Overseas investors have accounted for a relatively large and growing share of commercial property purchases in this country as they chase the relatively high yields on offer here compared to the low yield environment in many other countries, the Reserve Bank says in its latest Financial Stability Report.
At the same time, domestic institutional investors, apart from listed property trusts, have been reducing assets, the report said in a chapter specifically focused on the commercial property market.
"With the commercial property market embarking on a new cycle, investors balance sheets are in a much stronger position than prior to the GFC," the report said.
"Aggregate debt as a share of earnings increased significantly in the wake of the GFC, as earnings declined, some commercial investors drew on credit lines and borrowing for late-cycle construction projects continued.
"Debt-to-earnings has since declined, alongside reduced sales activity and property prices and as some indebted investors existed the market.
"Declining interest rates and an increase in earnings since 2012 have also driven an improvement in interest cover ratios.
The report said although there was limited information on the distribution of debt within the commercial property sector, debt-to-income ratios and income cover ratios of listed property trusts had improved since 2007.
"Development activity is beginning to increase, particularly in the office sector, in response to rising activity and values," the report said.
"With the lack of mezzanine finance reducing leverage available for property development, this supply pipeline is mostly being funded through wealthy private equity investors or listed property trusts - with significantly more equity than their counterparts prior to the GFC.
"This increase in equity buffers, along with the exit of riskier deposit taking finance companies from the sector, has reduced the direct risks to the financial system associated with development lending.
"The scale of the supply pipeline is also forecast to remain well below that seen prior to the late 1980s crisis and the GFC.
"The Reserve Bank will continue to monitor for any signs of growing risks in the commercial property sector," the report said.
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