A new survey has found the industrial and logistics sector remains the clear top pick in Australia for lenders, however build-to-rent (BTR) has been on the rise.
The new CBRE lender sentiment survey tapped a mix of 31 local and international banks and non-bank lenders for its H1 survey of Australian commercial real estate lenders.
While lending costs were expected to rise and there had been a moderate dip in the desire to grow commercial loan books, the survey showed that banks and non-bank lenders still had Australian property in their sights.
Following the industrial sector, Australia’s emerging BTR sector came in at second place, as population growth projections, an ever-tightening rental market and a more favourable taxation environment strengthened the sector’s growth prospects.
The majority of respondents expect lending costs to increase going forward and there was a moderate dip in the percentage of respondents expressing a desire to grow their commercial loan books – from 44% in October last year to 32% when this month’s results were calculated.
However, CBRE’s Managing Director of Debt & Structured Finance Andrew McCasker said domestic banks, offshore banks and non-bank lenders were still participating with varying appetites across all the asset classes in Australia.
“The majority are willing participants in the industrial and build-to-rent sectors, and we see that continuing to build out over 2023, moving into 2024,” McCasker said.
“The underlying fundamentals of Australia’s housing economy is creating significant opportunities in the BTR sector and the desire by domestic and offshore financiers to fund projects will see this sector continue to grow in the coming years.”
CBRE’s Pacific Head of Research Sameer Chopra said the top line results showed that industrial remained the favoured asset class, with more than 4/5 of the survey respondents expressing a preference to lend into that sector.
“The overall reduction in lending appetite was most prominent amongst non-banks, although the results show that are still interested in growing their BTR, residential-to-sell and industrial portfolios,” Chopra said.
“Tighter credit conditions are placing undue downward pressure on future supply, which could boost longer-term rent growth across all sectors.”
Credit margins could continue to see upward pressure of approximately 20bps, with over 40% of lenders indicating such a move over the next three months.
An Interest Coverage Ratio (ICR) requirement of 1.5x for new investment grade lending was preferred by over 80% of the institutions surveyed, with ICR also the main focus for new underwriting.
While Loan to Value (LVR) ratios have been stable around 40-60%, Chopra noted that they might come under pressure as assets were revalued during the coming two quarters, with a slight uptick in hedging requirements since October last year.
“Lenders also indicated higher average credit spreads, LTV and ICR requirements for prime office assets compared to their industrial counterparts,” Chopra said.