‘Rising risks’ for banks in commercial property

Higher vacancy rates for office properties combined with growing settlement risks for newly-built residential apartments add up to a credit negative for Australia's major banks, Moody's Investors Service has said.

A new report by Moody's Investors Service has concluded that the risks from commercial real estate are rising for the big four banks, but they remain "manageable".

After a hiatus in the years following the global financial crisis, Australia's major banks have been steadily growing their exposures by 5 per cent or more each year from December 2013 onwards.

There are two major risks in the commercial property sector, according to Moody's.

First, there are higher vacancy rates in office properties in Brisbane and Perth due to an increase in supply (and weak demand).

Second, there is growing settlement risk from a potential oversupply of newly-built residential apartments in Sydney, Melbourne and Brisbane.

The second risk factor could negatively affect property development companies as well as the broader market, said Moody's – "especially in the context of tighter lending restrictions imposed by the major banks recently".

However, Australia's major banks should be able to manage the risk because they have limited their exposure to the high-risk commercial property segments, said Moody's.

The major banks' commercial real estate loans as a percentage of total committed exposures is "moderate" at around 6-8 per cent, said Moody's.
Australia's big banks also tightened their lending criteria to the commercial real estate sector following material losses in the aftermath of the GFC, said the ratings house.

"As a result, we see foreign bank branches being more at risk of current headwinds in this segment, and expect the major banks' CRE impairment levels to remain at moderate levels," said Moody's.

A stress test of the major banks' commercial real estate exposures indicates only a "mild deterioration" in Common Equity Tier 1 ratios under a "severe stress" scenario, said Moody's.

[Related: Banks set to be sidestepped for property funding]

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