Non-Bank Lenders Thriving in Australian Commercial Property Market Amidst Bank Pullback


Updated: 2:39 AM, Mon November 06, 2023

Non-Bank Lenders Thriving in Australian Commercial Property Market Amidst Bank Pullback

Private credit lenders are making significant strides in the Australian commercial property market as traditional banks reduce their higher-risk lending activities due to the impact of elevated interest rates. This shift has opened up opportunities for borrowers who are now seeking alternative sources of funding.

The availability of funds for commercial property deals is on the rise, as investors like pension funds, sovereign wealth funds, and insurance firms are in search of substantial returns that are becoming scarce in today’s equity markets. These investors are particularly interested in the real estate sector, which has been discounted due to various challenges.

Qualitas, an Australian real estate specialist with backing from the Abu Dhabi Investment Authority, has nearly doubled its funds under management to A$8 billion ($5.07 billion) since mid-2022, with a significant portion of this increase occurring since June. Similarly, U.S.-based PGIM Real Estate intends to deploy an additional $1 billion in the country over the next few years, according to Steve Bulloch, the firm’s head of Australian real estate.

Non-bank lenders have been steadily growing their presence in the market, although they still represent a relatively small portion of Australia’s financial assets, amounting to roughly 5% in 2022, compared to the International Monetary Fund’s global estimate of 50%. Nonetheless, these lenders have expanded their operations, reaching more than A$600 billion in assets last year, including lenders focused on retail credit. Now, they are further expanding into residential and commercial construction as banks reduce lending or exit these sectors, as reported by the Reserve Bank of Australia (RBA) in March.

Borrowers can expect attractive returns ranging from 9% to 11%, backed by the security of loans tied to tangible assets such as condos or warehouses. These loans often come with a 30% to 40% equity buffer, offering additional protection for lenders. Paul Notaras, the executive director at Barings Real Estate Australia, highlights the higher costs associated with borrowing from non-bank lenders, with the Reserve Bank of Australia citing a spread of approximately 200 basis points over major bank loans for various business loan types.

However, despite the increased costs, non-bank lenders are seen as a valuable source of credit as traditional banks have become more cautious in lending to sectors historically considered high-risk, such as construction. The challenges faced by the construction industry are evident, with the highest number of insolvencies recorded last financial year since 2013, as builders grapple with rising costs and fixed-price contracts.

Data from the prudential regulator shows that new commercial property lending by the four major banks has only seen modest growth, averaging 1% per quarter since June 2022, levels last seen during the pandemic. This lending has mainly been focused on offices and residential contracting. Major banks now prioritize blue-chip property companies due to increased prudential scrutiny and reduced risk appetite. Andrew Schwartz, co-founder of Qualitas, explains that banks have tightened their loan-to-value ratios and narrowed the types of borrowers they are willing to work with, making it more challenging for borrowers to secure financing and driving them towards alternative lenders.

Banks remain cautious about lending more than 40% to 45% against the value of build-to-rent residential projects. In contrast, private lenders are willing to go as high as 65%, according to Barings’ Notaras. The issuance of property-related bonds has also hit record lows, hindering many unrated mid-market borrowers from accessing this form of financing.

Despite the challenges facing certain segments, such as office and retail spaces, non-bank lenders are drawn to companies contributing to Australia’s undersupplied residential market, especially in the emerging build-to-rent sector, as well as the resilient warehouse and industrial property market. For instance, Qualitas and the Abu Dhabi Investment Authority have formed a A$1.45 billion partnership focused on the residential sector.

While some experts have raised concerns about the increased costs associated with non-bank lending, the growing presence of these lenders in the Australian commercial property market has provided borrowers with much-needed credit at a time when traditional banks have scaled back their activities in higher-risk sectors. With institutional investors increasingly seeking to diversify their portfolios and take advantage of the lucrative returns available in real estate, the role of non-bank lenders is set to continue expanding in the Australian market.

Frequently Asked Questions (FAQs) Related to the Above News

What is the current state of the Australian commercial property market?

The Australian commercial property market is experiencing a pullback from traditional banks due to a slowdown caused by elevated interest rates. This has created opportunities for non-bank lenders to thrive and provide alternative financing options.

Why are non-bank lenders thriving in the Australian commercial property market?

Non-bank lenders are thriving because they are filling the gap left by traditional banks that have retreated from higher-risk lending. These lenders offer higher loan-to-value ratios and attractive returns, making them an appealing option for borrowers.

What types of investors are fueling the growth of non-bank lenders in the Australian commercial property market?

Institutional investors, such as pension funds, sovereign wealth funds, and insurance firms, are seeking higher returns that can be hard to find in today's equity markets. They are investing in non-bank lenders to diversify their portfolios and take advantage of opportunities in the real estate sector.

What is the level of non-bank lenders' presence in the Australian financial market?

Non-bank lenders currently account for only around 5% of all financial assets in Australia, compared to the global estimate of 50% by the International Monetary Fund. However, non-bank lending in the country exceeded A$600 billion in assets last year.

What types of assets do non-bank lenders typically offer loans against?

Non-bank lenders typically offer loans secured against real assets such as condos or warehouses. These loans often have a 30% to 40% equity buffer, providing added security.

Why are non-bank lenders particularly valuable in the construction sector?

Traditional banks have slowed lending to high-risk areas such as construction, creating a gap in the market. Non-bank lenders are filling this gap and offering valuable credit options for construction projects.

What segments of the property market are experiencing challenges?

Segments like office and retail have been heavily impacted by higher interest rates and changing consumer habits. Traditional banks and large institutions are shying away from these projects, creating opportunities for alternative lenders.

What are the growth prospects for non-bank lenders in the Australian commercial property market?

Non-bank lenders are expected to continue their growth and expansion as they fill the gaps left by traditional financial institutions. Especially in undersupplied residential markets and robust markets such as warehouses and industrial properties.

Please note that the FAQs provided on this page are based on the news article published. While we strive to provide accurate and up-to-date information, it is always recommended to consult relevant authorities or professionals before making any decisions or taking action based on the FAQs or the news article.

Share post:



More like this

Oil Prices Rise on Easing Inflation Signs in the US – Brent Crude Hits $86

Oil prices rise as US inflation eases - Brent Crude hits $86. Signs of demand recovery and economic weakness influence market sentiment. Will Fed cut rates?

HERO Software Raises €40M in Series B Round to Revolutionize Tradesmen SMEs in Europe, Germany

HERO Software secures €40M to revolutionize tradesmen SMEs in Europe. Join as they lead the way in digitalizing the industry for success.

Robotic Revolution: Future of US Military with AI Warriors

Explore the future of US military with AI warriors and robotic revolution. Find out how smart machinery will shape warfare in the coming decade.

WHO Urges High-Risk Groups to Get COVID-19 Vaccines Amid Declining Coverage

WHO urges high-risk groups to get COVID-19 vaccines as coverage declines. Director-General calls for prioritizing health workers and individuals over 60.