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Lenders shy away from commercial sector

A new report by CBRE has found a number of factors are making lenders more reticent in their lending practices for commercial properties.

The report explains how increasing economic uncertainty brought about by the onset of COVID-19 has resulted in retailers struggling to stay open and pay the rent.

Commercial rent in most Australian office markets has declined, and vacancy rates for sub-leased space in some markets “is increasing to levels not seen since the 1990s”.

“These issues and the ongoing uncertainty are impacting loan terms offered to borrowers as credit risk has been repriced and the willingness to lend has decreased,” the report notes.

“Lenders are becoming more selective with a preference for assets with a clear strategy and quality sponsors,” Ben Martin-Henry, CBRE’s associate director of research, explains.

The uncertainty surrounding many sectors is seen as a red flag to lenders.

“New loans for the hospitality and retail sector are proving to be the hardest to facilitate, but assets with long WALEs [weighted average lease expiry] and a quality tenant profile are viewed favourably – particularly in the industrial sector, which is showing signs of the most resilience in the current downturn,” Mr Martin-Henry continued.

“Traditionally, real estate lending does not elicit the best returns compared to other sectors, so there is an internal competition for capital under way, whereby lenders are becoming more fastidious.

“This is not only resulting in fewer loans issued but is also significantly delaying the approval process as lenders take their time when undertaking due diligence.”

The report predicts that overseas lenders will be looking to capitalise on this more cautious approach from domestic lenders to increase their market share.

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Nathan Jolly

Nathan Jolly was an in-house journalist with Elite Agent. He worked with the company from July 2020 to December 2020.