In this week's article, Stamford Capital provides some insights into commercial property finance markets.
With the first quarter of the year behind us and the 11th cash rate rise in a year, there is a lot of mixed sentiment in the commercial property finance markets. While property is a slow-moving beast, and commercial property even more so, many are wondering how the rest of 2023 will pan out.
The velocity with which rates moved since May 2022, has left, and will continue to leave, many borrowers are now exposed. We are hearing from banks that they are being flexible with existing clients who are in breach of their interest servicing covenants. Whilst acting precipitously isn't in the best interest of the banks, the real test will come at the end of term, when revaluations will likely reveal an LVR shortfall. For those in breach, banks will have their hands tied. Borrowers will be faced with the limited options: those who can't pay down debt or refinance to a non-bank alternative will be forced to sell assets and crystalise their loss. Whilst examples of this have played out over the past 12 months, we believe this will become more critical over the coming year.
Non-bank lenders are beginning to adapt their product offering to meet the expected fall out of transactions from the banks. Coupled with their ongoing appetite for construction debt, we expect the non-bank footprint to only increase over time.
While the cost of construction materials has stabilised, the effects of the past 24 months' cost increases are still being felt. Labour and material shortages remain an issue but are diminishing. A number of builders have already gone into Voluntary Administration or Liquidation as a consequence of these issues.
Supply in the apartment market, particularly affordable stock, remains constrained. We are seeing a national rental crisis across almost all capital cities, further exacerbated by the recent sharp increase in immigration levels.
As the turbulence in the construction sector eventually eases and site values reset, we expect 'build to rent' (BTR) or 'investor stock' projects to be a focus for savvy developers.
The Federal Government recently announced a reduction in the managed investment trust (MIT) withholding tax rate from 30% to 15% for newly constructed residentially build-to-rent (BTR) projects after July 2024. With most of the investment into BTR projects coming from overseas, this tax cut will no doubt incentivise BTR projects in Australia – which constitutes a relatively small market compared to overseas – hopefully contributing meaningfully to housing affordability.
The challenge here remains to acquire sites and build for a cost which it can feasibility sustain, given the price point sensitive nature of the stock.
Despite these challenges, liquidity remains available, albeit at slightly reduced leverages and with a finer lens on credit. Market conditions are doing the heavy lifting and pre-qualifying borrowers for lenders. Whilst liquidity is certainly tighter than 18 months ago, there is still solid appetite and weight of capital in the non-bank market.
At Stamford Capital, we are relatively optimistic about the rest of the year. There are pockets of opportunity available as land values reset, residential vacancy rates remain low and demand for A-grade office stock continues. We're urging clients to be more conscious of their debt management more so than in the past 18 months and are helping them navigate any potential breaches.
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