The Australian banks are rationing the provision of debt to the property sector for logical reasons. They include a global push by regulators for banks to hold higher amounts of capital, and locally a residential investment and construction boom fuelling strong loan growth and therefore further supporting capital required. Furthermore, they are wary of the risk of deteriorating creditworthiness of borrowers which comes beyond the low point of the interest rate cycle, high property prices and increased supply. There are also changing and unclear capital export rules for foreign investors.
In the background, banks are striving to maintain high dividend payouts to their shareholders.
The capital allocation models used by banks and endorsed by regulators include capital penalties for loans reported as irregular in some way. This helps explain why they are rejecting projects where there is any risk of irregularity, notwithstanding that the ultimate recoupment of principal and interest appears very likely.
We therefore feel there are sensible opportunities for investors who understand property fundamentals, and who are not bound by banking regulation to replace the banks in filling the funding gap left by bank rationing.
Stephen Girdis
Chairman of the Debt Management Investment Committee
