MARKET REVIEW

Improving residential market welcome news for CRE lending
With Sydney and Melbourne’s property markets registering their first quarterly price gains since 2017, current conditions look sound for investors in CRE lending.

Financial Year 2020 has started positively for Australia’s residential property market and, in turn, for those investing the Commercial Real Estate (CRE) lending space.

In the three months to August 2019, both Sydney (+1.9%) and Melbourne (+1.8%) registered their first positive quarters of price growth since 2017.

This lift in prices comes down to two factors: increased buyer activity and low stock levels.

The restricted supply can be seen in the reduced number of property listings. By June 2019, there were 30% fewer properties for sale in Sydney and Melbourne than at the market peak in 2017. There were also fewer major residential projects being approved.  In fact, the ABS reported that in July 2019, the trend estimate for private sector dwellings excluding houses fell 7.3%. Meanwhile, the Rider Levett Bucknall Crane Index was already showing reduced development activity in Sydney by March 2019

On the demand side, the ABS reported that lending to households rose in the month of June 2019 – driven in part by owner occupier dwellings excluding refinancing (up 2.4%).

Given consecutive interest rate cuts over June and July, combined with relaxed residential lending criteria and stability at the federal political level, we expect the second half of 2019 to be a more favourable market in which to launch developments.

While the recent high profile insolvencies of Sydney-based Ralan Group and Melbourne’s Steller Group may cause concern to some investors, the reality is that the risks that led to these collapses are not present in our portfolio of loans. Our conservative approach means we invest only in first mortgage senior debt with a typical loan-to-value ratio (LVR) of between 50% and 65%. This should protect us from any fallout from similar scenarios.

Instead, based on the factors outlined above, we believe settlement risk should remain low for the remainder of 2019, even in the face of a slowing economy. We also expect to see increased opportunity for developer lending given the constraints the Big Four banks continue to operate under and the growing role of non-bank lenders in this important space.