Commercial property lending peaks despite rate rises, pandemic

Australian Prudential Regulation Authority (APRA) statistics show total commercial real estate debt grew $35 billion over the year to June 2022, before central banks around the globe started to raise interest rates and slow demand for debt.

Loans for commercial property rose despite the vicissitudes of the pandemic, partly because of a strong pipeline of developments under construction that underpinned activity, but mainly because of historic low interest rates, Plan1 research director Richard Jenkins said.

Offshore lenders are taking on a greater share of the country’s commercial property loans, APRA’s figures show.

“Foreign banks accounted for 24.2 per cent of total commercial real estate debt, up from 20 per cent three years ago. The current share of debt held by foreign banks is now close to an all-time high,” Jenkins said.
“Debt exposure held by the foreign banks in the office, industrial, retail and tourism sectors also reached all-time highs,” he said.
The market share of Australia’s big four banks (ANZ, NAB, CBA and Westpac) fell during the June quarter, to 70.3 per cent, well below its 10-year average of 78.2 per cent. The big banks’ share of lending peaked at 84.7 per cent in 2013.
Loans to the office sector reached an all-time high and, while high-density development and land subdivision debt increased 7.4 per cent over the year, exposure to the sector has shrunk well below the 2017 peak.
“Banks are adjusting their portfolios and increasing their exposure to the industrial sector at the expense of higher risk categories such as land and residential development,” Jenkins said.
The country’s largest bank, CBA, had commercial property loans of $87.3 billion on its books by the end of June, its annual results show.
Only about 0.4 per cent of that debt was classified as “troublesome or impaired assets” compared with 3.1 per cent of the bank’s $11.2 billion construction loan book.
The bank said its exposure to the apartment space was 45 per cent below the last lending peak in December 2016. Retail and office debt had the largest weightings in its portfolio, it said.
Retail exposure was tilted towards landlords who have non-discretionary retailers as anchor tenants and exposure in the office sector was biased towards premium, as well as A and B grade buildings.
Banks have started decreasing their lending activities and exposure to construction projects, forcing developers towards non-bank financiers, Jenkins said.
Office landlords may struggle to get funding from major banks as they are becoming more selective about which sectors they lend to, particularly with slumping levels of occupancy and the slow return of workers.
Dan Gallen, chief investment officer with financier Pallas Capital, said market conditions remained tight because interest charges were tracking Reserve Bank rate rises.
The number of commercial real estate borrowers unable to satisfy bank lending conditions has risen, Gallen said. “In many cases, bank lending policies have resulted in banks being willing to lend only at lower loan to value ratios than, say, four months ago.”
Banks are now lending at 50 to 55 per cent loan to value ratios, whereas earlier this year they would have lent at 65 per cent, he said.
“This has resulted in many development projects being deferred, as developers are often not able to find the additional equity needed to make up the shortfall.”
Non-bank lenders are continuing to fund projects but those that are dependent on high-net-worth backing for funds are cutting lending volumes or are only lending at substantially higher rates, Gallen said.