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APRA flags commercial lending risks

The prudential regulator has identified risks in the commercial real estate lending space off the back of softening demand for property from local and foreign buyers.

In its latest insight into the commercial real estate (CRE) lending market, the Australian Prudential Regulation Authority (APRA) has raised concerns over the rise in higher-risk lending associated with the reduced number of loan applications with “qualified pre-sales” in the CRE market, with property developers increasingly opting to “construct to hold”.

The prudential regulator attributed the shift in demand to softening market conditions coupled with an oversupply of housing.

“More recently, APRA has observed an emergence of ‘construct to hold’ residential development loans, which do not require, or require reduced levels of, qualifying pre-sales,” the regulator said.

“All else being equal, these loans imply higher credit risk and are likely to reflect difficulties in obtaining qualifying pre-sales in an environment of softening demand from end purchasers, both foreign and local, in the presence of already boosted supply and softening house and apartment prices.”

Majors and foreign banks still dominating CRE space

In its analysis, APRA also stated that major banks “continue to be the main lenders to the Australian CRE industry”, with the foreign bank branch sector the second-largest CRE credit provider.

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APRA added that the foreign bank branch sector has been “growing rapidly” and has exposure levels “greater than other domestically owned banks and foreign bank subsidiaries combined”.

According to APRA, before the global financial crisis, foreign banks (subsidiaries and branches combined) lent approximately 20 per cent of all Australian CRE credit.

APRA stated that the GFC saw the exit of many European bank branch operations from Australia and an associated reduction in their CRE lending.

However, the regulator observed that over the past four years, there has been a “resurgence” in foreign branch bank CRE lending activity, particularly from lenders based in Asia.

APRA concluded: “Asian-based banks have driven the foreign bank sector’s lending to CRE back to – and above – pre-global financial crisis levels.”

[Related: APRA scraps interest-only cap]

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