Australia’s major banks have increased their exposure to commercial property by 6.5 per cent, $12.3 billion, in the 12 months to March despite warnings from the Reserve Bank of Australia about rising risks in the sector.
Major banks – the Australia and New Zealand Banking Group, the Commonwealth Bank of Australia, the National Australia Bank and the Westpac Banking Corporation – now hold $202.3 billion worth of office towers, shopping centres, warehouses and developments.
“The risk of a large repricing and associated market dislocation in the commercial property sector has increased,” the Reserve Bank said in its Financial Stability Review in March.
However, some of the leading bank analysts in the country believe the risks around commercial property are overblown.
CLSA’s Brian Johnson said the key area to look at was how much exposure the banks have to commercial property developments. At arguably the worst time in the financial crisis, in March 2009, that exposure was 24 per cent of overall commercial property exposure. Now it is 16 per cent.
“Yes it’s up the quarter, but the banks have really run down their risk through the reduction of their development book,” Mr Johnson said.
The largest property exposures are office property with $70.3 billion and retail property with $53.8 billion, representing 30 per cent and 23 per cent of all exposures respectively.
While the Australian Prudential Regulation Authority has set stricter policy for banks when their growth in lending to investors for residential property goes over 10 per cent annually, it has no such policy for those banks when they lend to investors for commercial property.
At Westpac the total committed exposure to commercial property in March was $64.8 billion, up from $56.55 billion 12 months earlier. That’s 12.73 per cent growth.
Westpac was glowing about the health of the commercial property market in its financial results earlier this month.
“The commercial property segment has continued to show the greatest rate of asset-quality improvement. After peaking in the midst of the financial crisis at 15.5 per cent, the ratio of stress as a percentage of total committed exposure has now declined to 1.8 per cent. The level of stress is now at its lowest point for over a decade.”
A large portion of self-managed super funds invests in commercial property and this, along with a flood of overseas capital and record-low interest rates, has seen strong growth.
National Australia Bank had $48.6 billion in commercial property exposures in March this year, up from $45 billion 12 months ago. Neither the ANZ nor the CBA participated in this story.
Overall, authorised deposit-taking institutions accounted for $234.2 billion in commercial property exposures in March. This is an increase of $15.1 billion, 6.9 per cent, in 12 months, indicating that growth in commercial property lending was even higher outside of the major banks.