Commercial property lending peaks despite rate rises, pandemic

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.

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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.

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