For the five years to the end of 2007 Australian property investors were spoilt by the simplicity and availability of property finance. The four major banks (the four pillars) dominated the financial landscape and the three second tier banks (St George, Bankwest, Suncorp) each had aspirations for growth and property lending featured prominently in their strategy. These seven banks, a variety of third tier bank lenders both on and offshore, a $30 billion mortgage trust sector plus private and niche lenders combined to provide a plethora
of lending balance sheets with diverse approaches to risk and lending terms. Many of these lenders were chasing volume growth and were often willing to soften credit criteria to win transactions. Pricing was also
used to attract transactions with what seemed like a never ending downward spiral to thinner margins and an acceptance of increased risk as expressed by loan to value ratios.
With cheaper and easier credit being made available, borrowers were prepared to pay ever higher prices for properties, forcing yields down to irrational levels as low as 5% and so fuelling a commercial property bubble. The apparent rise in property values gave lenders comfort and continued to support still cheaper and easier credit. Not only was the initial credit approval easier, so too the loan conditions and post-settlement monitoring with property valuations accepted at face value, scant draw down controls and often a willingness to waive initial approval criteria. Lending grew by about 12% per year in those five years – far outstripping the growth
of bank deposits – and with it Australian banks’ growing dependence on wholesale funding.
These conditions would not last.
Along came the GFC came and the music stopped.
The GFC led to a breakdown in interbank lending and a halting of wholesale funding (bank bond issuance). Economic optimism quickly changed to pessimism for lenders worldwide, including Australia, as they struggled to fund existing loan portfolios, let alone credit growth. The lack of funding availability had an immediate impact with demand for property assets declining. This resulted in a 15-30% drop in commercial property values (witnessed by the rapid expansion of commercial property yields to 8-9%) and an even sharper decline in the values of vacant land. Banks immediately tightened conditions on existing loans, called for new valuations, insisted on fresh equity contributions to remedy gearing breaches and reviewed loan pricing dramatically upward. New credit applications were mercilessly cut off, even in many cases to banks’ existing clients.
Property investors and developers had no certainty of obtaining loan funds so were unable to transact.
From a borrowers perspective, the most dramatic consequence of the GFC is the deeper concentration of power within the Australian banking sector. The four majors now control about 90% of property funding (residential and commercial) and are clearly in a position to dictate terms. The banks are again lending but their pricing and their conservative credit terms are generally aligned.
Mortgage trusts, non-bank institutions and private lenders still account for approximately $20 billion in property loans but have been very quiet for the last two years. There are clear signs now that they are re-emerging and ready for business albeit on a modest scale.
In this environment, demand for debt outstrips supply and lenders are very particular about what they will consider. Assessment criteria typically covers the borrower group in great detail, asset marketability, strength of servicing, lease quality and tenor and the possibility of additional fee revenue from the borrower. On top of all this, the bank approval process is torturously slow and unreliable.
This document has been prepared by Balmain NB Corporation Limited (Balmain) ABN 86 107 505 760
This document contains general information only and does not take into account any individual objectives, taxation position, financial situation or needs. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making any decision.
Balmain has taken all due care in the preparation of this document. To the maximum extent permitted by law, Balmain, its related bodies corporate, directors or employees are not liable and take no responsibility for the accuracy or completeness of this document and disclaim all liability for any loss or damage of any kind (whether foreseeable or not) that may arise from any person acting on any statements contained in this document.
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Snapshot as at
28 February 2020
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A lending margin is added to these rates depending
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