RBA's Malcolm Edey says commercial property risks appear manageable
Malcolm Edey, the RBA Assistant Governor (Financial System) spoke at the Australian Property Institute's Queensland Property Conference last week on the risks in commercial property.
"Historically this has been a common source of financial instability both here and abroad," he told the huge gathering.
"During the height of the GFC, Australian banks remained in comparatively good shape but they did suffer a noticeable deterioration in asset performance, with the aggregate non-performance rate rising to just under 2 per cent of loans.
"A significant part of that deterioration was in commercial property lending; impaired commercial property exposures accounted for around 30 per cent of Australian banks' non-performing domestic assets at that time."
He noted that after the post-crisis downturn, the commercial property sector was again experiencing strong investor demand, and bank lending to the sector is increasing.
"However there are a number of signs of increasing risk.
"Trends in commercial property prices and rents have been diverging over the past few years, with prices continuing to rise while rents have been flat to down (Graph 4).
"As a result, yields have declined. At the same time, vacancy rates have been increasing.
He noted as with the housing market, conditions have not been uniform across the country, and they have been noticeably firmer in Sydney and Melbourne than in other centres.
"But in aggregate, the major categories of commercial property have all seen downward pressure on yields over recent years.
"Strong demand from foreign buyers has contributed to this, reflecting the global environment of low interest rates and ‘search for yield’ (Graph 5).
"The risks appear manageable at this stage, but they underscore the need for sound lending practices and for appropriate prudence by investors."
Graph 5
