August 22, 2009 THE US commercial property market is threatening the country's tender financial sector with a second bout of subprime pestilence. Property prices are plummeting and authorities have warned of a logjam of debt due to be refinanced in the next few years.
Australia shares these problems, yet its prognosis is more benign. Just as the residential sector here has avoided a crisis, the commercial market, while ailing, is unlikely to poison the entire financial sector.
There are still some obvious parallels. Cheap lending has led prices to soar in both countries, and the subsequent falls have been precipitous.
Australian commercial property values are 25.9 per cent below their 2007 peak, having suffered the biggest annual fall since 1991, according to this week's Property Council/IPD index.
In the US prices are down about 35 per cent from a peak in October 2007, according to the ratings agency Moody's, much of the fall occurring in the past year.
Our values have fallen roughly in line with those in the US, but our debts seem nowhere near as pernicious.
US lenders have reported a sharp rise in defaults and delinquencies. Wells Fargo, with commercial property loans worth $US340 billion, reported a 70 per cent increase in non-performing loans last financial year. Questioning the Federal Reserve recently, a US senator, Chris Dodd, said: ''Some have suggested commercial defaults may even dwarf the residential mortgage problems.''
In Australia commercial property lending is largely the domain of the big four banks, of which only the Commonwealth, with one of the lowest commercial property exposure, has so far announced its profit results.
Its head of property lending, Peter Barnes, said there were no commercial property loan defaults or delinquencies within its institutional division, and he expected no big refinancing problems.
''Australian banks have always been, and this bank in particularly, more conservative than American banks.''
First-half results showed overall loan losses for the big four banks rose from $2.5 billion to $6 billion. Their commercial property exposure was estimated at about $143 billion at March 31, up 18 per cent from September 30 last year.
The other big source of commercial property funding in Australia is overseas lenders. Their withdrawal has been perceived as one of the greatest threats to the sector.
Jeff
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