October 9, 2020

Loan settlements are proceeding in line with expectations, evidence of a healthy functioning lending market


Asset prices remain strong across our lending markets, particularly in the land subdivision and agricultural sectors.

We have experienced minimal evidence of settlement risk within the Partners Fund loans, and a number of loans have been repaid during September, demonstrating that market conditions are stabilising and functioning normally.

A key factor behind the containment of settlement risk, particularly in apartment construction loans, has been the market’s supply response to slower demand. Urbis reported just 23 apartment launches nationally in the June quarter, down from 60 in the previous year, with just 55 product launches in 1H2020. This compares to 199 apartment project launches in 2019, which itself was half of the 2015-2018 average of 407. Many projects have been put on hold and the return of supply is expected to be gradual due to the declining number of approvals combined with the time lag involved in apartment delivery. The rapid and significant supply response has helped support price activity. Capital city unit prices fell just 1.5% over the September quarter to remain 4.0% higher than levels a year ago. Pricing stability, which largely determines finance approvals, is a major determinant of settlement risk. Limited price downside going forward will facilitate a smooth financing and settlement process. Additional settlement risk mitigation is provided by the increasing availability of residual stock facilities. These loans are secured against any unsold apartments from completed projects and enable construction loans to be efficiently refinanced.

We are also seeing the efficient repayment of loans in other key lending sectors. Land subdivision conditions are strong, with prices and settlements supported by demographic shifts and fiscal support measures such as the HomeBuilder program. Sentiment is also positive in the agriculture lending market, which has benefited from rising commodity prices and significant demand for agricultural assets.
The smooth repayment of Partners Fund loans is a positive indicator of the health of our lending markets and demonstrates the effectiveness of our portfolio risk management processes. We remain confident that senior lending against quality assets at conservative LVRs is providing investors with the best risk-adjust returns currently available.

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