Sustainable building practices remain firmly on the industry’s agenda, with about half of lenders responding to a recent survey intending to develop green loan products.
According to Stamford Capital’s Real Estate Debt Capital Markets Survey 2023, 52 per cent of respondents expressed their commitment to incorporating environmental, social, and governance (ESG) factors by either already having or planning to develop loan products favoring assets with such credentials.
This percentage may rise further due to the recent announcement in the 2023 Federal Budget, which introduced low-interest loans for energy-efficient upgrades.
Although sustainability practices have been widely adopted in commercial office buildings, allowing for the comparison of ESG credentials through established rating systems, other sectors have been slower to embrace these practices. However, it is clear that a shift is imminent in these sectors as well, the report said.
Michael Hynes, Joint Managing Director at Stamford Capital said it is too early to see any meaningful examples of ESG credentials being rewarded by capital, but there is clearly an appetite for change.
In the midst of Australia’s ongoing housing crisis, characterised by low residential rental vacancies, increasing interest rates, and decreasing affordability, the country’s banking sector is lagging behind global counterparts in funding build-to-rent projects, something that will likely change, according to Mr Hynes.
He noted that recently announced government tax incentives for BTR could help fast-track both developer and lender interest in the emerging sector.
According to CBRE’s Lender Sentiment Survey, Australia’s industrial & logistics sector remains the clear top pick for lenders, BTR came in at second place.
The majority expect lending costs to increase going forward and there was a moderate dip in the percentage of respondents expressing a desire to grow their commercial loan books – from 44 per cent in October last year to 32 per cent when this month’s results were calculated.
However, CBRE’s Managing Director of Debt & Structured Finance Andrew McCasker noted the domestic banks, offshore banks and non-bank lenders were still participating with varying appetites across all the asset classes in Australia.
“The majority are willing participants in the industrial and build-to-rent sectors, and we see that continuing to build out over 2023, moving into 2024,” Mr McCasker said.
“The underlying fundamentals of Australia’s housing economy is creating significant opportunities in the BTR sector and the desire by domestic and offshore financiers to fund projects will see this sector continue to grow in the coming years.”
Respondents of the Stamford survey observed certain improvements in specific categories within the residential sector. However, what stands out the most is the rapid resurgence of this sector.
Despite these positive developments, the BTR model has not yet garnered full support from lenders, indicating the emerging sector in Australia is still in its early stages compared to more established global markets, the report said.
The national survey attracted participation from over 100 active lenders, including major trading banks, non-bank lenders, super funds, foreign banks, private financiers, and second-tier trading banks.
Lenders are becoming increasingly selective amid the escalating cash rate environment and increasing interest cover ratio (ICR) covenant breaches, the survey found.
ICR is a lending metric utilised by banks to assess the amount of net income needed by a borrower to meet their monthly interest payments.
Over 70 per cent of survey respondents require a minimum ICR of between 1x and 2x – up from 45 per cent in 2021.
“In today’s market, you either fit the lenders’ criteria or you don’t. It’s binary and there’s no room to pay at the margins,” Mr Hynes said.
According to Stamford Capital’s Real Estate Debt Capital Markets Survey 2023 this is set to continue with 46 per cent of respondents expecting major banks to tighten investment loan credit, and non-banks expected to do the same.
Just over 50 per cent of respondents in Stamford Capital’s Real Estate Debt Capital Markets Survey 2023 anticipate major banks to decrease construction lending. In addition, 33 per cent of respondents also expect decreased investment loan activity.