Chapter News

Commercial lending: The current state of play

In the first of a two-part series on lending, the Journal asks the industry to assess the commercial lending market and its direct impact on real estate.

Commercial broker

Jason Meares - CEO of Centenary Advisory Group

Q. What is the current state of the commercial lending market in NSW?
After the GFC, the banks have had a very thin layer of capital for property transactions.

It took the banks about five years to clean up their balance sheets and we saw the banks chase the usual ‘mum and dad’ consumer finance area. It was difficult to raise commercial property related debt with the banks. They were only lending to very solid transactions. There was a reasonable pit of money for transactions under $5m.

However, the banks have recently appeared to open their doors a bit wider and there is a stronger appetite for commercial mortgages.

Q. What are the driving factors in the lending market?
You don’t have to be a rocket scientist to see Sydney’s recent property boom is being driven by investors wanting to acquire property in Sydney, which is seeing property prices increase – the old supply and demand rule – and seen developers obtain high pre-sale levels in the residential market.

For a bank construction loan, pre-sales are fundamental. After the GFC we saw many developments stall with investor sentiment very low. Once investors had confidence in the market again we have seen incredible results. One of our recent clients had made a $1,200,000 budget for marketing and sold out after spending just $30,000.

Q. Will the market correct itself?
I think some postcodes have gone too high in their asking prices. With all markets there’s a correction at a point in time. As long as they can develop the asset and sell it in this cycle, [developers] will do OK. Liquidity is the key to economic activity in all markets.


Commercial agency

Matt Whitby - National Director and Head of Research & Consulting at Knight Frank

Q. What is the current state of the commercial lending market in NSW?
With interest rates at historically low levels and relative strength in underlying property values, banks have an increased willingness to lend and recycle debt capital and are being increasingly competitive. Foreign banks are also coming back, which is assisting with pricing and terms available to borrowers.

Q. What impact does this have on developers?
A. After several years of funding challenges for developers, during and post the GFC, activity within the development sector is trending upwards, as site values increase. However, banks remain discerning in their choice of lending for non-income producing development sites. Those with DAs in place, hence mitigating planning risk, are the most highly sought after as banks are continuing to enforce relatively strict lending criteria such as 50%+ pre-sale levels and 100%+ debt cover ratios prior to lending.

Q. What impact is the lending market having on agents?
A. Commercial transaction activity hit record highs in 2013, predominately driven by the low cost of capital environment. The improvement in the availability and cost of debt was a material factor in driving this level of activity as has the inflow of domestic and global equity capital. Notwithstanding the weak underlying occupier activity, office transactions were double the levels of 2012, while in the retail sector the 2013 levels was 40 per cent higher than 2012, highlighting that investor appetite for hard assets like commercial property was insatiable over the past year.

This article was first published in the April 2014 edition of the REINSW Real Estate Journal.