Foreign Banks take the lead in AustraliaApril 30, 2018 / By
Foreign banks have emerged as the dominant lending force in the Australian commercial real estate (CRE) markets over the past few years, as domestic banks seek to reduce their exposure in the face of continued regulatory burdens and capital constraints. While domestic banks hold the lion’s share of overall loan exposures, they have cut their CRE lending by A$6.3 billion over the past 18 months. By comparison, foreign banks have seen their Australian CRE loan books increase by A$23.7 billion (or 117%) over the past two years, taking their overall loan exposures past A$43 billion. Foreign banks (including foreign subsidiary banks) have also increased their share of the total bank lending towards CRE in Australia from a trough of 7.1% in mid-2013 to 16.2% as of the end of 2017.
Figure 1: Foreign Bank CRE lending share
This overall share is closing in on the previous peak of 18% of total CRE exposures, when foreign lenders aggressively entered the Australian CRE lending market in the lead up to the financial crisis.
The environment for foreign lenders to enter the Australian market is extremely favourable, with regulators putting pressure on domestic banks to shore up their capital reserves. Australia also remains one of the few developed markets with relatively wide lending margins (over swap rates), as capital supply in other parts of the world has seen lending competition drive margins lower. Most mature markets globally offer core lending margins somewhere around 100bps over the prevailing swap rate, with some markets like Japan sitting closer to 50 bps. This pales in comparison to Australia where typically even a prime asset can still attract a lending margin of closer to 200bps. Offshore lenders are also filling gaps in various areas of the market by offering terms the domestic banks cannot or will not offer. Higher leverage loans and longer tenors are two good examples where foreign capital has come in to offer a bit more flexibility in the financing environment, which often matches the equity investors financing preferences.
Figure 2: Foreign Bank Branch CRE loan exposure
Another area where foreign lenders have been quite dominant has been in the tourism and leisure (hotels) segment of the CRE markets. In fact, this segment makes up 10% of total loan exposure of foreign banks, compared to just 2% of the domestic banks loan book. Interestingly, foreign banks have yet to jump on the logistics/industrial market to the same extent as their Australian peers, with just 8% of their loans books allocated to this sector, compared to 12% of the domestic banks.
Table 1: Banks CRE Loan exposure by asset classSource: APRA
We see these trends as a result of the combination of growth in foreign investment in the Australian property market that is generally being supported by foreign relationship banks, and the conservatism in the domestic banking market. We expect this trend to continue. It is hard to tell from the statistics, however for development or opportunistic investment, different capital sources are becoming increasingly important.
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