Total Australian commercial debt has hit new records as banks continue to pile into the industrial sector but shrink from the office sector amid ongoing challenges to new patterns of working.

Total Australian bank real estate debt has reached an all-time high of $326.7 billion, increasing by 6.7% over the past 12 months with total debt rising by $20 billion in that time, well above the 10-year annual average increase of $15 billion.

Plan1 Project Management & Consultancy Co-founder, Richard Jenkins said growth of Australian CRE debt was led by industrial property, which has now reached an all-time high.

“With industrial and logistics properties benefiting from the acceleration in the structural shift to online retail trade, lenders have increasingly sought to increase their exposure to the sector. Australian industrial CRE debt has increased by 42% over the past two years, far surpassing the gains of the other sectors," Mr Jenkins said.

Mr Jenkins said, interestingly, CRE debt provided to the retail sector grew by more than the office sector which is indicative of the uncertainty the office sector is current facing with stubborn low office occupancy rates.

Australian ADIs reduced their exposure to the office sector by more than $3 billion over the quarter, the greatest decline to the sector in 14 years, however the sector still accounts for 30% of all CRE debt held by Australian ADIs.

“With inflation maintaining upward pressure on interest rates, economic uncertainty and hybrid work keeping office usage well below pre-pandemic levels, financing office assets remains challenging, with the cost of capital increasing and lender appetite diminishing.”

Mr Jenkins said that while Australian ADIs retreated from the office sector, the sector offered an opportunity to non-banks as the sector will continue to need investment as more stringent ESG requirements and tenant demands have rendered many offices no longer up to standard.

Mr Jenkins added despite the shortage of housing across the nation, Australian ADIs exposure to high-density development had also dropped over the quarter as the number of apartments under construction continues to fall. Debt provided to high-density development is also down over the year.

“The composition of lenders in the Australian CRE debt market continues to evolve, with the share of Australian CRE debt held by the major banks (ANZ, NAB, CBA and Westpac) continuing to decline, falling to 68.4%, their lowest share of Australian CRE debt since March 2009.

“The share of Australian CRE debt held by the major banks (ANZ, NAB, CBA and Westpac) peaked at 84.7% in 2013.

“Australian CRE debt held by the major banks (ANZ, NAB, CBA and Westpac) decreased in the quarter, by the fastest rate since 2017.

“In response to APRA’s revisions to ADI capital requirements, banks have been forced to reweight their portfolios to loans backed by income-producing real estate assets.

“CRE debt exposure held by the major banks in the industrial and retail sectors have all reached record highs while their exposure in the office and tourism sector reduced.

“Major bank exposure to office sector lowest since 2021,” he said.

Mr Jenkins said CRE debt held by foreign banks rose over the quarter, is now $8.9 billion higher than a year ago.

“Foreign banks accounted for 25.6% of total CRE debt, which is now at all-time highs.

“Over the past year, Australian CRE debt held by foreign banks has increased by 12%.

“CRE debt exposure held by the foreign banks in the office, industrial and retail sectors have reached all-time highs.”

Mr Jenkins said, the Australian banking system in good stead with Australian banks some of the best capitalised major financial institutions in the world.

“Australia had gone beyond the Basel III global banking regulatory requirements and is the only jurisdiction in the world that mandates large banks carry capital to address the risk of rising interest rates as part of their core capital requirements.

“The health of Australia’s banking system is highlighted by the low level of “non-performing” loans (which are regarded as past 90 days due) which totals $1.8 billion (or 0.6% of total CRE debt in Australia),” he said.

Mr Jenkins said, that while the health of the Australian banking system is in very good shape, the increased regulatory pressure has reduced the major banks’ capacity to meet demand CRE debt which will offer an opportunity for not only foreign banks but also the non-bank sector, which continues to grow in Australia.