NZ commercial property lending less risky now: RBNZ

Other factors include irrational
exuberance- where investors over-pay for property due to
misplaced optimism about returns which can lead to long
periods when prices are higher than implied by the economic
fundamentals of rental returns, vacancy rates, and interest
rates.

At least two-thirds of commercial property stock in
New Zealand is held by investors, with the rest mainly by
owner-occupiers.

The sector accounts for about $30 billion
of mainly bank debt and 9 percent of total bank lending.
Because of its higher risk it plays an important part in the
capital required to cover that bank lending.

Tighter
lending standards were brought in by the banks after the GFC
and with the near collapse of property finance companies,
which also pushed commercial property prices down.

While
access to finance has improved in the past four years and
development activity has picked up again, those tight
lending standards remain. Banks are typically requiring loan
to value ratios of 60 percent for new loans and some
restrict borrowers taking out additional mezzanine finance,
which gives the lender rights to take equity in the
borrowing company if the loan isn’t repaid on time.

Those lending restrictions have led to the supply
pipeline being mainly funded by wealthy individuals and
listed property trusts, who accounted for 30 percent of
purchases in recent years.

Offshore investors also account
for a relatively large and growing share of purchases due to
comparatively high yields for the sector here compared to
other parts of the world while institutional investors have
reduced their holdings.

The Reserve Bank said that means
the balance sheets of commercial property investors are in
much better shape than before the GFC and debt to earnings
ratios, including for the listed property trusts, have
improved.

“This increase in equity buffers, along with
the exit of riskier deposit-taking finance companies from
the sector, has reduced the direct risks to the financial
system associated with development lending. Moreover, the
scale of the supply pipeline is forecast to remain well
below that seen before the late 1980s crisis and the GFC,
” the bank said.

(BusinessDesk)

#169; Scoop Media

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