New research shows most bank and non-bank lenders prefer funding industrial developments above all other property assets.

CBRE’s latest Lender Sentiment Survey shows this is true even for non-bank lenders that typically focus on the residential sector.

Industrial is the most preferred for construction and investment lending. Lenders are most overweight in build-to-sell residential and most underweight in industrial, the market sector which has the healthiest property fundamentals.

It is now the preferred asset class by more than 70 per cent of lenders. CBRE research head Zoltan Moricz says it is notable that several non-bank lenders, whose focus is mainly on residential development or subdivision lending, are also wanting more exposure to industrial development.

Twenty lenders took part in the survey including seven international and 13 domestic (three banks and 10 non-bank lenders).

Loan books

More than twice as many lenders want to grow their loan book as those wanting to shrink, but their appetite is lower for construction compared to investment lending.

Despite showing a preference for industrial deals, non-bank lenders are keen on residential construction loans with townhouses and land subdivision being preferred over apartments. Subdivision lending was only the most favoured by three out of 20 lenders.

For residential lending there are clear distinctions between housing types, especially when it comes to lending appetites between townhouses, with 47 per cent of lenders choosing this as one of their top two preferred asset classes for construction lending, and apartments cited by 18 per cent of lenders as one of their top two classes.

The appetite for build-to-rent appears limited.

Local banks have a fairly low appetite for residential construction lending, but other lenders continue to seek exposure. They are wanting higher barriers to entry as the challenge of attracting residential sales grows.

Higher Barriers

Two major Auckland developments have hit the wall in the past month: Takapuna apartments being put up for mortgagee sale and an international bank calling in loans on units at a Browns Bay complex.

All survey participants want higher barriers, with local banks wanting the highest level, requiring 100 per cent of debt covered. Non-bank lenders have increased their requirements and only a small number remain comfortable with sub-50 per cent cover.

Generally, non-bank lenders are now seeking 50 per cent cover as a minimum and being comfortable the development is attractive to buyers. A road map, marked by key milestones, is then required to ensure 100 per cent of debt cover by project delivery.

Loan to cost (LTC) and loan to valuation ratios have also been impacted, but not to the same extent as presale requirements.

Banks continue to be comfortable at a maximum of 70 per cent LTC. Non-banks are comfortable to consider up to 90 per cent. A few lenders have been happy to consider 100 per cent of cost cover, but only for deals that typically have stronger equity margins in the valuation or net realisation.