The Australian property types that lenders are favouring

Every economic climate has a silver lining and, despite the expected onset of rising lending costs and a moderate decline in the desire to grow commercial loan books, there remains a significant appetite for specific Australian property types from bank and non-bank lenders.

Australia’s emerging build-to-rent (BTR) sector is gaining serious attention from local and international lenders as the market’s underlying fundamentals continue to strengthen. That’s according to CBRE’s latest Lenders Sentiment Survey which identified two frontrunners in preferred asset classes for new investment.

While Australia’s industrial & logistics sector remains the clear top pick for lenders, BTR came in at second place, with the asset class buoyed by population growth projections, an ever-tightening rental market and a more favourable taxation environment.

“The majority of lenders are willing participants in the industrial and build-to-rent sectors, and we see that continuing to build out over 2023, moving into 2024,” explains Andrew McCasker, CBRE’s Managing Director of Debt & Structured Finance.

“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.

Conditions for securing BTR loans

Investors who are keen to secure finance for BTR should do their homework in order to maximise positive lender sentiment.

“It would be reasonable to say that obtaining BTR finance is dependent on the location of the asset and its connectivity to key infrastructures being road and rail and also connectivity to working hubs, schools and universities,” McCasker says.

While CBRE’s survey was compiled over a period of rising interest rates, which continues to evolve, McCasker adds that these variances shouldn’t change lender sentiment towards Australia’s BTR sector.

“When the survey was being completed, the lenders we spoke to were doing it with the view that there were going to be one or two more rate rises,” he says.

“Certainly, real life, on the ground situations we’ve seen post-survey and post-rate rises shows that the sentiments expressed in the survey reflect the current market.”

Health of existing BTR developments

There's no better testimonial than a real-world development and Greystar’s BTR projects across Melbourne serves as that example, including a planned $500 million dual tower scheme in South Yarra.

“We closed the second BTR debt facility for South Yarra two months ago and it was heavily supported by domestic banks, offshore banks and funds,” says McCasker.

“Ultimately, Greystar secured a competitive, well-structured finance package to allow them to deliver and the South Yarra project and is continuing its strategy for BTR into the Australian market.”

Lender confidence in industrial & logistics

While industrial & logistics assets were the survey’s leaders, it’s worthwhile to understand where the confidence is coming from and whether this positive lender sentiment towards this asset class will last beyond 2024.

“The confidence that lenders have in industrial & logistics comes from the indication that rental rates aren’t reflecting what current market rates are,” says McCasker.

“There’s a perception and expectation that there’s going to be rental reversion in the industrial & logistics sector, which gives banks and lenders confidence in borrowers’ ability to continue to meet and exceed interest coverage ratio. Industrial assets represent the lowest lender risk in the current environment.”

Similar to BTR, lender sentiment towards industrial & logistics projects comes with its own conditions.

“Ideally, it’s in an industrial site located close to transport, which is a key criteria for I&L. Quality of sponsor and quality of tenants also plays a part in lender sentiment.”

Will investors need to hedge higher

The conversations around LVR and higher hedging requirements are happening most frequently in the office sector.

“We haven’t had a great deal of market evidence yet to demonstrate a softening in valuations. However, there is an expectation around yields softening across all asset types in the office sector,” says McCasker.

“We do see valuations or yields in industrial potentially softening, but that’s well and truly been negated by the increase in rental rates. And if I look at BTR, we haven’t seen any evidence or pressure on yields for the asset going forward. Similar to industrial, we‘ve seen significant and real rent rises in the BTR space, so any softening of yield will actually be negated by this.”

Start your investment journey the right way

CBRE’s comprehensive Lender Sentiment Survey is conducted to provide a real-time market view of lender appetite in the Australian market. It is compiled on a regular basis, which allows CBRE to identify and track trends between each cycle. This frequency ensures that our clients can make the most informed investment decision backed by the latest updated economic information available.