As Australia’s housing supply slows, overseas debt investors are starting to look to the country’s commercial real estate market.
Over the past two years, foreign lenders have plugged a financing gap in the residential development market, but regulatory measures to cool the housing market and curb investor lending has affected the housing pipeline, prompting overseas and non-bank lenders to turn to other asset classes.
“Residential lending has been the go-to for people trying to find a niche in Australia. But the coupons are coming down,” says Stuart Crow, Head of Asia Capital Markets for JLL.
“I’ve heard people say the risk/reward is not there, and at some point, it may be that mezzanine debt, particularly in development, doesn’t look as good as it once did.”
The number of foreign banks gaining exposure to the Australian market has rocketed over the past two years, plugging the debt funding gap created by domestic lenders.
Lending margins over prevailing swap rates in Australia tend to be higher than most other core markets, adding to the attraction for foreign lenders by supporting higher returns.
However, given where the residential market is in the cycle, “the question for overseas debt funds is whether they can deploy capital in that mezzanine high-yield space,” says Nicholas Wilson, Director of Capital Markets Research for JLL.
On the other hand, the complex market conditions have created an opportunity for further structured finance, he adds.
The difficult lending market locally has caused developers to shift their focus from high-density large scale projects to small-medium density developments, or to defer their projects to the next cycle, according to JLL’s Head of Residential Development in Australia, Troy Linnane.
Though he adds the pace of decline is showing signs of stabilizing.
Click to read about how and why Japanese capital is targeting Australia.