Banks worried about property values

Banks are assessing that some of their commercial property customers have a higher risk of defaulting than they previously did, following the impact of Covid-19 and the lockdown. A Reserve Bank

found banks said that the greatest uncertainty concerned the impact of Covid-19 on commercial property values.

The central bank conducted the survey at the end of last month to understand how demand and the availability of credit had changed after lockdown.

Banks provided separate responses for household, smalland medium-sized enterprises (SMEs), corporate, commercial property and agricultural lending.

‘‘Several banks noted that they were downgrading their commercial property portfolios, which increased capital utilisation and reduced their capacity for new lending,’’ the report said.

The Reserve Bank clarified that statement in the report, saying banks had recognised the deteriorating credit worthiness of some of their commercial property borrowers.

They assessed that some of their customers had a higher probability of defaulting on their loans than previously.

‘‘This downgrading of customers means that the risk weights on these loans have gone up, increasing the amount of capital that banks must use to fund these loans.

‘‘Some banks have internal limits on how much capital they can allocate to particular risk areas and, where this is the case, customer downgrades may reduce their willingness to lend to other customers,’’ the Reserve Bank said.

The survey showed investors and developers were not seeking as many loans as previously and would seek fewer again this year.

The banks were more cautious and less willing to lend for new development and investment in commercial properties, continuing a three-year trend.

One bank said it was difficult to get valuations done because valuers preferred to wait for market evidence post Covid-19. But several banks said more current valuations would be required, and more regularly.

Banks expected

asignificant

Gareth Kiernan

Infometrics chief economic forecaster, left

slowdown in commercial property lending over the latter half of this year, particularly for development.

With regard to commercial property investment lending, several banks said uncertainty around tenants’ ability to meet their lease obligations was slowing the market. A flight to quality was evident in most sales transactions.

Interest in retail, accommodation and hospitality properties had softened, and one bank said higher loan-to-value ratios were being applied to retail, secondary office and hotel properties.

There were probably few buyers for commercial property at present and, with the high level of uncertainty, owners would be unlikely to sell if they did not have to, Infometrics chief economic forecaster Gareth Kiernan said.

‘‘It’s obviously not a risky situation but [there’s] just the sheer level of uncertainty. So it’s a case of crossing your fingers for many of these people who may be considering selling.’’

One hope was that because New Zealand’s economy was performing better than others that might attract some international investment but that could months, Kiernan said.

In May, the Reserve take some

‘‘It’s a case of crossing your fingers for many of these people who may be considering selling.’’

Bank’s

said commercial property had historically been a cause of significant credit losses for banks, including in New Zealand.

Banks’ lending on commercial property was about $40 billion, 8 per cent of total bank lending, with about $5b related to property development.

In recent years, banks had tightened lending standards to the commercial property sector, improving the overall quality of the lending.

Problems in the commercial property sector were unlikely to threaten financial stability on their own, but could exacerbate the downturn and weaken the financial system’s resilience.