Record commercial property bank debt to subside as banks rethink their exposure

The surge was led by the industrial sector with growth of $5.2 billion, as less popular commercial property, such as warehouses, made a comeback on the back of a boom in e-commerce.   

And despite COVID-related work disturbances, office deals increased by a record $4.7 billion, with bank debt secured against retail assets up by $4.5 billion.

But despite the record-breaking figures, Plan1 believes a drop off in bank lending is around the corner, with banks said to be reconsidering their exposure to retail and tourism property in particular, as the risk factor of shopping centres and hotels increases on the back of the COVID pandemic.

Plan1 co-founder and director Richard Jenkins told AFR that it will be a year to watch for retail.

“For decades, it’s been the sector lenders relied on for steady income. That’s no longer the case, given the increased store vacancy and reduced capital expenditure,” Mr Jenkins said.

Similarly, ratings agency Fitch declared in June that “the quality of Australian major banks’ commercial real estate exposure is likely to deteriorate over the next two years due to the economic downturn caused by the coronavirus pandemic”. 

At the time, Fitch noted that structural changes in consumer and business behaviour, such as remote working and online purchasing, could increase vacancy rates, lower asset values and reduce volume growth in the long term.

It also revealed that office space exposure was the largest sector within the major banks’ CRE exposures, with the proportional exposure to retail property up substantially to 26 per cent of total CRE in 2020, from 16 per cent in 2008. 

But property is not expected to feel the pinch of the banks’ withdrawal, with Mr Jenkins revealing that non-bank lenders are predicted to step in, picking up some of the slack.

Late last year, CRE debt by non-bank lenders was predicted to explode to over $50 billion by 2024 — equal to the aggregate extra capital APRA has asked banks to hold from January 2024 to protect themselves against failure.