Can Australia’s commercial property market keep riding high?

Indeed, why are there virtually no distressed sales of commercial properties, even though so many of the the country’s small- and medium-sized businesses have seen their revenues evaporate as a result of the pandemic?

One senior banker told me there was an easy explanation for the extraordinary resilience of the commercial property market to date. “The market mechanism has been suspended,” he explained.

“There was some distressed selling in the immediate aftermath of the GFC, but a lot of it took a long time to come through.

“So while there was quite a dramatic impact initially, the banks did a reasonably good job of letting the market clear itself. This is happening even more so now.”

He added that banks, which have received capital relief from regulators, had refrained from foreclosures, although there were a few property sales going on behind the scenes.

He said the federal government and the prudential regulator were expecting some quid pro quo in exchange for the cheap funding the Reserve Bank is providing them.

“The attitude is that you’ve been given cheap funds through the lending facility not to foreclose on mortgages and to give small businesses relief,” the banker said.

“So the market mechanism is not operating because the banks have been asked not to move on customers.”

Still, he predicted that the banks’ willingness to continue supporting SME borrowers would eventually come to an end.

“You’re going to see distressed selling later this year, and next year,” he predicted.

He noted that large listed property groups had tapped capital markets for billions of dollars in fresh equity to shore up their balance sheets, and to insulate themselves against possible drops in property values.

That meant it was smaller players which were most vulnerable. “It’s the SME end that the banks have been providing assistance to.”

Other senior bankers pointed out that there had been fewer forced sales as ultra-low interest rates had reduced the pressure on banks to enforce their security when borrowers aren’t paying interest.

Normally, banks tend to become increasingly anxious as unpaid interest rapidly accumulates, causing problem loans to grow rapidly.

But ultra-low rates mean that problem loans aren’t ballooning in the way they usually do in a recession.

What’s more, the Morrison government – particularly through its JobKeeper wage subsidy – has provided critical financial support for small and medium businesses, reducing the pressure on them to liquidate assets.

The subsidy was due to expire on September 27, but the government has revamped the JobKeeper scheme and extended it for a further six months until March 28 next year.

In addition, many smaller companies have been shielded by the government’s decision to slap a moratorium on insolvent trading laws until the end of the year, in order to help businesses navigate the shock of the pandemic.

Still, many bankers believe that commercial property prices will inevitably feel the crunch when the government decides to taper its protection for SMEs.

ANZ boss Shayne Elliott told a parliamentary committee last week: “We do believe there will be, sadly, a pick-up in insolvencies, probably some point in the middle of next year as some of these [government support] packages start to be removed.”

And he expressed some trepidation that cracks in the commercial property market could eventually cause grief for the country’s lenders.

“I have worked in different markets around the world and I have seen that movie many times; it is a concern.”

Bankers say it is still too early to know with any certainty the extent of the problems they will suffer in their commercial property portfolios.

In coming weeks, major banks expect to contact some 105,000 SME customers who opted to defer loan repayments for six months when the coronavirus pandemic first struck.

According to Australian Banking Association figures, some 65,000 business loan deferrals will be assessed by the end of this month, and a further 40,000 by the end of October.

Bankers told The Australian Financial Review that although they’re in the early stages of contacting business borrowers, preliminary indications suggest that roughly half of SME borrowers will be able to resume their loan repayments at the end of October.

That means bankers will face a daunting task in coming months as they work out what to do with tens of thousands of troubled small business loans worth tens of billions of dollars,

According to the latest figures provided by the Australian Prudential Regulation Authority, the country’s banks had deferred $55 billion in small business loans – or around 17 per cent of their total small business loan book – as at June 30.

Given that many of these troubled loans will be secured by property – either residential or commercial premises – there is a strong likelihood that there will be an increase in the number of distressed sales.

Banks also face the challenge that a sizeable chunk of borrowers who opted to defer their home loan repayments for six months are ignoring the banks’ efforts to contact them.

They estimate they have been unable to make contact with about 20 per cent of borrowers, despite repeated efforts to reach them using a variety of channels, such as phone calls, texts and emails.

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