Lenders drawn to alternative assets

As returns from traditional office and retail properties decline, commercial lenders cast a wider net

Lenders drawn to alternative assets

Property lenders are shifting their focus from traditional office and retail properties to alternative assets, seeking more stable returns amidst expectations of further valuation declines.

A recent survey conducted by real estate agency CBRE revealed that while there is a flat overall appetite for new Australian property loans in the next three months, lenders are particularly interested in data centres, healthcare facilities, life sciences, childcare centres, and self-storage properties, according to a report by The Australian.

Of the 40 local and international banks and non-bank lenders surveyed, 37% expressed their intention to grow their loan book, while 10% aimed to decrease it. The industrial and logistics sector remains the most sought-after asset class for debt investment due to its low vacancy rate and rental growth, CBRE managing director of debt and structured finance Andrew McCasker told The Australian.

However, there has been a noticeable increase in lenders' interest in alternative assets, driven by a surge in sales volumes and an appetite for equity side investments in emerging asset classes. The survey results also revealed a declining sentiment towards the office sector, which now trails behind retail.

“Sentiment towards the office sector has been compounded by a lack of sales evidence in the market to demonstrate a softening in yields,” McCasker said. “Until lenders have certainty as to the impact on values, they will continue to have a conservative view on this sector.”

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CBRE's associate director of debt and structured finance, Will Edwards, provided some reassurance regarding the availability of debt capital for pending refinances, The Australian reported. However, he noted that these refinances would occur on revised metrics and longer timelines. The survey also indicated that more than half of the lenders have less than 25% of their loan book maturing in any given year from 2024 to 2026, suggesting no significant debt-maturity cliff in Australia.

The results further highlighted that commercial construction lending requirements differed between industrial and office assets. While most lenders did not require pre-leases for industrial construction, over 60% demanded pre-leases for office buildings.

This discrepancy could potentially hinder new commercial projects, as securing tenant commitments becomes more challenging, The Australian reported. Edwards predicted that this could result in a delay or indefinite postponement of office asset construction and redevelopment, except for landlords with substantial capital resources.

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