Property Australia

How is Australia’s capital debt market weathering the pandemic?

PROPERTY AUSTRALIA October 6, 2020

With liquidity in the market and interest rates at historic lows, debt remains attractive, according to Stamford Capital’s first post-pandemic real estate capital debt markets survey.

 

  Three key takeaways:

  • Stamford Capital’s third annual Real Estate Debt Capital Markets Survey is a barometer of lending sentiment and an early identifier of market trends.
  • There is still liquidity in the market, thanks to the Reserve Bank, government support schemes and the empathetic actions of lenders
  • 68% of survey respondents expect major banks to tighten lending criteria for construction loans in a post-COVID environment.

 

Stamford Capital surveyed Australia’s commercial finance sector in February 2020 and again in August 2020 after the “first wave” of the global pandemic.

More than 100 active lenders participated in the national survey, including major trading banks and non-bank lenders, super funds, foreign banks, private financiers and second-tier trading banks. More than half of survey participants have loan books over $500 million.

Stamford Capital’s joint managing director Michael Hynes says the data has “effectively captured the ‘pain points’ in the market and the changes we can expect to see over the next six to 12 months”.

 

Liquidity remains in capital markets

Overwhelmingly, participants expect investment loan appetite to remain strong with 70 per cent expecting major banks’ appetite to be maintained or increased and 84 per cent expecting non-banks to maintain or increase their investment loan appetite.

Construction lending is slightly less optimistic, with 57 per cent of major banks and 68 per cent of non-banks expecting to maintain or increase it.

Stamford Capital says government initiatives throughout COVID-19 such as JobKeeper and the HomeBuilder Grant have propped up the economy while helping retain liquidity in market.

“With historically low cash rates, there’s no return in banks and equity markets are perceived as too risky, so debt has emerged as an attractive asset class and we expect will remain favoured by investors,” Hynes explains.

 

Lending criteria to tighten

The biggest impacts of COVID-19 are expected to include further tightening of lending criteria, reduced leverage and increased margins.

The pre-COVID-19 dataset showed 13 per cent of respondents expected major banks to tighten lending criteria for investment loans with 19 per cent expecting stricter criteria for construction loans. This ballooned to 62 per cent and 68 per cent respectively in the post-COVID-19 environment.

A third of lenders are now looking to decrease leverage levels, compared to just three per cent pre-COVID. Similarly, 67 per cent of lenders expect an increase in loan margins in 2020/21 compared to only 11 per cent pre-COVID.

Hynes’ colleague and joint managing director, Domenic Lo Surdo, says COVID-19 has introduced “prolonged uncertainty” and lenders are reducing their appetite for risk and factoring it into pricing. “Construction lending looks set to be the hardest hit.”

According to the survey results, banks and non-banks are set to increase margins. In fact, 67 per cent of respondents expect to see major banks increase loan margins, a significant jump from only 11 per cent in February. Nearly two-thirds (64 per cent) of respondents expect non-banks to increase loan margins, up from just 12 per cent pre-COVID.

 

A spotlight on presales

Reduced risk profiles, growing caution and continued uncertainty have once again put the spotlight on pre-sales.

Stamford Capital’s data shows that 60 per cent of all lenders surveyed require 60 to 100 per cent in pre-sales, with 17 per cent expecting this to increase further in the next six to 12 months. An overwhelming 93 per cent of major and second-tier banks require 60 to 100 per cent in pre-sales.

The non-banking sector however continues to power on, increasing market share and underwriting developments with limited pre-sales. Half of non-banks surveyed require no pre-sales at all, although a quarter plan to increase this in the next six to 12 months.

“Non-banks continue to flourish in this market, just last year 34 per cent of nonbanks in our survey required no pre-sales and this has jumped to 50 per cent this year – even with COVID’s impacts the non-banks continue to increase traction,” Lo Surdo adds.

“It’s getting harder for large-scale developments to secure funding, with banks seeking significant levels of pre-sales.”

Torie Brown, the Property Council’s acting executive director for capital markets, says the latest data from Stamford Capital “further reinforces that COVID-19 is not a liquidity crisis, it is a health crisis”.

“There is still capital looking for opportunistic investments in Australia right now, which is quite a different economic experience to that endured during the global financial crisis,” Brown explains.

“It’s vital that the Australian Government doesn’t reduce the availability of debt by applying high Foreign Investment Review Board approval fees to foreign owned non-bank money lenders, as this data shows how vital this sector has been for the property industry since the pandemic began.”