This article is from the Australian Property Journal archive
AUSTRALIA’S banking regulator is stepping up scrutiny over lending to commercial property, which accounts for disproportionate losses in a crash and bring banks down, rather than the housing market.
Speaking at the Centre for International Finance and Regulation lunch in Sydney yesterday, Australian Prudential Regulation Authority’s executive general manager of supervision and support Charles Littrell said APRA is increasing focus on bank lending to commercial property.
“There is a lot of conventional work at our end focusing on sound lending – and in fact, we are now dialling up our systemic supervisory focus on commercial real estate,” Littrell said.
Although banks require more equity for commercial real estate loans than residential property, they do not report reveal the loan to value (LVR) ratio.
APRA’s concerns were echoed by the Reserve Bank of Australia’s head of stability Luci Ellis, who said commercial property loans can become a “vector of stress” during a crisis.
“While it is true that we tend to see housing booms and booms in housing prices ahead of banking crises, it is usually not the mortgage book that is the issue that actually brings the banks down.
“The thing that has tended to be the casual agent in banking crises…[has been] the property developers [and] commercial real estate – these are the vectors of stress that actually cause a problem for the banking system historically,” Ellis said.
This is not the first time the monetary authority has warned of higher risk in the commercial property sector.
In September last year, the RBA said the obsession with the boom–bust episodes of housing market has distracted and shifted focus away from commercial property, which accounts for disproportionate losses in a crash.
At the time, Ellis said commercial real estate lending should receive equal attention from risk managers, policymakers and academic researchers.
“It is these segments of lending that tend to grow in importance in the late stages of a boom, and to account for a disproportionate share of loan losses in a bust,” she pointed out.
A chart from RBA/APRA shows at the peak of GFC in 2010, the share of non-performing assets in commercial property was over 6% versus under 1% for housing.
“It is easy to wrap your arms around the housing market, whereas there are these more subtle issues. We think it’s really important to keep watching that and understanding that. You’ve got to put appropriate weight on both of them. It’s not either or. You’ve got to look at both.
At the time, Westpac general manager, risk analytics and insights, Sean Carmody agreed with the RBA’s assessment and said commercial property was riskier.
“We still see, in our stress testing, that is where we tend to lose the most money. Where banks have always lost the most money is commercial property.
“Not withstanding that these are big portfolios with the banks, they do need to be resilient,” Carmody reportedly said.
According to Credit Suisse, National Australia Bank has the highest exposure to commercial real estate, representing 11.6% of total group exposures.
APRA’s move could potentially see banks introduce tighter lending standards to commercial property, similar to the restrictions placed on residential real estate developers and property investors, particular for high-rise apartment projects. Those measures have slowed the growth of investment lending.
An estimated 44,784 apartments are due for completion this year across Sydney, Melbourne and Brisbane, compared to 36,486 last year. MacroPlan Dimasi estimates 52,920 apartments will be completed next year.
Australian Property Journal
