Non-banks pick up slack as big four retreat from apartments

Published with full permission of the AFR.

Author: Larry Schlesinger

Banks, especially the big four, reined in lending to apartment developers over the past financial year, allowing the ever-expanding pool of non-bank lenders and alternative financiers to increase market share.

Analysis from property and construction consultancy Plan1 showed the banking sector’s exposure to apartment developers fell 7 per cent to $32 billion over the past 12 months. That was down 14 per cent from the post-GFC peak of $37 billion in 2017 when apartment construction was booming, and 18 per cent lower than the peak $39 billion exposure in 2008.

As of June 30, banks have exposure to about 70 per cent of the 119,000 apartments under construction, worth about $46 billion once completed.

Of this funding, 76 per cent has come from the four majors banks – ANZ, CBA, NAB and Westpac. That was their lowest share of the market since mid-2018, according to Plan1 co-founder and director, Richard Jenkins.

Mr Jenkins said present apartment development levels indicated that at least $8 billion of Australia’s apartment residential development was being funded outside of Australia’s authorised deposit-taking institutions.

“As already witnessed elsewhere globally, when lending criteria is tightened, the non-banking sector has gained market share of commercial real estate debt.

“With major banks constrained to lend to residential development through financial regulations, a significant proportion of Australia’s apartment development will be funded through non-banks going forward given the growing role of institutional capital in the commercial real estate debt market,” he said.

We’re very confident in the Sydney market over the next few years and have significant amounts of capital to deploy.

— David Oudshoorn, MaxCap NSW director

Among the most active non-banks in the apartment, market has been MaxCap. In June it provided a $121.2 million loan to kick-off construction at a 296-unit project in Sydney’s Castle Hill.

While banks require a very high level of pre-sales and bigger deposits before committing to funding, MaxCap funded the construction of the four-building Chateau project despite only about a third of apartments in stage one having been sold at the time.

“We’re very confident in the Sydney market over the next few years and have significant amounts of capital to deploy into debt and equity opportunities,” MaxCap NSW director David Oudshoorn said,

Alongside MaxCap, Qualitas, Wingate and Pallas Capital have all provided debt and equity to developers, while the likes of Hong Kong investment giant Sun Hung Kai & Co sought a slice of the market through a $400 million real estate debt fund.

By contrast, the Commonwealth Bank, the nation’s biggest lender, revealed in its half-year results in February that only about 3 per cent of its $77.5 billion exposure to commercial real estate debt was to developers.

Over the six months to December, the bank increased its lending to developers by $700 million to $2.3 billion – 55 per cent below its last peak in December 2016.

Among the other major banks, ANZ continued to reduce its exposure to the residential development sector, down from 21 per cent in 2019 to its current level of 18 per cent.

NAB’s exposure to the residential development sector accounts for 11 per cent of its commercial real estate debt book.

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