Australia's Build-to-Rent Properties Uptick on Lender's Wish List in 2023

Australia's Build-to-Rent Properties Uptick on Lender's Wish List in 2023

Commercial News » Sydney Edition | By Michael Gerrity | June 8, 2023 8:11 AM ET

While Australia's industrial and logistics sector remains top pick for lenders

Based on a new survey by CBRE, Australia's emerging build-to-rent (BTR) residential property sector is being eyed by local and international lenders as the market's underlying fundamentals continue to strengthen in 2023.

While Australia's industrial & logistics sector remains the clear top pick for lenders, BTR came in at second place in CBRE's latest Lender Sentiment Survey, as population growth projections, an ever-tightening rental market and a more favorable taxation environment strengthen the sector's growth prospects.

CBRE Research tapped a mix of 31 local and international banks and non-bank lenders for its H1 survey of Australian commercial real estate lenders.

The majority expect lending costs to increase going forward and there was a moderate dip in the percentage of respondents expressing a desire to grow their commercial loan books - from 44% in October last year to 32% when this month's results were calculated.

However, CBRE's Managing Director of Debt & Structured Finance Andrew McCasker noted the domestic banks, offshore banks and non-bank lenders were still participating with varying appetites across all the asset classes in Australia.

"The majority are willing participants in the industrial and build-to-rent sectors, and we see that continuing to build out over 2023, moving into 2024," Mr. McCasker said.

"The underlying fundamentals of Australia's housing economy is creating significant opportunities in the BTR sector and the desire by domestic and offshore financiers to fund projects will see this sector continue to grow in the coming years."

CBRE's Pacific Head of Research Sameer Chopra said the top line results showed that industrial remained the favored asset class, with more than 4/5 of the survey respondents expressing a preference to lend into that sector.

"The overall reduction in lending appetite was most prominent amongst non-banks, although the results show that they are still interested in growing their BTR, residential-to-sell and industrial portfolios," Mr. Chopra said.

"Tighter credit conditions are placing undue downward pressure on future supply, which could boost longer-term rent growth across all sectors."

Credit margins could continue to see upward pressure of approximately 20bps, with over 40% of lenders indicating such a move over the next three months.

An Interest Coverage Ratio (ICR) requirement of 1.5x for new investment grade lending was preferred by over 80% of the institutions surveyed, with ICR also the main focus for new underwriting.

While Loan to Value (LVR) ratios have been stable around 40-60%, Mr. Chopra noted, "This might come under pressure as assets are revalued during the coming two quarters, with a slight uptick in hedging requirements since October last year. Lenders also indicated higher average credit spreads, LTV and ICR requirements for prime office assets compared to their industrial counterparts."

CBRE Australia Commercial Lending Chart 2023.jpg

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