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RBNZ says the banks have $40 billion of loans on commercial property with $5 billion of that in development projects

RBNZ says the banks have $40 billion of loans on commercial property with $5 billion of that in development projects

The amount of money banks have loaned against commercial property could worsen the economic downturn and weaken financial stability, according to the Reserve Bank.

In its latest Financial Stability Report the RBNZ said banks' total exposure to commercial property is around $40 billion, which is about 8% of their total lending.

About $5 billion of that related to development projects.

"Commercial property has historically been a source of significant credit losses for banks," the report says.

"Many property owners have proactively offered rent reductions to support tenants during the downturn, but a prolonged economic slump will put downward pressure on rents and lead to increases in vacancy rates.

"Current development pipelines also indicate that an above average volume of retail and accommodation space is due to be delivered over the next 12 months in the Auckland and Queenstown markets.

"Demand may therefore struggle to keep pace this increased supply, and the viability of some commercial property loans may be called into question.

"Occupier demand for retail space may be permanently stunted as social and physical distancing measures accelerate existing trends towards online shopping.

"For office space, the recent experience of remote working may encourage firms to extend their flexible work arrangements, decreasing demand."

The report also noted that the debt loadings of many commercial property owners could make them susceptible to a downturn.

"Many investors are leveraged, with significant maturity mismatches on their balance sheets, and rely on rental income to service debt.

"Investors also tend to have relatively undiversified portfolios and face single tenant risk," it said.

However the report also noted that the quality of bank lending to the commercial property sector had improved in recent years.

"Banks have tightened lending standards to the sector," it said.

"Pre-sale requirements have increased; LVRs are more conservative; and banks have applied more scrutiny around the quality of construction companies.

"Overall, this has improved the quality of bank lending to the sector.

"Problems in the commercial property sector are therefore unlikely to threaten financial stability on their own, but could exacerbate the downturn and weaken the financial system's resilience," the report said.

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17 Comments

13
up

I'm aware of credit restrictions being applied to commercial property already, and unless you had a greater than 40% equity position prior to Covid, it might be advisable to sell before conditions/positions deteriorate further.

Those involved in property syndicates are going to find out the truth to this unregulated sham. Trumped up (pun intended) values, with grossly inflated front loaded establishment and high management fees being the sole purpose of these schemes. Folks there's no coincidence these guys leave little sink in the game, as the initial prices paid are at the top of the market and almost always more than others are prepared to pay. What's concerning is the valuers support these prices, and continue to be allowed to get away with it.

No secondary market, so the properties have to be sold to the open market when the banks say so. Some people will remember Waltus syndicates, where their management forced the good funds to amalgamate with the bad funds to keep them afloat for alittle while longer. Unfortunately for the mum and dad investors, its going to be groundhog day for them in the next 2 to 3 years.

Meanwhile, those involved in setting them up will head for the hills with their establishment fees and sale of the building management prior to the meltdown.

well said,i done all right out of property syndicates until I invested in some of waltus offerings that became the tangled web of urbus,at least then the units were 5000dollars not 100,000 and you didnt sign up jointly and severally for debts and liabilities,.now I would rate all of them under b for bargepole.

"I'm aware of credit restrictions being applied to commercial property already, and unless you had a greater than 40% equity position prior to Covid"

Good Samaritan

Is the maximum LVR now 60% on commercial property? I thought it was 65%.

Also is there a distinction between different types of commercial property? retail, industrial, office, motel (being sublet to a motel operator)

Yes indeed, I remember well my learnings from owning a few $5k Waltus syndicates back in the day, although in the end I think I got out mostly unscathed. Unfortunately friends who more recently asked my thoughts on where to invest a couple of $Mil didin't want to know when I suggested that the commercial property syndicates they were looking at were quite likely more risky than the balanced and diversified portfolio of financial assets that was the other option they were considering. "But it's property - you can see it" and "a 7-8% return, fantastic" and so on.

A pity, I think they might be about to get some of the same lessons I learnt with Waltus regarding: lack of liquidity, semi-hidden fees, and lack of diversification, but on a much grander scale. It is hard to get your head around this stuff until you've felt it in your gut - best to learn on small amounts I find.

Even longer ago, losing ~$10k in 1987 has been the best education in sharemarket investing I could have wished for - I got great value for money :-)

Syndicated property ...
Uninformed investors
Fast Eddie salesmen
Short memories
Toxic mix

Excess supply over demand
Cycle imbalance
Cue price and rent falls
Cue deflation

No, no, no, that's OLD thinking. Now it's:

Excess supply over demand
Cycle imbalance
Cue government and bank and RBNZ bailout money!
Cue deflation (even with above)

Not a game for newbies, theres too many sharks looking for fresh meat. The sector ought to be more (?) regulated as it could be argued there are conflicts of interest in the information provided to investors right across the sector, not unlike the finance company debacle of the early 00's. I.e. what are you REALLY buying into? Having said that, publicly listed infrastructure and property companies have some quite good models up and running. Tilt Renewables being one to keep an eye on...

$40 billion sounds low. How much residential and farming debt is out there?

They can slow it down, but they can't stop it.
How much more debt can we swallow?
Shut up & keep eating.

This article seems a bit muddled in that it compares development projects with residential undertakings and long established industrial, flakey, often hysterical retail and overpriced glamour office. For instance one of your posters slags off about syndicates which he obviously confuses with funds, partnerships, private companies and single owners. These are all totally different markets and any stress in one does not mean stress on all. If you want to discuss the ups and downs of commercial property then you must be clear which of the countless branches and sub branches you are analysing.

Good to hear from you Big D. My sense is we hit peak retail worldwide a few years ago, maybe 2007, as cheap Chinese clothes hit the towns of the world. We all expanded our wardrobes by buying more clothes per annum, and exported the last few sewing jobs. We have not quite realised it, but it is downhill from here for retail, except op shops.

My guess is that decent affordable offices and industrial and warehousing will not be as badly hit as retail and tourist accomodation. Quite a mixed up mess of an article, as you say. They fail to mention the banks have been holding commercial property owners to ransom to get loan to value ratios below 40% over the last few years, as required by the RBA.

"sign up jointly and severally for debts and liabilities,.now I would rate all of them under b for bargepole."

some lawyers might have to run to the hills with some of the syndicate scheme promoters.

"They fail to mention the banks have been holding commercial property owners to ransom to get loan to value ratios below 40% over the last few years, as required by the RBA"

Roger,

1) To clarify, in case of typo, do you mean:
i) LVR below 40% (and equity value of over 60%) or
ii) LVR below 60% (and equity value over 40%)

2) RBA and not RBNZ (i.e not a typo)

LVR below 40%. They are Aussie banks so the reference to the RBA (with RBNZ approval) was intentional. To be clear, the LVR ratio is based on experience, the central bank reference is my inference.

The LVR was up to 60% for many years, so the sudden change was a big problem. Can't trust the buggers.

Thank you Roger.

So if the LVR is currently above 40%, does that mean the debt level needs to be reduced to a maximum LVR of 40%?

Also when did that rule come in and when will it become effective by the NZ subsidiaries?

"To be clear, the LVR ratio is based on experience, the central bank reference is my inference."

Sorry I don't understand you there. Can you please elaborate.

Yes, if the LVR was at, say 50%, they required it be brought down to 40%. Previously the long standing ceiling was around 60%.

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