Article | Intelligent Investment

What sort of property business do lenders want right now?

As interest rates and their impact on the property market are front-burner topics in boardrooms around the country, we examine some key lending trends we are seeing across the Pacific markets.

September 17, 2022

By Alex-Nikolaou Richard Zhao


As interest rates and their impact on the property market are front-burner topics in boardrooms around the country, we took an opportunity at CBRE’s recent New Zealand Debt & Capital Sources Forum to examine some key lending trends we are seeing across the Pacific markets.

Working as we do to arrange and match capital with our clients through a range of local and global lenders, part of our job involves understanding where lending appetite sits and what sort of business lenders want to see. This is why we put together a survey of 16 lenders – including banks and non-banks, locally and overseas – to understand in some depth what is driving their decisions at present.

Themes that emerged from the survey included:

Lending appetite is there – for some asset classes

With New Zealand’s domestic banks in something of a stable holding pattern, not looking to grow exposure, and as international banks’ appetite reduces, domestic non-bank lenders are by far the most bullish. They are increasing exposure and appetite particularly for industrial property, which is the preferred sector for construction and investment lending across all lenders.

In the debt space, an increased number of Australian non-bank debt providers are now coming to New Zealand as they see the quality of recent transactions in New Zealand. These non-bank lenders include pensions/mutual funds and private equity companies, all raising capital to lend into our markets.

Appetite remains for stabilised office assets with strong metrics, and there is considerable appetite for build to rent, but not across the board. Build to rent is a sector in which lenders confess to being significantly underweight. The majority of positive sentiment for build to rent was from international banks and non-banks, which are nearly unanimous in their view of being underweight in the sector.

Overweight / underweight?

Domestic and international non-bank lenders have said that they are overweight in residential-to-sell and alternatives, while being underweight in industrial.

International banks have a strong preference for stabilised office but are overweight in industrial and residential-to-sell sectors, while non-bank lenders continue to seek exposure to residential construction loans, office repositioning and residential built to sell.

Interestingly, lenders have indicated that stabilised office remains high for appetite. This likely reflects the continued attractiveness of good assets, with good tenants and long WALT.

Looking ahead

With the cost of debt expected to increase, higher margins and interest hedging requirements are front of mind for all lenders as they look ahead. In broad terms, appetite is specific across lenders, and lending will get more expensive over the short-term, with increased hedging requirements.

That said, we are seeing that interest rates are getting to a point where they are peaking, with the potential to come back towards the back end of 2023.

In term of pricing, more than 75% of investment/development funding lenders will increase lending margins as a result of combined risk and liquidity premiums. For investment loans, non-bank and international lenders will take more stretched positions, with a loan-to-value (LTV) position of 60%+ across all respondents, while domestic banks sit at 40%-55% LTV depending on quality of assets and sponsor’s strength.

In terms of hedging requirements for investment loans, the current interest rate hedging requirement of the international banks is 55%-75%, with the domestic banks sitting at 25%-45% required and non-bank lenders at nil-25% required.

For construction loans, the minimum entry of pre-sales to debt cover for the banks and prime lenders is over 100%, ranging from 110%-130% depending on the underlying transaction matrix. The majority of non-bank lenders sit at 50%-80%, although with an upwards trend recently. The driver of this lift is rising settlement risk as result of the Credit Contract and Consumer Finance Act (CCCFA), income/debt ratios and the recent residential market downturn. Current maximum loan-to-cost (LTC) and LTV requirements for banks we are seeing are: 70% LTC, 50-55% LTV. The majority of non-bank lenders are capped at 80% LTC and 65% LTV. Some non-bank lenders could stretch up to 90% LTC and 75% LTV.

Sustainable lending: one to watch

With Fitch putting out guidance on sustainable lending, and some green/ESG loans happening, this is a market that is in the early stages of emergence. What is certain is that ESG components are now being examined more closely by lenders, and although we are unlikely to see a material pricing discount for ESG lending just yet, we are seeing a premium if you don’t comply with ESG requirements.

Andrew McCasker, CBRE’s Managing Director Pacific Debt & Structured Finance, has created a podcast on this emerging – and growing – category, if you would like to explore it further.

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