Kathryn House
Hello, and welcome to Talking Property with CBRE. I'm Kathryn House, your podcast host, and in this latest episode, we'll be doing a deep dive into how commercial real estate lenders are viewing Australia following recent market shifts. CBRE recently completed its latest Australian Lender Intentions Survey, and we have one of the respondents joining the show.
Dugald Marr
The large non banks are still very active. They're perhaps just a bit more considered on project lending. And I think that would explain the survey feedback where lenders are starting to see more growth coming from their refinancings as opposed to acquisitions or developments.
Kathryn House
That's Dugald Marr, head of real estate debt for Nuveen in APAC. Nuveen is a premier global asset manager and the wholly owned investment subsidiary of TIAA, overseeing over US$1.4 trillion in assets. Nuveen specialises in income generating strategies, alternative credits, real estate, and natural capital for both institutional and individual investors.
Andrew McCasker
Certainly, from what I'm seeing in the market, margins have remained fairly consistent, and I think the margins are being driven by the competition by the lenders into the space and the competition for groups wanting to bank the good projects with the good sponsors that are well structured and put together.
Kathryn House
And that's CBRE's Pacific head of Debt & Structured Finance, Andrew McCasker, who will be discussing some of the key findings from the Lender Intentions Survey. I hope you enjoy our conversation. Dugald, thanks so much for coming on the show.
Dugald Marr
Hi, Kathryn. Thanks for having me.
Kathryn House
And, Andrew, thanks for making a return visit to Talking Property. It's always great to get your insights.
Andrew McCasker
Always excited when you ask me to come back for a bit of a chat, Kathryn.
Kathryn House
So, Andrew, to set the stage for our conversation, we conducted our latest Lender Intentions Survey after this year's interest rate rises. It would be great to get your views on some of the key findings, particularly in light of some of the recent market shifts. And I believe this is the most respondents we've ever had to the survey.
Andrew McCasker
Yes, Kathryn. Look, we were very pleased with the number of responses we had to the survey, and timing was important, and we staged it that way to be post the second interest rate rise that the RBA announced. Interestingly, what we did see come out of the survey is that industrial continues to remain the top investment in asset classes that people are looking for, but it has fallen 20% since our last survey. And we've started to see a resurgence back in the office, hotels, and student accommodation asset classes. So for the office investors and our agency team, it's a a really good sign to see that we're seeing capital roll back into the office market.
Kathryn House
So was that the biggest, maybe one of the biggest surprises for you to see industrial shift back and office creep up?
Andrew McCasker
Look, Kathryn, I'd had a prediction for the last two surveys where I had said that industrial can't keep performing the way it's performing and attracting the capital that it's been attracting, and I've been wrong every time. It was a little bit pleasing to see the return of investors into that office space because I think they're now seeing really good value in office across the east coast of Australia.
Kathryn House
So, Dugald, you were one of the respondents. Having looked at the results, were there any surprises for you?
Dugald Marr
I don't think there were any surprises there, Kathryn. I think just on the industrial, despite the fall, I think it's probably important to still recognise that lender interest in industrial still remains very strong at circa 70%. I do think we need to be careful watching cap rates, but, yes, I agree with the survey that industrial fundamentals and appetite is still really solid, especially for infill. It was interesting to see a decline in build to sell. I personally don't think that's anything other than a bit more caution on feasibilities given cost pressures and people watching end values, given some economic uncertainty. It'll also be interesting to see how the recent tax changes flow through on residential. But, again, I do think demand for housing remains, so there's still good appetite for the right project and product. Retail continues to improve, and I agree that looks quite safe with low vacancy, low tenant occupancy costs, allowing room for rental growth, and low levels of supply. And a favourite for us is build to rent, which is still holding firm based on rental increases and low supply.
Andrew McCasker
Dugald, do you think that the reduction in the focus on industrial has correlated with the number of transactions that have been done in the last six to 12 months as well?
Dugald Marr
I do think that that is the case. And I think then if we go back to office very quickly, it's probably a function the increased appetite there of people becoming more comfortable with values due to the transactions in the office sector late last year. And there's also been a lot of analysis around future supply, which is effectively going to drop off a cliff in future years. And then that gives people comfort on rental growth, particularly for those premium office towers. And that's where tenants obviously want to be, and tenants are going to have less options moving forward.
Kathryn House
Andrew, is it really asset specific when it comes to office? It was very interesting to see that it's the first time in three years that we've seen that interest in stabilised office investments rise. Across the board or very asset specific still?
Andrew McCasker
Yes, Kathryn. Look, Sameer, who's our Head of Research, he puts it very well. We've gone from being a asset class to being a specific asset class down to geographic location. So we're seeing A grade office in Sydney CBD perform different to office buildings in North Sydney and Parramatta and Chatswood. And I think we're moving back to what was previously where there was a differentiation between not only office quality but also office location, and that was reflected in the yields. And we're sort of moving back to the future in that space.
Kathryn House
Dugald, when you're looking at office, are you getting really specific? Is it location? Can it vary even in one market? How are you looking at stabilised office?
Dugald Marr
I think you have to be. I think that in all sectors, there's a flight to quality. I think it's more pronounced in office than any other sector at the moment. So when you're looking at the type of office and the amenities that that office will provide or the project or the the refurbishment, it will provide post that project finishing, but also just as important is the location. And I touched on it before. I think a lot of people are getting quite bullish because the amount of supply and the amount of options for tenants going forward is going to significantly reduce versus previous cycles. But then on the other end of the spectrum, you know, whilst many people are bullish on premium office, there are headwinds for B grade office, and that's, you know, particularly around their amenities or their location, especially with AI and, you know, future economic conditions. So I think that it gets very specific within the sector and none more so than office.
Kathryn House
So taking a step back, Dugald, I'd love to you know, if you could just talk us through Nuveen's overall strategy. You recently closed your real estate debt strategy for Australia with $650 million in committed capital. Where does Nuveen see the best opportunities in this region?
Dugald Marr
I think we're one of the few non-banks that can lend in both the core lending space on behalf of our parent, TIAA, and we also provide core plus development lending to borrowers on behalf of, again, our parent, TIAA, and third-party capital. That $650 million raising was closed last year and is almost fully committed, which means we're now moving on to a new vehicle with those same investor partners. In terms of the best opportunities and because of that success, we've been deploying a lot. We certainly focus on the bigger projects and the larger sponsors, but we also look at a focus on sectors with good tailwinds. And where we see the best opportunity is prime infill logistics due to the scarcity of land, tenant demand across the industries, and the ability to back a project that will deliver a superior product sort of in tight markets. In industrial, we do have to watch cap rates, but we're still very bullish on that sector. In terms of all forms residential, that's also a favourite for ours, but particularly build to rent. I know build to rent has been difficult, you know, for many people to make it stack up, but the rental demand for housing is going to stay strong. Supply is really not keeping up with demand. And therefore, if you can put together a project that works, then there will be upside in rents, which obviously drives values and performance, especially in those inner city locations where people want to live, and those new projects provide the best amenities. The only other comment I'd make is just generally on alternate asset classes. Nuveen being a global real estate investor has a strong view on what's happening globally on some of those newer asset classes, and some of them have limited competition and limited supply, but very stable demand. And we're talking self storage, health and aged care, life sciences, education. So they're sectors that we like and projects that we like to support.
Kathryn House
So, Andrew, interesting on that alternatives front, are you seeing much of a shift in how lenders generally are viewing the alternative sectors?
Andrew McCasker
Yeah. Absolutely, Kathryn. As Dugald sort of highlighted, those alternates being storage, health, childcare. We could even sort of throw student accom in there or that sort of links over into living. But the domestic banks, the offshore banks, and the private credit funds are all looking at that alternate sector and giving the opportunity to be able to be involved with some of the really key players in those markets. And because the markets are evolving, the opportunities continue to present across the lending market in that space.
Kathryn House
Do we still consider data centres to be an alternative, Andrew? I think we changed this in the survey. What are your thoughts on data centres?
Andrew McCasker
I think data centres are definitely no longer alternates. I think it's an asset class in its own right, similar to what we saw with build to rent as it started to come into the Australian market and people understood the size and the demand of the market. Data centres have absolutely eclipsed the Australian lending market.
Kathryn House
Dugald, is a data centre something that Naveen is looking at?
Dugald Marr
It's a great question because I think it is now accepted as mainstream, as Andrew said, but people still look at it from different angles. So some of them look at it as real estate, some of it look at it as infrastructure, and some of it have specialist teams within sort of technology. From Nuveen perspective, it is seen as almost quasi-infrastructure, but we certainly have appetite, like many investors, on both our equity and our debt side to lend to it via real estate infrastructure, via core or non core funds. So it is a sector with that much growth and that much excitement. It's something we can't ignore.
Kathryn House
So in the way you look at Australia and New Zealand, given your APAC role, are you looking at different countries in different ways in terms of the assets that you want to provide debt for? Does it vary considerably from country to country?
Dugald Marr
It does. And, listen, Australia's in a really fortunate position in that regard just in terms of its basis. So that, you know, the strict rule of law, you know, the fundamentals in terms of population growth, economic diversity, and low supply, stable regulation, stable government, low government debt, means that when you are comparing on a risk and returns, if you're looking at just from a return perspective, then obviously, it's a bit different. But from a risk return perspective, which is the way lenders always look at it because you have to manage your risk because you don't get the upside, then Australia and New Zealand are really well placed.
Kathryn House
If I'm going to throw in another question that I didn't prep for, but this is for Andrew. In the survey, did you see some big shifts in terms of bank lenders versus non-bank lenders? Are things shifting in that space in terms of what people want to lend on?
Andrew McCasker
Yeah. Definitely. Yeah. I think what we saw was the biggest shift was specifically in the domestic bank sector where we see a lot more appetite for build to sell, but they've moved their presale levels down, moved their total lending amount up, but still sort of pricing at what we saw was traditional bank debt pricing. And where we're seeing that impact is that they're almost pushing up into that bread and butter type transaction that private credit would deal in. So that was the biggest call out that I saw in the appetite from the domestic lenders into that space.
Kathryn House
And if we look at maybe the things that lenders are most concerned about. So the survey showed elevated construction costs remain the biggest challenge expected across the market. Dugald, how is that influencing Nuveen's lender decisions, this, you know, risk of continued high construction costs?
Dugald Marr
Yeah. Listen. It it was interesting, that result from the survey. I think from our point of view, you can still establish a point of difference by funding and supporting development projects given it often opens up better sponsors, a pathway to a prime asset that should outperform in the cycles at the right sectors and lower leverage. The issue is at the moment is it is more difficult to manage construction risks given the elevated construction cost volatility. Listen, if you're super focused on looking at those costs, I still think you can structure a project and a loan investment with good buffers and good protections. I think that the appetite of lenders, as Andrew was saying, is not diminished in terms of the residential and the build to sell sector. It's just perhaps a little bit more cautious, and that's around just making sure that projects are certain to go ahead. Construction costs are locked in. And, yes, as Andrew said, presales levels potentially are a little bit higher based on the fact that with economic uncertainty, there may be a little bit of volatility or uncertainty on the the end value.
Kathryn House
So anything you'd like to add there, Andrew, on the construction cost front?
Andrew McCasker
Yeah. Look, Kathryn, I think also the builder who the developer chooses to use to build out his program, it's always been a critical factor for lenders, but now it's sort of at that next level, because the lenders are are very conscious about making sure that the builder that signed on to the program can deliver. And if there are any cost overruns or latent issues that they need to deal with, that the builder's got, A), the capability and skill set to do it and, B), also the financial wherewithal to manage it.
Kathryn House
So maybe if I touch on a couple of things where there was some division in the survey. One of those was on credit margins and the expectations seem to be quite divided there. While the majority of lenders still expect stability, 34% expect credit margins to increase by at least 10 basis points, up from just 5% in H2 2025. Was that one of the surprises for you, Andrew, or what are your thoughts on credit margins?
Andrew McCasker
Look. I was surprised to read that and certainly have that as one of our callouts as far as metrics which have moved since the previous survey. Certainly, from what I'm seeing in the market, margins have remained fairly consistent, and I think the margins are being driven by the competition by the lenders into the space and the competition for groups wanting to bank the good projects with the good sponsors that are well structured and put together. And if everything's a like for like, the only way they can differentiate themselves is A) margin and B) the history of how the lenders behaved in the marketplace in construction during that period of time because construction's the most volatile program you can be involved in and it very rarely works out as we think it's going to when we write it down on a piece of paper.
Kathryn House
What are your views on credit margins, Dugald?
Dugald Marr
Yeah. I think, it was an interesting result. I think it's as a result of there's still really good debt liquidity in the market. But what we're seeing is that banks are probably more aggressive on that lower risk vanilla transaction end. And just with some of the volatility, particularly around costs, they probably have a little bit less appetite. We have to work harder with banks on the structured lending transactions where they perceive rightly or wrongly some more risk. I think what else we're seeing in the market and around pricing is some smaller non-banks are pulling back due to investor flows, but the large non-banks are still very active. They're perhaps, as we touched on before, just a bit more considered on project lending. And I think that would explain the survey feedback, again, where lenders are starting to see more growth coming from their refinancings as opposed to acquisitions or developments.
Kathryn House
So talking about refinancing and maybe we can switch back to that after maybe having a quick chat about interest rate expectations, because that was another area where the survey was a little split. So over 75% of lenders expect at least one more rate hike this cycle, but 35% expect at least two. Andrew, what are your views? Do you think we're going to get one, two?
Andrew McCasker
Look. To reiterate, so when we went to the market for this survey, we'd just had two rate rises. And, obviously, the rate rises have come into play because of the impact on inflation, not only from what we had domestically in Australia, but the impact that we saw from the Middle East crisis and what had happened with fuel. So we had a couple of moving parts, which I think made the decision of the RBA that they had to move rates. Our last interest rate cycle from cut to rise was seven months, which is the shortest interest rate cycle we've had for a very, very long time. And I think what we're seeing is that that interest rate market is becoming a lot more dynamic. And if we can have some resolution in the Middle East, which is a very big if because no one really knows what's going on there yet. We have seen, unemployment figure jump to 4.5, which was outside of market expectation at the last reporting. We may see a bit of contraction in that inflation figure and lots of ifs in all those answers, Kathryn. But if that all happens, I think we could even be at the end of of this potential interest rate rise cycle that we're at at the moment. My best guess is we've got one more to go and then probably six to eight months of waiting to see what happens.
Kathryn House
What are your views, Dugald?
Dugald Marr
Well, I thought I was going tp be a contrarian, in terms of no more rate rises. But listen, I think most people are still predicting one more given inflation in many parts of the economy is still high or too high. So that is a risk. But listen, after three rate rises, oil shocks flowing through the economy, and most recently, some government tax changes, which will impact business. My personal view is I think that the RBA will wait and see the impact of a number of big items that have that we just raised before going through the economy and the impact on consumer and business confidence that that is slowing at the moment. So a personal prediction is the RBA may sit and wait, and it may be a big surprise to everybody. But if there is some more uncertainty or any more negative news, then the next one might be down. But I agree with Andrew. I think it will be a period of time now before they they make another move.
Kathryn House
And how will that impact, do you think, on refinancing? So one thing the survey showed that performance-based variables have really risen in importance amid this elevated uncertainty. With these thoughts about what's happening with rates, how's that going to flow through to refinancing, do you think?
Andrew McCasker
Look, Kathryn, I think it's going to be very critical, and you talk about performance-based assets. The issue that we're going to have is obviously, potentially a a lending value impact as we see interest rates move and cap rates potentially soften. So the borrower needs to have enough capacity to be able to create enough refinance at the new lender to move the loan and the asset across. And then more importantly, as we talk about the base rate moving up and potentially margins pushing out, how does that impact the interest cover ratio and the ability for the borrower to be able to meet that interest cover on an ongoing basis, and not only in the next four months, but six months and 12 months.
Kathryn House
Dugald, what are your views?
Dugald Marr
Yeah. I think when we that did come through, that focus on performance. And, listen, I agree with Andrew. I think, well, firstly, it's a it's a bit of a flight to quality when you're looking at a bit more uncertainty going forward. But the other one is particularly around the ICR. So it's around borrowers managing that ICR to ensure a comfortable refinancing, but also borrowers managing their assets, trying to grow income, and then that leads into backing the right sectors that still has tailwind. So I think performance ties into all of those things, and I think that's why that was a bit more important in terms of it on a look forward basis for refinancing.
Kathryn House
Well, it seems like there are still a lot of ifs, but still a lot of positivity, which is good. Dugald thank you so much for joining Talking Property. Really great to get your views, and I'll look forward to seeing what Nuveen does in the short to medium term.
Dugald Marr
Thanks, Kathryn.
Kathryn House
And, Andrew, thank you again for joining the show. And, we will include a link to the Lender Intentions Survey in our show notes so that people can read more about some of those results.
Andrew McCasker
That's great, Kathryn. Always appreciate being invited along and it was good to be able to share the time with Dugald.
Kathryn House
Fantastic. So to our listeners, thanks for tuning in to our latest episode of Talking Property with CBRE. If you like the show and want to check out more, make sure to subscribe via your favourite podcast hosting platform. Until next time.
