Banking on it

Banking on it

Total Property - Issue 4 2018

With increased interest in commercial and industrial property from investors, how do the banks approach lending in these sectors and what clues does the current broader economic environment give us?

According to the Reserve Bank of New Zealand (RBNZ), New Zealand’s financial system remains sound with key risks being housing market vulnerabilities, dairy sector indebtedness and the banking system’s exposure to volatility in international funding markets.

As for the commercial and industrial property lending environment, head of macro financial for RBNZ, Bernard Hodgetts points to RBNZ’s November 2017 financial stability risk and policy assessment (FSR).

That report says commercial property prices have increased strongly over the past three years, credit growth to the sector has been relatively strong and commercial property lending now accounts for around 8 percent of total bank lending.

Risks appear to be relatively well-contained for now and in recent years, New Zealand commercial property prices have increased at a faster rate than in many other countries.

Further, the strength of the New Zealand economy has increased owner-occupier and investor demand for commercial property, supporting capital growth and, despite price growth outpacing rental inflation, rental yields still appear attractive relative to other markets.

BNZ head of property finance, Phil Bennett says BNZ continues to support high quality developments with an emphasis on working with its current customers and that essentially, the key lending fundamentals never change.

“Client character, capability and capacity is always to the forefront of any lending decisions,” he stresses.

“Then, the market conditions, yield, cashflow, and security coverage come into play.”

Head of property finance, corporate business, and institutional relationships at Westpac, Andrew Bashford, says Westpac’s commercial property strategy focusses on providing customers with tailored and fit-for-purpose funding support.

“We have maintained our appetite for lending to the commercial property sector with unchanged lending criteria,” he says.

“Westpac continues to positively support its customers and maintains a watching brief on economic developments and potential impacts on the property sector, at both a macro-level and by region and asset class.”

Director of New Zealand Mortgages and Securities, James Kellow, is pretty upbeat about the current lending environment.

For more than five years now, he’s stated that interest rates would not go up in the short term saying there is very little pressure to do so.

“In the medium term with a change in government, continued global growth, Americas Cup celebrations and positive business sentiment, rates could trend up, but they’re unlikely to reach the levels of 10 years ago.”

Kellow says banks are aware of the “flight to quality” in the current market and are concentrating on transactions with strong lease covenants, low area vacancy and rental growth potential to offset any medium term interest rate hikes.

“The three Cs are pivotal. Counterparty – who is the borrower, and what is their ability to fund any unforeseen capital costs? Collateral – what is the property to be mortgaged, is it of an acceptable quality, are the tenants reliable and has the valuer outlined any unacceptable risks or CAPEX requirements?

“And thirdly, Cashflow. Do the leases or the borrower’s external income comfortably – at least two times – cover interest costs?”

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