Total Australian commercial real estate bank debt reached an all-time high of $261.7 billion in the 2020 calendar year, fuelled to a large extent by the booming industrial property sector as well as legacy office and retail commitments, new figures show.
However, lending growth is expected to ease back this year due to declining activity in the pandemic-hit retail sector and as banks further reduce their appetite for residential developments, where non-banks will continue to grow their market share.
Analysis by consultants Plan1 shows that over the 12 months to December 2020, total commercial real estate debt provided by all banks increased by 6 per cent or $14.7 billion.
This was led by the industrial sector, where bank debt funding increased by $5.2 billion as the e-commerce boom drove waves of investment capital into warehouses and logistics projects.
Funding for office deals grew by a record $4.7 billion, while bank debt secured against retail assets lifted $4.5 billion despite the sector taking a pounding during the pandemic as vacancies increased, rental income dried up and values fell.
Funding for residential developments – new apartments and land subdivisions – fell $2.3 billion during the year as banks restricted their lending to high-profile projects, while funding for another hard-hit sector, hotels, rose by a modest $1.3 billion.
Looking ahead at 2021 and beyond, Plan1 co-founder and director, Richard Jenkins said he anticipated that banks would continue to reweight their lending books towards industrial but with reduced exposure to residential and retail assets.
“Residential development will continue to decrease given diminishing development pipelines and constrained appetite from banks,” Mr Jenkins said.
“It will also be a year to watch for retail. For decades it’s been the sector lenders relied on for steady income. That’s no longer the case, given the increased store vacancy and reduced capital expenditure,”
Overall, Mr Jenkins said, there would not be the same growth in bank lending for commercial property assets over the next couple of years.
He said the high levels of debt funding in the office and retail sectors in 2020 had a lot to do with legacy projects, where banks had already committed finance at a time of strong economic tailwinds.
However, this was likely to ease back given the changed conditions since the pandemic and with fewer big officer and retail projects likely to proceed.
It is expected non-bank lenders, which have re-emerged from the pandemic and been successful raising fresh capital, would pick up some of the slack, not just in funding residential development, but in the commercial sectors as well.
Kathy Johnson, co-founder of commercial mortgage originator Yarraport, said the commercial real estate debt exposure held by the major banks in office and industrial were at record highs.
“At present, new lending demand from Australian banks is generally subdued. However quality assets and quality sponsors continue to attract interest.
“Some banks’ liquidity position provides for more capital to deploy than others but it’s about knowing where to go,” she said.
Article First Appeared in Financial Review | Larry Schlesinger | 19 Jan 2021