Domestic lenders decrease exposure to commercial real estate
Ongoing economic uncertainty due to COVID-19 is affecting commercial real estate loan terms, with credit risk being repriced and domestic lenders decreasing their exposure to the sector in favour of higher returns achieved elsewhere.
A new report by CBRE research analysts found several trends playing out in the market – retailers struggling to stay open and meet rental obligations, a decline in office effective rents and an increase in some markets of sublease space hitting levels not seen since the 1990s – were all contributing to lenders being less willing to loan money.
“New loans for the hospitality and retail sector are proving to be the hardest to facilitate, but assets with long WALEs and a quality tenant profile are viewed favourably – particularly in the industrial sector, which is showing signs of the most resilience in the current downturn,” CBRE’s associate director of research, Ben Martin-Henry, said.
He said domestic lenders were decreasing their exposure to the real estate sector in favour of higher returns achieved through non-real estate lending.
“Traditionally, real estate lending does not elicit the best returns compared to other sectors, so there is an internal competition for capital under way, whereby lenders are becoming more fastidious,” Mr Martin-Henry said.
“This is not only resulting in fewer loans issued but is also significantly delaying the approval process as lenders take their time when undertaking due diligence.”
While loans on real estate acquisitions are still being funded, loan-to-value ratios (LVRs) are down below 50 per cent for many borrowers, the report found.
Unlike in the GFC, bank and non-bank lenders are not short of capital but the economic uncertainty in the current environment is causing lenders to become more risk-averse which in turn has increased the cost of capital for investors, ranging from a rise of 50 to 100 basis points on commercial loans.Andrew McCasker, CBRE’s managing director of capital markets – debt and structure finance – said the increased caution in the domestic lending market could allow for offshore lenders to further penetrate the Australian market.
“Offshore groups have always been attracted to Australia’s stable and transparent market – and are generally more competitive on longer-term loans, between five and 10 years, than their domestic counterparts,” Mr McCasker said.
“The challenge, however, that remains for these lenders is how to navigate entry into the Australian market. They must either have a domestic presence or rely on third-party origination platform and loan service business.”
