Since 2013, lending by foreign branch banks for Australian commercial property has increased by $16.2 billion, or 162 per cent.

Ms Thompson said that while commercial debt funding by the major banks was not going backwards, the volume of transactions occurring and the level of development across Australia’s major markets suggested that the increase in lending was not keeping up with demand.
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“Foreign banks are going some way to make up for this shortfall but like Australia’s major banks, they are still heavily concentrated in the asset classes that provide the most risk-free return – office and retail property,” she said.

The Australian Prudential Regulation Authority (APRA), which monitors and regulates lending standards by domestic and foreign ADIs, sent a warning letter to these institutions regarding lending practices for commercial property earlier this year.

“Commercial property lending has historically been a source of significant loss for banks, both in Australia and overseas,” Ms Thompson said.

“APRA’s intention was to encourage domestic and foreign banks to tighten their risk outlook for commercial property deals because a heightened risk outlook by the banks invariably leads to lower lending volumes, or at least slower growth in lending.”

Ms Thompson said alternative lending sources would allow the commercial market to overcome APRA’s lending restrictions.

“The previous yield compression cycle ended when access to debt for commercial property deals was virtually impossible – known as the ‘credit crunch’ – and at a time when yield spreads were close to zero,” she said.

“Now, however, bond spreads for prime grade office space are 338 basis points, a full 100 basis points above the long-term average, suggesting that some yield compression is still ahead of us in the major markets.”

Private funds, such as Maxcap Group, Wingate and Gresham, are using institutional and private money to participate in deals, Ms Thompson said.

“The private capital market is seeing an opportunity to capture returns that have been somewhat elusive, and is filling the void that the banks are creating,” she said.

“This is seen as a win-win for Australia’s commercial property market, as solid deals with good underlying fundamentals can still occur with these alternative debt sources.

“These funds typically lend at the higher end of the risk spectrum, although they’re still selective on borrowers’ covenants. They particularly offer finance for residential developments that major banks tend to shy away from.”

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Article originally posted at: https://theurbandeveloper.com/articles/australia-feels-capital-shift-commercial-property-market