The great commercial property fire sale: Maley

If you ever wanted to pick up a bargain in a top Sydney suburb, such as Bellevue Hill or Mosman, the time to do it was probably the first half of 2009.

Two of Australia’s two big-paying investment banks, Allco Finance Group and Babcock & Brown, had hit the skids, and it had become painfully obvious to hundreds of investment bankers that the days of the large bonuses they’d counted on to pay their outsized mortgages were over.

The investment bankers weren’t the only ones hit. The big accounting and law firms also took fright, and started quietly laying off staff.

As a result, there was a spike in forced sales of multi-million dollar homes, and hapless vendors had little choice but to offload their homes at depressed prices.

Since then, house prices in Sydney’s top suburbs have come bounding back.

It’s not hard to see why.

Investment banks have enjoyed soaring profits, on the back of jumbo capital and debt raisings. As a result, investment bankers are busily upgrading their houses, and queuing up to buy the latest Maserati.

This surge in capital and debt market activity has also boosted the incomes for bankers, lawyers and accountants.

As a result, buyers who snapped up expensive houses in the dark days of early 2009 have seen astronomic rises in the value of their houses.

But it’s an entirely different story when it comes to commercial real estate.

In fact, many close market observers believe that careful cashed-up buyers will be able to pick up commercial property at prices that will appear ridiculously cheap in several years’ time.

The main reason for this is the banks’ huge aversion to commercial property.

In the first place, a number of the foreign banks that were big players in the commercial property sector are trying to free up capital in Australia. They’re putting pressure on their clients either to refinance their loans, or to sell some of their properties and repay their debts.

At the same time, the Australian banks are close to choking on their exposure to the commercial property sector.

Bank executives are under instructions from their boards to reduce commercial property loans as a percentage of their total loan book.

As a result, bankers are applying extreme pressure on commercial property groups to repay part of their loan. So desperate are the banks to reduce their property exposure that they’re prepared to countenance properties being sold at extremely depressed prices, even if it means taking a write-down on their loan.

At the same time, potential buyers are hamstrung, because a number of banks are simply refusing to provide any new loans for commercial properties.

This point was made by Stockland boss, Matthew Quinn in an interview with KGB TV.

Quinn said that Stockland had diversified its funding sources, but he noted there is still an over-reliance on bank debt in the property sector.

The banks, he said, “have made it quite clear that they’re overweight commercial property and I think they would like to get their money back as quickly as possible and we respect that”.

He also noted the banks were “not dishing out a lot of loans to small business”.

In fact, he said, small businesses wanting to open in Stockland shopping centres or take up space in Stockland office buildings were finding it so hard to get bank credit that Stockland had transformed itself into “the bank of the day for them” and was providing them with capital incentives to fit out their shops.

With banks’ aversion to commercial property running at such elevated levels, it stands to reason that there’ll be some very attractive buying opportunities – but only for those buyers who are able to raise the finance without going to the banks.

This article first appeared on Business Spectator.