Alternative assets in focus as lenders eye new investment horizons

In a significant shift, lenders are now favouring investments in alternative Australian property assets over office and retail properties, a new CBRE survey has shown.

CBRE Research tapped a mix of 40 local and international banks and non-bank lenders for its H2 Lenders Sentiment Survey.

At a topline level, the results highlight a flattish appetite for new Australian property loans over the next three months, with 37% of respondents wanting to grow their loan book and 10% wanting to decrease.

However, the most noticeable shift has been the appetite for investing in alternative assets such as data centres, health care, life sciences, childcare and self storage, which has more than doubled since CBRE’s H1 2023 survey.

CBRE’s Managing Director of Debt & Structured Finance Andrew McCasker noted, “The industrial & logistics sector has retained its mantle as the most sought-after asset class for debt investment, given the sector’s low vacancy rate and rental growth. However, we have seen a significant uptick in the appetite to lend on alternative assets following a marked increase in sales volumes and equity side investment appetite to build exposure to these emerging asset classes.”

“In tandem, the survey highlights that the appetite to lend on office assets has continued to decline and now trails retail for the first time since the survey’s inception at the start of 2022. Sentiment towards the office sector has been compounded by a lack of sales evidence in the market to demonstrate a softening in yields. Until lenders have certainty as to the impact on values, they will continue to have a conservative view on this sector.”

In regard to the overall survey findings, CBRE Associate Director, Debt & Structured Finance, Will Edwards said the results provided a level of reassurance around the availability of debt capital for pending refinances, noting that these will take place on revised metrics and the time to execute may be protracted.

“The survey responses indicate that more than half of lenders have less than 25% of their loan book maturing in any given year from 2024 to 2026, with no indications of a significant ‘debt-maturity cliff” in Australia,” Mr Edwards said.

Lender Preferred Asset Class for New Investment

The survey also highlights that commercial construction lending pre-lease requirements have bifurcated between industrial and office assets, with the largest cohort of respondents indicating no pre-lease requirement for industrial construction lending but a more than 60% pre-lease requirement for office construction.

“We anticipate this will start to play a role in office asset construction and re-development being pushed back or postponed indefinitely, except for well-capitalised landlords,” Mr Edwards said.

“For residential, nearly 60% of lenders expect over two thirds of the debt component of construction finance to be covered through pre-sales, which will continue to weigh on future supply.”

Financers have maintained their appetite for well-located, high-quality build-to-rent (BTR) assets across Australia, with BTR ranking ranked second behind industrial on the list of preferred asset classes for new investment.

The survey also highlights that more offshore banks and non-bank lenders have grown their appetite for this asset class since CBRE’s last survey, with Mr Edwards noting that transactional evidence around both cap rates and rents was expected to propel sentiment towards the sector moving forward.