Stamford Capital has released the first comprehensive dataset analysing the initial impacts of COVID-19
- Written by The PR Partnership
Stamford Capital has released the first comprehensive dataset analysing the initial impacts of COVID-19 on Australia’s commercial finance sector, undertaking its annual Real Estate Debt Capital Markets Survey in February, 2020 and again in August, 2020 after the “first wave” of the global pandemic.
More than 100 active lenders participated in the national survey from major trading banks and non-bank lenders to super funds, foreign banks, private financiers and second-tier trading banks. Over half of Survey participants have loan books over $500 million.
The annual survey is the third to date and is a barometer of lending sentiment and an early identifier of market trends.
“It is compelling to be able to measure just how the first wave of COVID-19 impacted our finance markets and our data has effectively captured the ‘pain points’ in the market and the changes we can expect to see over the next 6 to 12 months”, said Michael Hynes, Joint Managing Director at Stamford Capital.
Key findings of Stamford Capital’s Real Estate Debt Capital Markets Survey 2020 include liquidity remaining despite declining markets, leverage levels decreasing, lending criteria tightening, non-banks continuing to increase market share, ICR pressures easing but heightened risk remains and a forecast increase in margins.
Overwhelmingly, participants expect investment loan appetite to remain strong with 70 per cent expecting major banks’ appetite to be maintained or increased and 84 per cent expecting non-banks to maintain or increase their investment loan appetite. Construction lending is slightly less optimistic, with 57 per cent of major banks and 68 per cent of non-banks expecting to maintain or increase it.
According to Stamford Capital, government initiatives throughout COVID-19 such as JobKeeper and the HomeBuilder Grant have propped up the economy while helping retain liquidity in market.
“With historically low cash rates there’s no return in bank and equity markets are perceived as too risky, so debt has emerged as an attractive asset class and we expect will remain favoured by investors,” said Hynes.
Interestingly, the Stamford Capital Real Estate Debt Capital Markets Survey 2020 revealed the biggest impacts of COVID-19 are expected to include further tightening of lending criteria, reduced leverage and increased margins.
The pre-COVID-19 dataset showed 13 per cent of respondents expected major banks to tighten lending criteria for investment loans with 19 per cent expecting stricter criteria for construction loans. This ballooned to 62 per cent and 68 per cent respectively in the post-COVID-19 environment.
A third of lenders are now looking to decrease leverage levels, compared to just three per cent pre-COVID. Similarly, 67 per cent of lenders expect an increase in loan margins in 2020/21 compared to only 11 per cent pre-COVID.
“COVID-19 has introduced prolonged uncertainty in the market and with no defined end in sight, lenders are reducing their appetite for risk and factoring it into pricing. Construction lending looks set to be the hardest hit according to the Survey,” said Domenic Lo Surdo, Joint Managing Director, Stamford Capital.
According to the Survey results, banks and non-banks are set to increase margins. 67 per cent of respondents expect to see major banks increase loan margins, a significant jump from only 11 per cent in February. Nearly two-thirds (64 per cent) of respondents expect non-banks to increase loan margins, up from just 12 per cent pre-COVID.
Reduced risk profiles, growing caution and continued uncertainty have once again put the spotlight on pre-sales, according to Stamford Capital’s dataset.
The data shows that 60 per cent of all lenders surveyed require 60 to 100 per cent in pre-sales with 17 per cent expecting this to increase further in the next six to 12 months. An overwhelming 93 per cent of major and second-tier banks require 60 to 100 per cent in pre-sales.
The non-banking sector however continues to power on, increasing market share and underwriting developments with limited pre-sales. Half of non-banks surveyed require no pre-sales at all, although a quarter plan to increase this in the next six to 12 months.
“Non-banks continue to flourish in this market, just last year 34 per cent of non- banks in our Survey required no pre-sales and this has jumped to 50 per cent this year – even with COVID’s impacts the non-banks continue to increase traction.
It’s getting harder for large-scale developments to secure funding, with banks seeking significant levels of pre-sales”, said Lo Surdo.
According to the Stamford Capital Real Estate Debt Capital Markets Survey 2020, Interest Cover Ratio (ICR) is not the same roadblock it was last year. While 86 per cent of lenders seek to maintain their interest cover hurdles, The RBA’s cash rate reduction has eased some difficulty for investors. Again, non-bank lenders differentiate themselves with 47 per cent having no ICR requirements.
“We expect some investors may find it challenging to meet ICR requirements as tenants look to renegotiate lease terms or fail to make rent payments. This could ultimately lead borrowers to refinance to avoid breaching interest cover ratios,” says Lo Surdo.
Pictured L -R: Domenic Lo Surdo, Joint Managing Director, Stamford Capital and Michael Hynes, Joint Managing Director at Stamford Capital.
