Lending by Australia’s biggest four banks for apartment developments stalled in the three months to June as they cut back on exposure to the rapidly growing sector.
Loans by ANZ, Westpac, NAB and CBA and their subsidiaries for commercial-scale residential construction stood at $26.5 billion in the second quarter, unchanged from March, Australian Prudential Regulation Authority figures this week showed.
The quarterly halt, after a year in which lending by Australia’s majors for apartment construction jumped nearly 14 per cent, was a welcome sign that banks were limiting their exposure to a sector that is already at risk of oversupply, with approvals still rising, UBS analyst Jonathan Mott wrote in a note on Friday.
Approvals of new apartments jumped 23 per cent in July, their biggest monthly gain in almost three years.
“We were pleased to see the data from APRA confirming management commentary that the majors’ underwriting standards for high-rise apartments have been tightened,” Mr Mott wrote.
However, the extent to which the slowdown in development finance by the large local banks is being offset by foreign funding sources is unclear. It raises questions about the construction of the 73,000 high-rise apartments approved over the past 12 months.
Mr Mott cited APRA’s 27 per cent quarter-on-quarter increase in loans by foreign lenders – to a total $4.1 billion – for apartment construction lending in June, as evidence that foreign lenders were stepping in.
“This demand for financing appears to have been picked up by the foreign banks and branches,” Mr Mott wrote.
However, Michael Holm, the executive chairman of Balmain Group, the country’s largest originator of commercial property finance, said there was no evidence of overseas growth in the senior construction debt that locals were stepping away from.
“The rise in foreign bank assets reported by UBS may be some foreign banks co-investing in some Australian bank sell-down of excess commercial property exposure, possibly some portfolio acquisitions or maybe some preferred equity being classified as debt,” Mr Holm told AFR Weekend.
“What it is not is foreign banks filling the gap in commercial lending to mid-market commercial or providing development finance to construction of residential apartment towers.”
Foreign investors are extending finance – US funds giant Invesco is lending about $150 million on a 90-storey tower in Brisbane AMP Capital is developing – but the interest rate of that deal indicated it was likely additional funding, rather than the construction finance, Mr Holm said.
“If you funded your tower with senior construction debt at 15-20 per cent you’d go broke,” he said.