Despite interest rate rises and a growing number of construction insolvencies, overwhelmingly the outlook for lenders is optimistic, a recent survey has found.
In its first comprehensive study on how the post-pandemic climate has affected Australia’s commercial finance sector, Sydney commercial property finance brokerage Stamford Capital sought feedback from over 100 lenders in March for its annual Real Estate Debt Capital Markets survey.
It found that 90% of survey respondents expected to increase the size of loan books in 2022 – up from 82% in 2021.
More than half (55%) of major banks expect to increase investment loans in 2022 but there was a significant pull-back in construction lending with the majority tipping maintaining current levels or decreasing these loans (39% and 29%, respectively).
There was an overwhelming consensus from respondents that 2022 would see interest rates continue an upward trajectory, with 90% of lenders expecting interest rates to rise.
Of those, more than half (54%) expect a bump of 0.5% to 1.0%, which will undoubtedly raise concerns among borrowers around serviceability.
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“With borrowing costs moving up, interest cover will decrease. It also opens opportunity for greater innovation and new lending products,” said Stamford Capital joint managing director Michael Hynes (pictured).
Survey respondents included major trading banks, non-bank lenders, super funds, foreign banks, private financiers and second-tier banks. The annual survey, a barometer of lending sentiment and an early identifier of market trends, was the fifth in the series so far.
“It is compelling to measure how the pandemic impacted our finance markets, as we emerge into the post-pandemic climate and navigate the ongoing challenges it presented to a range of industry sectors,” Hynes said.
“2022 is going to be a wild ride with rates forecast to rise further, non-banks continuing to grow market share and a number of property sectors, including residential and industrial, earmarked to be nearing their peak in the cycle.”
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The survey found that residential presales were returning to pre-COVID criteria, with most property sectors firmly in recovery mode while the industrial boom continues.
The expectation is that loan books would continue to grow but with rising margins, as well as non-banks entering mainstream lending and the opportunity for product innovation amongst further interest rate rises.
“It’s down to the fundamentals of demand and supply,” Hynes said. “On one side of the ledger, the market is buoyant – developers are wanting more capital. On the other side, non-banks can offer higher returns to their investors than the bank, so there’s capital flow.”
Stamford Capital said despite a swing towards zero or minimal presales in 2021, just 22% of lenders now willing to finance zero presale projects.
“With interest rates creeping up and housing prices coming off the boil, it now makes more sense for residential developers to lock away some revenue with presales,” Hynes said.
“Over half (57%) of lenders now expect to see at least 60% in presales, up from 45% last year – and 88% expect to maintain this level through 2022.”
Hynes said leverage requirements for investment loans were unlikely to change – 90% of respondents said they would maintain their leverage standards.
Only 15% of lenders said they had no interest coverage ratio – down from 26% last year. Now 65% require an ICR of >1.5X, up from 49% last year.
“There's no suggestion the banks are loosening credit requirements in any way – and if anything, APRA has kept the screws turned pretty tight.”
The industrial sector was identified as the strongest performing sector, fuelled by continued demand for warehousing and logistics, with online shopping surging in popularity since the onset of COVID-19.
A total of 65% of respondents indicated they felt industrial property was surging towards its peak.
“Everyone loves certainty of income profile and industrial currently seems to have it better than most. It’s very much an institutionally led market and the certainty of planning demand, big sheds, and big tenants make it attractive,” Hynes said.
The residential sector (including new developments and housing) was also forecast to reach a peak with 42% identifying residential development as approaching peak and 51% feeling the housing market will peak.
The rise of non-banks continued with more than two-thirds (67%) expecting non-banks to increase investment lending, with 62% predicting increased construction lending as non-banks were less risk-averse and ready to pounce on the opportunity left by the big banks.