October 18, 2019 / 9:16 AM / a month ago

Aussie property pipeline builds

* Loans: Foreign banks and alternative debt providers capitalise on opportunities

By Mariko Ishikawa

SYDNEY, Oct 18 (LPC) - Australian real estate credits are increasingly turning to foreign banks and alternative debt providers as domestic lenders scale back their exposure to the sector under increased regulatory pressure and higher capital requirements.

Sydney-based builder Walker is the latest on a growing list of borrowers from Australia’s real estate sector that are raising funds in the syndicated loan market, seeking an A$880m (US$597m) loan barely three months after completing an extension of a loan from last year.

International lenders and non-bank investors are stepping in to plug a funding gap left by domestic banks that are reducing their exposures to certain types of lending, such as those supporting land acquisitions and construction. As a result more loans from the sector have seen participation from a wider range of lenders this year, compared with the past when such deals were completed as bilaterals or clubs.

Contrary to concerns raised about some banks nearing lending limits to the property sector, several recent deals from developers and real estate investment trusts for construction, upgrading, refinancing or acquisitions of commercial property assets have been well received.

In August, Charter Hall Prime Office Fund made an impressive debut in the syndicated loan markets with a A$500m unsecured seven-year loan that had 20 lenders participating, including sole mandated lead arranger and bookrunner Sumitomo Mitsui Banking Corp. All the lenders were international, with the sole exception of Australian non-bank investor Metrics Credit Partners.

Charter Hall returned this month to raise an additional A$300m six-year loan from four Asian lenders.

Commercial property exposure in Australia for foreign and subsidiary banks increased to A$53.05bn at the end of June from A$46.70bn a year earlier, according to data released in September by the Australian Prudential Regulation Authority.

According to MaxCap Group, a debt specialist focused on commercial real estate in Australia and New Zealand, funding needs for the sector are expected to increase to A$50bn by 2023 as a result of the pull-back from domestic banks.

In September, MaxCap announced that Goldman Sachs had provided first-mortgage construction finance for its A$440m Aspire Melbourne joint venture with ICD Property, comprising a high-rise residential tower with ground floor retail space. In July, MaxCap arranged a A$360m construction loan for Midtown Centre office redevelopment in Brisbane.

BULGING PIPELINE

The pipeline continues to build with at least US$2.95bn in property financings in the market.

A consortium comprising Australia’s Star Entertainment Group, Far East Consortium International and Hong Kong’s Chow Tai Fook Enterprises is seeking proposals for a A$1.6bn 5.5-year loan for construction related to the Queen’s Wharf Brisbane integrated resort project.

Home Consortium, which was established when a group of investors acquired the former Masters Home Improvement real estate portfolio from Australian supermarket chain Woolworths, has launched a A$500m three-year loan.

The continuing flow of property-related loans adds to the US$11.08bn already raised year to date in Australia, putting 2019 on track to match the US$14.73bn raised from similar financings last year, according to Refinitiv LPC data.

This year property financings have accounted for a significantly larger portion of the overall syndicated loan volume from Australia, which declined 28% to US$50.15bn in the first nine months of 2019 compared to the same period last year.

RICHER PRICING

Property loans in general also provide better relative returns to lenders, coming against a backdrop of downward pressure on pricing in Australia and limited deal flow from other sectors of the economy.

Several top-tier borrowers from the country have taken advantage of abundant liquidity to cut borrowing costs and extend debt maturities. This year, interest margins for five-year loans in Australia have averaged 150bp, the lowest since 2014, according to Refinitiv LPC data.

In comparison, Walker’s seven-year loan offers a margin of 190bp over BBSY, while HomeCo is paying an opening margin of 175bp on its three-year borrowing. Warburg Pincus-backed ESR Group is offering a spread of 185bp for its A$180m three-year loan for refurbishment of a mixed-use commercial property in North Sydney.

This month, Blackstone Group completed an amendment and extension on a A$285m loan for Greensborough Plaza in Melbourne, soon after wrapping up a A$988m five-year loan backing its purchase of office towers in Sydney’s central business district. The two loans pay margins of 200bp and 180bp, respectively. ( Reporting By Mariko Ishikawa; editing by Prakash Chakravarti and Vincent Baby)

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