Australian bank real estate debt reached another all-time high of $388.6 billion in September 2024, marking a 6.0% increase over the past year.

While bank commercial real estate debt hit yet another record high, BWP Advisors Founder Richard Jenkins said the increase was well below the 10-year average of 7.8%.

“The slower pace of growth reflects a more cautious approach from traditional lenders, who have adjusted their risk profiles in response to economic uncertainty, elevated interest rates, and shifts in the commercial property market.

“This increased selectivity, especially in the office sector, has opened doors for non-bank lenders to expand their participation in commercial real estate.”

Mr Jenkins said that while CRE debt saw a $21.9 billion increase over the past year, with all real estate sectors recording growth over the year.

“Industrial and retail sectors have led the way in CRE debt growth, with both sectors reaching all-time highs. Australian major banks hold 71.9% of total CRE debt, a significant drop from their peak of 84.7% in 2013.

Changes in APRA's capital requirements have forced Australian banks to shift their portfolios towards loans backed by income-producing real estate. The industrial and retail sectors have benefited from this, with record-high levels of exposure.

However, office property continues to face headwinds, particularly with rising vacancies and the persistent hybrid work trend.”

According to Mr Jenkins, foreign banks have also seen a shift in their approach. Despite a $1.8 billion increase in their CRE debt exposure in the past year, their share of Australian CRE debt has waned in recent years and remains below their peak.

Foreign bank involvement in residential development has dropped by 8%, though their exposure to the industrial sector has surged to all-time highs. Overall, foreign banks now account for 23% of total Australian CRE debt, below their peak share of 24.7%.

“With inflation maintaining upward pressure on costs and interest rates remaining elevated, albeit appearing to have peaked, financing for office assets remains challenging.

“Lender appetite for these assets has weakened, and hybrid work patterns continue to dampen demand. At the same time, climate-related and broader ESG risks are increasingly on banks' radar, leading to tighter scrutiny of loans for assets requiring significant investment to meet sustainability standards.

The integration of ESG considerations into lending decisions is expected to limit finance opportunities for certain borrowers.

“Australia’s CRE debt market is also facing a significant refinancing wave, with nearly 30% of outstanding debt set to mature between 2025 and 2027 according to BWP Advisors research.

Borrowers looking to refinance will encounter higher capital costs, increased vacancies, and moderating lender appetite, especially for secondary assets. This environment will likely benefit non-bank lenders, who continue to grow their presence in the market.

“Looking ahead, Australia's projected population growth will drive demand across all property sectors, with CRE construction debt forecast to rise to $300 billion by 2026.

However, the increased regulatory capital requirements for the major banks will further constrain their ability to meet this demand, creating more opportunities for non-bank lenders and foreign institutions to increase their exposure.”

According to Mr Jenkins, Australian banks are among the best-capitalised financial institutions globally, with the country exceeding Basel III banking regulations. Australia's banks are also unique in carrying additional capital to address the risks posed by rising interest rates.

“The health of Australia’s banking system is highlighted by the low level of “non-performing” loans (which are regarded as past 90 days due) which totals $3.3 billion (or 0.8% of total CRE debt in Australia).

“Having said that, the level of non-performing loans has risen, having trended upwards since mid-2022 with non-performing assets loan increasing by 31% over the past 12 months.

Mr Jenkins concluded that while the health of the Australian banking system is in very good shape, the increased regulatory pressure has reduced the major banks’ capacity to meet demand CRE debt which will offer an opportunity for not only foreign banks but also the non-bank sector, which continues to grow in Australia.