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February 19, 2024

Our Forecast for Commercial Property Finance in 2024

Residential and Industrial assets will remain strong.

Industrial will continue to shine with logistics, storage and data centres favourable asset types for both investment and development.

With housing supply a topical issue, residential will continue to be the darling of commercial property for the next few years, but new builds will still feel the pain of construction labour shortages. The challenge for apartment developers will be to deliver affordable stock, given where construction costs now sit. We are yet to see many developers solve this, however those that can, will be able to tap into pent-up demand, the likes of which we haven’t seen for some time. Changes to state planning policies and tax could help remove roadblocks to development approvals and incentivise new builds.

Rates will plateau, increasing confidence.

The Big 4 Banks are forecasting the cash rate to peak at 4.35%, which it hit in November last year. Rate cuts are expected to commence toward the end of this calendar year. There is some disparity around how many cuts there will be, but some are predicting a cash rate as low as 2.85% by the end of 2025. Remember, the RBA is moving to a six weekly meeting cycle, instead of monthly, providing less opportunity for rates to move.

Stability will help borrower and lender confidence return, which should further open up access to capital with appetite for higher leverage.

CRE Investors will likely want to see much of that rate relief on the table before they make any bold moves. Borrowing rates are still higher than purchase yields for most assets. This will need to reverse or get much closer to parity for investors to step off the sidelines.

Non-bank lenders to continue to dominate.

Even with the forecast cash rate holds and expected cuts, non-bank lenders will be able to offer great flexibility and access to funds for borrowers less beholden to the cost of capital. Non-bank lenders can price for risk and offer less conditionality, while banks have remained conservative due to prevailing market conditions and the constraint of their loan covenants.

Bank interest coverage ratios continue to hamper what they can lend against CRE Investment assets. A recent transaction we completed, underpinned by a long-term lease to an ASX-100 tenant, the highest LVR we could obtain from a bank was 50%. This was purely to do with the Interest Cover Ratio, nothing to do with the quality of the asset or the sponsor. We placed the deal with a non-bank at 65% LVR, with only a 0.75% premium to what the banks were charging.

Conversely, banks continue to offer “out of the box” products for sub-$2 million loans – with as much as 100% of the purchase price covered. The small end of the market is typically more liquid, more robust and less susceptible to fluctuations and downswings; hence they are much more comfortable lending into this space with minimal loan covenants.

If you have investment or development plans for 2024, reach out to Stamford Capital.