Commercial recovery underway, as demand dam breaks

by BN15 Mar 2012

After an extremely busy run-through to May of 2011, commercial property lending volumes fell away through the middle of last year and remained suppressed, particularly as events in Europe began to destabilise global markets from early August onwards.
Similarly, mid-year deal quality also diminished. This was characterised by an influx of requests for finance from borrowers in stressed positions seeking to refinance an existing loan, either because their bank had asked them to move on or their lender had closed its doors.
The middle of 2011 also presented other challenges for the market in general. Continued pressure on commercial property valuations had been adding to the task of borrowers, and consequently many lending opportunities were failing to meet standard criteria.
Purchasers in the meantime were largely sitting on the sidelines, unwilling to commit to transactions amid concerns over rising interest rates in the first half, persisting soft conditions in the retail and services sectors and intensifying international volatility.
However, heading into 2012 the situation has been improving noticeably.
In the lead up to Christmas, Think Tank observed a significant increase in the number of finance applications for property purchases, suggesting SME's started to gain confidence on the back of easier monetary policy and better than expected employment, retail and consumer sentiment data.
We are inclined to think the RBA rate cuts in November and December will provide more impetus to this trend as the costs of borrowing reduce, thus improving net rates of return for commercial property investors, and reducing the cost of ownership for owner-occupiers providing for a more compelling option over renting. With the outlook for monetary policy now very much on the neutral to easing side, conditions are presenting more favourably for the broader economy and most specifically for commercial property.
We are expecting this positive commercial property trend to continue through 2012, with the quiet period of mid-year 2011 merely having generated latent demand that is beginning to translate into more property changing hands and increased demand for property finance.
This had been Think Tank’s experience through the GFC when a protracted period of suppressed activity sprang into life at a later date.
Whilst we remain concerned over the very real potential for systemic global market disruption to feed through from Europe this year, which would adversely impact the Australian economy bringing the current pick-up to a halt, we don't believe such a tipping point will be reached. Our indicators presently point to a positive and potentially strong year ahead for the sector.

Jonathan Street is the executive director of commercial lender Think Tank Property Finance.