Home World Business APRA warns on commercial property lending standards

APRA warns on commercial property lending standards

0
0
SHARE

Australia’s powerful banking regulator has fired another warning shot at the commercial property sector, saying it will further investigate lending standards and consider “additional guidance” if necessary.

Wayne Byres, chair of the Australian Prudential Regulation Authority, on Friday flagged “further tightening” from banks in the $1.5 trillion residential mortgage market, a crackdown some experts believe is behind a gentle slowdown in residential real estate in the past month.

Bank lending for new residential construction in Australia's eastern capital cities was, at the end of 2015, growing ... Bank lending for new residential construction in Australia’s eastern capital cities was, at the end of 2015, growing extremely rapidly, at 30 per cent per annum. Photo: Graham Denholm

But while there has been intense focus on residential property, commercial real estate cycles traditionally have caused more stress in the banking system, Mr Byres said at a committee for economic co-operation of Australia event.

Given the heterogeneous nature of commercial property lending, APRA said it was more difficult to implement curbs similar to residential lending where caps on interest-only loans by banks have prompted lenders to raise interest rates for some borrowers, slowing the rate of borrowing.

Australia's commercial property sector is being underpinned by rising tenant demand for office space and the flow of ... Australia’s commercial property sector is being underpinned by rising tenant demand for office space and the flow of money from offshore investors. Photo: Graham Denholm

“That should not be read to imply we have any less interest in the quality of commercial property lending,” Mr Byres said.

“Our work plan certainly has further investigation of commercial property lending standards in 2017, and we will keep the need for additional guidance material under consideration,” he said.

Australia’s commercial property sector is being underpinned by rising tenant demand for office space and the flow of money from offshore investors.

The Commonwealth Bank’s global head of real estate, Graeme Ross, said Friday the lender remained positive towards the office and industrial segments of the NSW commercial property market, while retail was declining.

Commercial lending for residential construction has grown sharply. Commercial lending for residential construction has grown sharply. Photo: Jessica Shapiro

In central Sydney there was a low amount of supply coming onto the market, and demand for office space was strong.

“The tightness of that market and the general growth and demand from tenants has seen prime prospective rents move quite substantially over the last 12 months,” he said.

Overseas capital has also flowed in, especially from Singapore and China.

“Every week I have another meeting with at least two new investors into Australia which have very significant mandates to invest in Australia,” Mr Ross said.

While commercial lending exposures of APRA-regulated banks continue to grow in absolute terms, they have declined relative to the banking system’s overall capital.

“Exposures are now well down from pre-GFC levels as a proportion of capital, albeit much of the reduction was in the immediate post-crisis years,” Mr Byres said.

There were two exceptions – lending for land and lending for residential development.

Bank lending for new residential construction in Australia’s eastern capital cities was, at the end of 2015, growing extremely rapidly, at 30 per cent per annum.

That rate has since slowed significantly, APRA said, with newer projects only being funded as existing projects are finished.

But the rapid rise in construction lending prompted APRA’s 2016 review, which found “clear evidence of an erosion of standards due to competitive pressures”, Mr Byres said.

“Prudence (not prices) is our catch cry: our objective is to make sure that, whatever the next stage of the property cycle may bring, the balance sheet of the banking system is resilient to it.”

LEAVE A REPLY

Please enter your comment!
Please enter your name here