Non-bank commercial real estate lending set to boom

by Duffie Osental06 Oct 2020

Significant changes may be coming to Australia’s commercial real estate (CRE) debt market over the next three years.

An expert recently told Australia Financial Review that non-bank lending in the CRE space will likely reach more than $50bn by 2024 – filling a widening gap left by the major banks as they look to minimize their exposure from increasingly risky properties in the tourism and retail sectors, such as hotels and shopping centres.

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“I expect that the four major Australian banks will continue to re-weight their commercial real estate debt portfolios in the wake of the pandemic and lower their exposure to the tourism and retail sectors in coming years,” Richard Jenkins, co-founder and director of consulting firm Plan1, told AFR.

“They will focus on funding prime assets at low-leverage levels given the impending increased capital requirements to be implemented by APRA [Australian Prudential Regulation Authority].”

While data from Plan1 revealed that total lending in the CRE space has reached a record high of $259.6bn in June, higher capital holding requirements and changes from the Royal Commission have caused the share of the CRE debt market held by country’s four largest banks to fall to 71.6% – the lowest it has been since the 2008 global financial crisis.

And while foreign banks (particularly Asian banks) have been increasing their share of the market (to 23%, from just 9% in 2015), this is expected to taper off over the next few years as Chinese investments continue to decline – allowing non-banks to “pick up the slack,” according to Jenkins

Additionally, Jenkins told AFR that non-bank lenders, which don’t have the same capital requirements as the majors, will be required to fund more than $50bn in the CRE debt market by 2024 – the equivalent of the aggregate extra capital APRA has required banks to hold from January 2024 to protect themselves against failure.

The commercial real estate market is itself an unknown quantity at the moment, offering investors (and lenders) a mix of risk and opportunity. The COVID-19 pandemic has turned many CBDs into ghost towns, but there are still buyers with appetite – Singapore investors alone have poured over $1.2 billion into the sector in the first half of the year, up from $970 million during the same period in 2019.

But despite one or two bright spots – the commercial market does look grim – CBRE data shows that overall commercial activity has slumped, with year-on-year activity in the first three quarters almost halving to $15 billion. Retail, unsurprisingly, has been worst hit. So this may not be an “opportunity” that the non-banks want to take.