Commercial real estate loans peak despite rising rates and pandemic

Lending to the office sector reached an all-time high, and while high-density development and subdivision debt rose 7.4% during the year, exposure to the sector declined to well below 2017 peak.

“Banks are adjusting their portfolios and increasing their exposure to the industrial sector at the expense of higher risk categories such as land and residential development,” Jenkins said.

The nation’s largest bank, CBA, had $87.3 billion in commercial real estate loans on its books at the end of June, according to its annual results.

Only about 0.4% of that debt was classified as “problematic or impaired assets,” compared to 3.1% of the bank’s $11.2 billion construction loan portfolio.

The bank said its exposure to apartment space was 45% lower than the last lending peak in December 2016. Retail and office debt had the largest weightings in its portfolio, it said. declared.

Retail exposure was biased towards landlords who have non-discretionary retailers as their anchor tenants and office sector exposure was biased towards high-end buildings, as well as A- and B-grade properties.

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Banks began to reduce their lending activity and their exposure to construction projects, forcing developers to turn to non-bank financiers, Jenkins said.

Office owners may find it difficult to obtain financing from big banks as they become more selective about the sectors they lend to, especially with falling occupancy rates and the slow return of workers.

Dan Gallen, chief investment officer at financier Pallas Capital, said market conditions remained tight as interest charges followed Reserve Bank rate hikes.

The number of commercial real estate borrowers unable to meet bank loan conditions has increased, Gallen said. “In many cases, bank lending policies have resulted in banks only lending at lower loan-to-value ratios than, say, four months ago.”

Banks are now lending at loan-to-value ratios of 50-55%, compared to earlier this year they would have lent at 65%, he said.

“This has caused many development projects to be postponed, as developers are often unable to find the additional equity capital needed to make up the shortfall.”

Non-bank lenders continue to fund projects, but those dependent on support from high net worth individuals are reducing loan volumes or only lending at significantly higher rates, Gallen said.

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