Property Exposures Update June Quarter 2018

Property exposures update June quarter 2018

The Australian Prudential Regulation Authority (‘APRA’) recently released its latest quarterly property exposure data for domestic and foreign Authorised Deposit‑taking Institutions (‘ADIs’). KordaMentha Property exposures update

Key insights

The number and value of Interest only loans Foreign bank branches Development loans new interest-only loans New interest-only home loan Commercial property An 8.8% decline in exposures to remain substantially below approvals remain near the lowest exposures for foreign branch development and subdivisions long-run averages, whilst the level since reporting commenced banks are now 364% higher for the 12 months to June 2018 in March 2008, despite a slight than the post‑GFC low of indicates lenders’ general rapid expansion of foreign increase over the June quarter to December 2012. Foreign aversion to the land development/ 15,704 (13,626 , March 2018). The branch banks now represent subdivisions market. Exposures branch banks continues. value of approved new interest- 14.2% of total exposures at are down 15.3% from the most only loans in June 2018 was 47.8% June 2018, up from only 3.4% recent peak in March 2017. lower than in June 2017. There in December 2012. has been an equally dramatic decline in interest-only loans as a proportion of total loans, being 16.6% of all new home loans issued for the June 2018 quarter.

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Overall exposure to property Change in property exposure by sector

Quarter on Quarter (‘Q-on-Q’) Year on Year (‘Y-on-Y’) •• Overall property exposure grew only slightly Jun Quarter 2018 Jun Quarter 2017 All residential 1.2% 5.6% in the June 2018 quarter, however, is 5.4% higher than at June 2017. Quarter-on-quarter Quarter-on-quarter Owner-occupied 1.7% 7.7% % % •• Owner-occupied residential loans (7.7% for +1.1 +1.5 Investment 0.3% 1.9% the 12 months to June 2018) continue to All commercial 0.5% 3.9% record high levels of growth, however, Year-on-year Year-on-year Office 1.5% 4.9% commercial property sub-sectors, industrial % % (8.1%) and tourism and leisure (15.2%), +5.4 +6.7 Retail (1.4)% 4.5% were the fastest growing sub‑sectors for Industrial 3.0% 8.1% the 12 months to June 2018. Development (1.9%) (8.8%) Other residential 3.8% (0.1%) Tourism and leisure 0.1% 15.2% Aggregate property exposure Other (3.0)% 4.5%

14.5% (-1 bps) Commercial

28.7% (+20 bps) Property exposure by lender group

Residential – Billions $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 investment 56.8% (+30 bps)

Residential – Major banks (ANZ, CBA, NAB, WBC) owner occupied

Other domestic ADI’s (other banks, building societies and credit unions)

Last quarter This quarter $ $ 1.87 trillion 1.90 trillion Foreign subsidiary banks and branches Residential Commercial

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Commercial sector

•• Aggregate commercial property exposure continues to Jun Quarter 2018 Jun Quarter 2017 expand beyond the previous peak of March 2009 (now Commercial property +10.5%), but at a slowing rate, with a 0.5% rise during Quarter-on-quarter Quarter-on-quarter exposure by sector the June 2018 quarter. +0.5% 0.0% •• Industrial property exposure grew 3.0% for the quarter Office 30.3% Retail 24.2% and 8.1% for the year, consistent with ongoing investor Year-on-year Year-on-year demand for industrial properties, supported by the Other residential 13.7% % % Industrial 12.2% sector’s broadly sound fundamentals. +3.9 +3.1 Other 10.8% •• Whilst new lending for land fell amid tighter credit Development 5.5% Tourism and leisure 3.4% restrictions, other residential, which captures Impaired exposure Impaired exposure (Q-on-Q) (Q-on-Q) apartments and high-density accommodation, recorded the strongest quarter-on-quarter growth -4.4% -11.0% (+3.8%) in the commercial sector amid elevated rates of completion and lower commencements. % total exposure % total exposure •• Tourism and leisure was stable in the June 2018 % % quarter following a strong result in the March 2018 0.2 0.3 quarter. • Whilst up 4.5% year-on-year, retail exposures declined Specific provisions Specific provisions • (Q-on-Q) (Q-on-Q) notably (-1.4%) over the June quarter, coinciding with % % sub-trend retail trade growth. +4.2 -8.2 •• Impairments, both in absolute terms and as a percentage of total exposure, were lower at June 2018 ($590.0 million) than a year earlier ($719.0 million), however, rose 4.4% over the June 2018 quarter. •• Specific provisioning increased by 4.2% to $260.0 million, however, as a percentage of total impaired property exposures remains steady at 44.1% amid credit conditions that, whilst facing heightened regulation and higher costs, remain broadly stable.

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Commercial sector

•• Reported exposure limits reflect the aggregate of all exposure to commercial property, including Aggregate exposure limits by sector drawn and undrawn commitments as well as, associated hedging. Ofﬁce Retail Industrial Land development/subdivisions Other residential Tourism and Leisure Other •• Exposure limits in commercial property sectors are increasing at a steady rate with the exception of land Millions development/subdivisions, which contracted 2.7% $100,000 quarter-on-quarter and 8.9% year-on-year. $80,000 •• Tourism and leisure continues to grow, increasing by 1.5% for the June 2018 quarter. $60,000

$40,000

$20,000

0 Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Commercial sector Commercial property impairment

•• The proportions of office, retail, industrial and other residential property exposures $ impaired % provisioned relative to all commercial property exposures has increased since the previous peak. Millions Peak % impaired $12.22 billion Proportional exposures represented by the balance of commercial property sectors $14,000 5.7% impaired 50% (Sept 2010) have contracted moderately. $12,000 40% •• Exposure to retail property is now 49.0% higher than at the March 2009 peak, $10,000 30% significantly greater than the exposure growth in the office (27.6%) and industrial $8,000 LT averaged provision sectors (13.9%). $6,000 Current 20% $590 million •• Foreign bank commercial property exposure continues to rapidly increase, with the $4,000 0.2% impaired share increasing from 5.5% (March 2015) to 14.2% of total commercial property (Jun 2018) 10% $2,000 exposure, with actual exposure increasing by 364% from December 2012. $0 0% Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Commercial property exposure by sector Foreign branch banks’ commercial property exposure by sector

Ofﬁce Retail Industrial Development Other residential Tourism and Leisure Other Ofﬁce Retail Industrial Development Other residential Tourism and Leisure Other

Millions Current Millions Peak $275.05 billion $300,000 $248.98 billion (Jun 2018) $50,000 Current (Junch 2009) $39.09 billion (Jun 2018) $250,000 $40,000 $200,000 13% 16% 5% $30,000 Peak 12% $20.40 billion $150,000 9% (Dec 2008) 12% $20,000 $100,000 24% 18% $10,000 $150,000 30% 26% 0 0 Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Residential sector Aggregate residential property exposure by type

•• The rate of growth of residential term loans remains steady, albeit at a slightly slower Owner-occupied Investment No. of residential term loans to households pace year-on-year. Millions ‘000s $1,800,000 Y-on-Y 6,000 • Owner-occupiers continue to represent two thirds of exposures, in-line with the Y-on-Y +2.2% • $1,600,000 +3.6% March quarter 2018 print. $1,400,000 34% 5,800 •• Lenders appear to be repaying APRA’s faith following its decision during the June quarter $1,200,000 36% 35% $1,000,000 to remove the 10% cap on investor lending growth. The 33.6% investor share of residential 5,600 lending is slightly lower than in the March quarter and substantially below the peak of $800,000 $600,000 39% in the June 2015 quarter. 65% 66% $400,000 64% 5,400 •• Declining exposure to interest-only term loans appears to be another legacy of closer $200,000 prudential supervision. The June 2018 figure of 28.5% continues to fall from the 0 5,200 Jun Sep Dec Mar Jun Sep Dec Mar Jun September 2015 peak (39.0%), following another 4.5% decline over the March quarter. 2016 2016 2016 2017 2017 2017 2017 2018 2018 The share of new interest-only loans has also reduced materially over the past 12 months, falling by 47.8% since June 2017. •• The decline in new highly leveraged loans (LVR greater than 80.0%) is an indicator of banks’ stronger self-regulation practices. While the June 2018 quarter (19.8%) was broadly in line with the prior quarter, it was 150 bps below what was recorded in June 2017. New residential loans approved per quarter by LVR

>90% LVR 80%–90% LVR 60%–80% LVR <60% LVR % interest only

Millions $120,000 40%

$100,000 9% 7% 7% 14% 14% 13% 35% Jun Quarter 2018 Jun Quarter 2017 $80,000 $60,000 53% Quarter-on-quarter Quarter-on-quarter 53% 35% % % $40,000 30% +1.2 +1.8 $20,000 25% 26% 27% 0 25% Year-on-year Year-on-year Jun Sep Dec Mar Jun Sep Dec Mar Jun 2016 2016 2016 2017 2017 2017 2017 2018 2018 +5.6% +7.3%

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Notes

APRA Revisions Notes KordaMentha Real Estate key contacts June Quarter 2018 Commercial property sectors: Berrick Wilson No institutions resubmitted data to APRA. •• Development Partner | Melbourne The June edition of the Quarterly ADI Property Land development/subdivisions. [email protected] Exposures publication includes revisions to previously +61 3 8623 3322 •• Other residential published statistics, due to better source data Tom Davis becoming available. Excludes loans to individuals or families, loans to private family companies or trusts Partner | Melbourne Further information for owner‑occupation. [email protected] +61 3 8623 3449 •• Other APRA’s ‘Quarterly ADI Property Exposures’ contains All other loans for the acquisition of commercial Paul Mirams information on ADIs’ commercial property exposures, property not included in remaining categories. residential property exposures and new housing loan Partner | Sydney approvals. [email protected] Commercial property exposure limits: +61 2 8257 3067 Further information including explanatory notes and an •• The aggregate of all claims, commitments and extended glossary can be found at: contingent liabilities arising from on and off balance Brad Bennett apra.gov.au sheet transactions with the lender counterparty, Partner | Brisbane i.e. includes outstanding balances and undrawn [email protected] commitments. +61 7 3338 0242

Sam Woods Executive Director | Perth [email protected] +61 8 9220 9306

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