Link Commercial Mortgages
Phone 1300 369 380


An overview of the Property Finance Market, post-2008: is a recovery in property funding underway?


The following brief research report was presented in bullet point form via a Power Point presentation
by Jean-Pierre Alouan at the McGee Valuers’ annual national conference at the Grace Hotel in Sydney
on 17th July 2009.
The leading questions were provided by McGee’s Valuers as items to be addressed, whereupon, the
writer conducted interviews with senior management of selected Australian major banks, foreign banks,
and funds managers.
All institutions and individuals interviewed are treated in confidence and their views and advice is herein
provided anonymously.

An overview of the Property Finance Market, post-2008: is a recovery in
property funding underway?

Presently, it is difficult to fund the purchase of commercial / industrial property. Home lending has
tightened up also with Lo-Doc facilities withdrawn by several institutions.

The refinance market is almost non-existent: it seems no lender wants to take on the risk exposure
of another – they’re all in the same boat, all carrying delinquent loans and nursing possessed
property security.

The debt market seems to have dried up, banks, they tell us, continue to face difficulties in raising
funding from capital markets, both domestically and off-shore. The limited funding available is
being “auctioned” to the highest bidders, thereby pushing up the cost-of-funds, which is being
passed-on to borrowers. The CBMS securitised market has no liquidity. Several of the four major
banks have recently undertaking capital raisings to bolster their balance sheets as well as to provide
funds for ongoing lending.

This is the case also with most off-shore banks in their respective countries of domicile: one UK
bank’s Director of Commodities stated in a telephone interview, “…we have a lot of good deals on
the desk; but have limited access to funds to lend…capital markets are dry”.

Domestically, there have been several market rationalisations. The reduced number of participants
is due to continuing acquisitions, mergers, and failures: this applies to the banking sector as well as
the funds management sector. Much of the acquisition activity has been undertaken by the four
major banks: we are moving back to where we were some 15 years ago, ie; to a market dominated
by the four majors.

The term, “Cash is King” now rings truer than ever… The auction rooms (in Sydney) are less and
less being frequented by buyers dressed in suits, much of the buying is being done by increasingly
younger persons dressed in jeans and designer T-shirts. Many properties are passed-in without a
single bid, whereupon the seller is then approached with an offer under the reserve, often time, the
offer is accepted. It seems the market here is driven by cashed-up buyers, requiring little or no

The Double Whammy of falling demand for properties and inhibited ability to raise funding for
purchases continues to drive down asset values in the market place. This is creating a concern for a
softening property market, particularly by the lending institutions, a predominance of the portfolios
of which are secured by first (and some second) mortgages over such property.

Some of the larger property trusts have suffered. Shopping centre yields have risen sharply with a
large number of centres being put to market, flooding the market in the face of limited demand from
a shrinking number of buyers…also limited big-ticket funding.

Most people don’t see the smoke at the big end as that market is narrow. What is becoming
abundantly apparent is the same thing at the smaller end with some property prices dropping up to
35% (depending on property class and geography) from boom time highs. SME need to do more
hiring, the Velocity of money needs to increase (with consumer confidence) in order for things to
start improving.

For now, however, certainly LVR covenants are being breached with property owners / borrowers
are being forced to put their hands-in-pockets to bring back into line these exposure covenants.
From state to state across Australia, property owners / borrowers are doing what they can to protect
what they own, for example by selling down peripheral assets to support their cash flows and
maintain their main asset holdings.

Almost all lending institutions are nursing delinquent loans, some of these are secured by vacant
and non-income producing property security. There is a real fear that if a large number of
possessed properties are put to an increasingly slowing market, where funding for purchasers is
limited, that this may cause an adverse market movement, causing asset prices to dive: it’s a little
more complicated than demand vs. supply.

Institutions, mainly banks, have found themselves overweight in exposure to commercial / retail
property, in once particular post acquisition case, the portfolio weighting is substantially beyond the
prescribed portfolio weighing, the comment provided being, “…we may not be able to lend on
straight property transactions for the next 2-3 years, not until the effect of refinances,
amortisations, and sales & discharges reduce our exposure…”.

Will the rationalization / mergers between lenders / brokers continue?

The short answer is, “Yes”, both domestically and globally.

There have been already several publicised take-overs of what are termed to be non bank lenders.
These businesses had pitched themselves in direct competition against the major banks, offering the
borrower market an alternative to the usual, traditional bank product (mainly residential lending).

It is anticipated that the major banks, while snapping up their smaller banking competitors, will
continue to also buy-out their competitors in non bank sector and that this activity will continue for
the foreseeable future.

The broker / introducer / originator market is expected to continue to suffer as banks squeeze out
their competition and regain control of the bulk of the market.

Over the past 2-10 years, in a push to compete against the broker / originator driven non bank
lending sector, many banks have become increasingly involved in expanding their market share by
the very same brokers / originators, an effective attempt to neutralise the non bank competition by
diluting the loyalty of its introducer base.

It is reasonably envisaged that the major banks will continue to rationalise, regaining dominance in
the market and decreasing their reliance on killing off the octopus, the tentacles will
die off. The broker sector is in for a shock over the next 2-5 years, it is reasonably expected.

The government’s “four pillars” policy is designed to keep strong the four majors while balancing the
competitiveness of the market. his entails, it is reasonably presumed, breaking down the
competition from smaller regional banks and local operations of overseas banks, and the NBFIs.

While it is accepted that the banking system is the platform upon which the economy stands, the
federal government’s guarantee on deposits clearly signals what’s ahead: the writing is on the wall.

Immediately before us are major non bank financial institutions with mortgage trusts frozen by a
run on redemptions in a perceived flight to quality / safe haven of government guaranteed bank
deposits: with several smaller trust funders in receivership (understood to be largely from
mismanagement) how long will it be before these NBFIs begin to collapse under the artificial tide
created by the federal government?

But, as it has been opined by one Chief Banking Officer, we must look beyond the government’s four

pillars policy to the overseas markets as they are what drive Australia: an example is the Chinese
government, via its corporations, continues its drive to buy up Australian resources, farms, etc.

Consider with this that the Aussie Dollar is one of the major currencies traded in the foreign
exchange markets globally; yet, Australian banks have a marginal presence overseas, no brand
power, and remain relatively unknown.

What may follow on from this is that a major overseas bank (5-15 years horizon was touted) may
come into the Australian banking sector and absorb one of the big four, providing the prominence of
the Aussie Dollar in global foreign exchange markets.

Further reasons for these thoughts are that Australian corporate paper is sold world-wide,
underwriting needs to be by globally known banks: Australian banks relatively unknown. Consider as
an example that Qantas commercial paper is well know globally; however, the Australian banks
which underwrite it are relatively unknown entities, such is the perception driving this thinking.

What changes have/are expected to occur in funding/loan approvals: are there
assumptions in property finance that can no longer be made?

In a nutshell, the answer is “tighter credit policies”. Lines-of-Credit are no longer readily available:
there are limits imposed by banks / lending institutions with tighter cash-out restrictions imposed
also by mortgage insurers in the residential lending market.

Lending policies are presently conservative. However, general “blanket” lending policies are
presently on hold with many institutions, in favour of assessing debt exposures on a deal-by-deal

For example, cycles and timing are considered rather than assumptions, per se, ie; micromarket
forecasts (the project, property, immediate market demographics, immediate competition in
the location, etc) are prominent factors being considered in most credit analysis.

There are different factors affecting assumptions: likely market conditions, asset value sensitivity
modeling, and government policies (tax structures, incentives vs. disincentives, etc), and end-user
affordability vis-à-vis interest rate forecasts (loan servicing sensitivity analysis now more vigorously
applied) and inflation are major considerations - it’s no longer a broad-brush market view.

Capital deployment in structured finance and syndication vehicles seems to have taken to the backburner
for now as wealth instruments and exotic products are greatly out of favour: we’re back at
grass-roots levels now with the basic fundamentals gaining prominence in credit decisions…no one
wants to stick out their neck.

Property security type differentiation is now more in play with higher gearing a thing of the past.
Exposure consideration vis-à-vis lender outs via refinance is gaining increasing prominence.

Debt cover covenant default is a growing concern: 1st and 2nd tier lenders are now applying 2.0% to
2.5% interest rate sensitivities on top of higher servicing hurdles, some institutions are doing this on
a fully amortising basis, ie; higher monthly servicing requirement – the consideration revolves
around the lender’s out at loan expiration, “who will refinance, will the exposure qualify? if the
exposure is to remain on the book, the appetite will be for an amortised residual not a full roll-over”.

With all the major and most of the minor mortgage trusts presently frozen, envisaged to remain so
for at least the next 12 months, refinance options are limited.

What will be the future for Structured Finance vs Direct Finance?
What property types have funding difficulties?

Structured Finance and exotic products have become a bit “no no”. Anything other than direct
finance has fallen out of favour with institutions which have incurred losses and hold delinquent
loans over the past year.

Banks and funds managers are protecting their portfolios in the face of rising yields & falling
property security values. The saving grace at present is the historically low interest rate, which is
contributing to keeping exposures from falling into debt cover default.

In the eyes of many bankers & funds managers, the immediate concern is investment property
tenant viability, where rental income is, for many exposures, the underpinning of loan servicing.
The next 1-2 years of economic activity will determine the impact on tenants and the viability of
their businesses.

The sub-tenant/lease market is growing because of staff redundancies and cost rationalisations. The
vacant (unused) space is not visible on the vacancy measure radar as much of it is subject to long-term
leases, eg; many large firms have cut back on staff and seek sub-tenants to generate
supplementary income from otherwise unused office space.

An example provided by one funds manager was Governor Phillip Tower, “…it is ‘fully tenanted’ but the underlying demand is not there…about 30% of the space there is not being used…we need to watch for stress levels”.

The cleansing of the market is expected to continue over the short to mid-term, which may certainly
cause further market slowdown. This is the short-medium term outlook.

Specialized property security is out of favour: motels, hotels, tourism oriented properties, etc, are
considered as viable as economic factors affecting them. Presently, consumer spending activity is

Fringe retail is also out of favour, so too is small-end suburban industrial, particularly strata factory investment units as tenant viability is a crucial consideration. Finally, the high-end properties, such as main shopping centres are extremely difficult to finance because of the sheer dollar amount of funding required.

Where can borrowers turn to in the event of lack of funding/refinance options?

Increasingly, Private Equity (non-geared) is plugging significant holes in funding and bringing into
line LVR breeches in the face of falling property values across the market, as well as addressing debt
cover breeches by reducing loan amounts.

Borrowers in all tiers are introducing multi-security scenarios where possible, ie; contributing
unencumbered or lowly geared properties as supplementary security to their existing credit
arrangements or to support new business.

This serves to keep lender exposures at levels attractive to credit providers, many of which have conservatively pitched their credit policies at conservative levels.

The refinance market is almost at a halt. There are small pockets of money available and the well resources broker / originator will have sniffed these out by now: many are small or obscure trusts and private funders who remain cashed up and out of the view of the mainstream market.

However, with size of lender / fund come a proportionate maximum loan size available.

If a borrower has a portfolio of properties securing a large loan, a sensible structure would be to split the
securities up to secure a suite of loans, mostly on a stand-alone / non-cross secured basis beneficial
to the borrower.

LINK Commercial Mortgages Pty Limited is a well resourced boutique commercial mortgage originator and has
access to property funding, at senior and subordinated levels, with which to assist property owners / borrowers
during these difficult times.

While many of the banks and major funds managers have either withdrawn from the market or have substantially
cut-back their lending activities, LINK Commercial Mortgages may arranging funding for refinance or to allow
purchasers to take advantage of buying opportunities that the current global downturn is providing.

LINK Commercial Mortgages Pty Limited
[ABN 72 082 232 077]
Level 57 MLC Centre
Martin Place
GPO Box 4525
Ph: 1300 369 380 begin_of_the_skype_highlighting            1300 369 380      end_of_the_skype_highlighting
Fx: 1300 369 390

Copyright © LINK Financial Services Group Pty Limited – 1999

Copyright@ 1999-2010 Financial Services Group Pty Limited
Netstarter - Web DesigneCommerce & Magento
Copyright © 1999 - 2011 - LINK Financial Services Group Pty Limited