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May 31, 2018

Foreign banks have plugged the debt funding gap created by domestic lenders, with their exposure to Australian commercial real estate rocketing by 117 percent over the past two years.

Their loan exposures have now passed A$43 billion, giving them a market share of 16.2 percent as they take advantage of favourable conditions.

By comparison, lending by domestic banks in the Australian market reduced by $A6.3 billion over the past 18 months as regulatory pressures and higher risk weighting for commercial real estate take their toll.

Lending margins over prevailing swap rates in Australia tend to be higher than most other core markets, which is supporting higher returns for many foreign lenders.

While domestic banks still dominate the Australian market, the growing provision of foreign property debt is good news for investors who want more flexibility.

Nicholas Wilson, director of capital markets at JLL, says: “Higher leverage loans and longer tenors are examples of how foreign capital can better meet investors’ financing preferences.”

He adds that the diversity of capital sources is also important for investors making opportunistic plays on the market, as well as for development.

There is increasing conservatism in the Australian market. Pressure on banks to shore up their capital reserves have forced them to reassess their exposure to real assets, particularly residential.

As well as offices, foreign debt is prevalent in the hotels sector, which accounts for 10 percent of banks’ total loan exposure, compared to two percent of domestic lenders.

The rise also in total offshore investment into Australia (36 percent in 2017 compared to 26 percent in 2012) would indicate that lenders are leveraging their relationship and following their clients into the market.

Click to read why investors are looking to debt as interest rates rise.

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Nicholas Wilson

Director, Corporate Finance & Debt Research Asia Pacific Capital Markets

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