Addressing the Australian Shareholders Association (ASA) Investor Forum in Sydney last week, RBA assistant governor Malcolm Edey spoke about regulatory measures taken last year to mitigate risks in the housing market, highlighting the economic risks posed by commercial property.
“The second main area of risk focus domestically has been in commercial property,” Mr Edey said, adding that historically this sector has been a common source of financial instability both here and abroad.
“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 two per cent of loans,” he said.
“A significant part of that deterioration was in their commercial property lending. Impaired commercial property exposures accounted for around 30 per cent of Australian banks' non-performing domestic assets at that time.”
Mr Edey warned that the commercial property sector is again experiencing strong investor demand and bank lending to the sector is increasing.
“However, there are a number of emerging signs of increasing risk,” he said.
“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. As a result, yields have declined. At the same time, vacancy rates have been increasing.”
As in the housing market, conditions in the commercial property sector have not been uniform across the country, and they have been noticeably firmer in Sydney and Melbourne than in other cities, Mr Edey noted.
“But the major commercial property markets have all seen downward pressure on yields over recent years,” he said.
“Strong demand from foreign buyers has contributed to this, reflecting the global environment of low interest rates and ‘search for yield’.”
Mr Edey said that while “the risks appear manageable at this stage”, they underscore the need for sound lending practices and for appropriate prudence by investors.