Commercial players to be tested by new finance reality

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The lifeblood of real estate investment and development – commercial real estate finance – is rapidly changing and will create new challenges and opportunities.

Rising interest rates and the reduced tolerance for risk are reshaping Australia’s $430 billion market for commercial real estate finance.

It is also a growing investment opportunity as non-bank lending expands. And, after collapses threatened the nation’s financial stability twice in the past 30 years, it is a sector closely watched by the Reserve Bank.Nevertheless, the CRE finance market remains opaque. Availability and pricing can vary markedly, though few have missed the shifts in the past six months.

Thinktank head of research Per Amundsen has seen no diminution in demand or availability of funds. “Arrears are going well and the economy is going well,” he says. The NAB Residential Property Survey, released in April, noted that rising interest rates were “becoming a more significant impediment for new housing development in all states led by Victoria and Queensland.”

However, such calculations do not foreshadow a repeat of the year-to-date price rout. Some REITs, like Scentre, will mitigate the impact because of their CPI-linked rental structure. History also shows that the big price falls tend to happen at the beginning of the tightening cycle.

Michael Wood, chief executive of Madigan Capital, an institutional investment management firm that in the past quarter has placed $300 million in CRE debt, warns that investors are not focused enough on what he calls “classic late-cycle mispricing of risk”.“Asset management is critical in non-bank lending,” he says. “If you are not across your loan book you will have problems.”

 

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