Recent deals in Australia, including PGIM Real Estate’s provision of AU$70 million in senior debt for a commercial redevelopment in Brisbane, have brought the issue of availability of commercial real estate debt into sharp focus.
The deal, which will be the fund’s single largest debt exposure in Australia has led many to examine the landscape of Australian property debt in the post-GFC environment.
According to JLL’s Head of Debt Capital in Australia, Tim du Temple, it’s the major banks and their subsidiaries that continue to carry the bulk of domestic debt provision in the Australian real estate market, with an 80 to 85 percent market share; significantly above the pre-GFC levels, when these banks accounted for under 70 percent of commercial real estate lending.
However, the market is shifting – regulatory changes and high levels of real estate lending have altered the nature of this category of debt in Australia, forcing banks to reassess their exposures to the real estate market , particularly residential development funding.
“There’s still strong appetite for well-located income-producing assets, but the banks are tightening up their lending criteria. “They’re getting more considered in terms of the deals they finance but commercial real estate– more specifically residential development funding – is a significant part of their overall lending business so they need to balance it carefully.”
“Given the strength of both the Sydney and Melbourne office markets, which continue to display strong fundamentals, we are likely to see a continuation of lending demand in these markets from the banks.”
“As domestic banks begin to readjust their exposures to commercial real estate lending, du Temple expects alternative lenders to step into the gap and is seeing increasing numbers of lenders starting to target Australia as a destination for debt investment.”
“At the moment, there is little indication that the relatively conservative levels of senior debt being offered by banks is going to change – but that may shift going forward,” says du Temple. “As commercial real estate investment returns continue to tighten, we may see the emergence of more structured real estate debt to assist in extracting additional value.”