17 Jun 2011

Commercial Property Update: Funding, investment and harmonisation

Gary Best and Peter McMahon from Clayton Utz's Real Estate team look at the funding landscape for commercial development in Australia, the harmonisation of property laws across the country, and the appetite for foreign investment into Australia.

Commercial Property Update: Funding, investment and harmonisation
Gary Best, Partner, Real Estate
Peter McMahon, Partner, Real Estate
David Bushby, BRR Media

David Bushby

We're speaking with Gary Best and Peter McMahon from the Real Estate team at Clayton Utz. We're looking in particular about the funding landscape for commercial development in Australia, the harmonisation of property laws across the country, and the appetite for foreign investment into Australia.

Gary if I could just start with you, of course the GFC resulted in numerous lenders exiting the commercial property market. For those that do remain managing their loan portfolios, what are you seeing on the ground?

Gary Best

I think lenders are still very risk averse. I think they're choosing their borrowers carefully so some people can get money, other people can't get money. There's still a pricing issue of how much debt will cost, and there's still the issue that lots of banks still have loans in there that they've been careful not to flood the market with, but they're not getting any better, so the time is coming closer where banks will actually start to say we need to offload these loans off our books. That's going to mean that into the market will flow some possibly good buying opportunities but there will be increasing supply of product that will need to find buyers to soak them up.

David Bushby

Gary, in terms of new lending in particular for large commercial development, how is the activity, and how are funds typically being sourced for large commercial projects?

Gary Best

I think the larger development sector is improving. It's still pretty conservative and pretty quiet but there are signs of life, so even if you turn over the AFR you'll see more articles. There are some of the larger players who are saying we need to get back into this sector and become more active, and if you look around there are the signs of increased activity.

So you've got 1 Bligh Street just finishing, our new offices, you've Grocon and its partners involved in 161 Castlereagh Street. You've of course got people pretty interested in Barangaroo and there are a number of other projects that are out there - Mirvac and 8 Chifley and Green Square - so I think there's a bit of life.

It's not easy to get debt for those projects but it is possible and people are sourcing money through the investment arrangements, overseas super funds and pension funds are coming in and people are looking to different fields to provide the funding, some of which needs to be found from sources other than traditional debt providers.

David Bushby

And Peter just turning to the patchwork of State-based laws governing real estate across this country, are we making any progress towards harmonising those laws?

Peter McMahon

David you are correct. It is a patchwork. They do need to be harmonised. We are making progress. Clayton Utz and the Property Council of Australia and the various peak bodies are working towards that harmonisation through the Property Law Reform Alliance of which I am a previous chairman.

We have very positive responses from Attorneys-General around Australia and other key people. We've drafted model legislation and now we need to go to the next stage.

The benefits when we achieve this will be enormous time and cost saving to those involved in property in Australia.

David Bushby

So you spoke about the cost savings and efficiencies but will that actually unlock value in the real estate sector?

Peter McMahon

Considerable value, yes. It is very important to achieve this and the value to be unlocked will be substantial.

David Bushby

And just finally in terms of foreign investment, Gary spoke about foreign sources of funding but in terms of investment into real estate by foreign interests what's the appetite like for Australian real estate?

Peter McMahon

David I'm in Asia on a regular basis and I'm seeing a lot of interest in Australian real estate. Sovereign wealth funds and a number of Asian companies are very interested in our property projects. Of course at the moment the Australian dollar is at a historical high and that is suppressing some interest but the appetite from Asian companies and sovereign wealth funds will increase over time because it is recognised our political climate is safe, sound and stable. We have some excellent developers and some fabulous projects and there will be great opportunities in the future.

David Bushby

Gary, Peter, thank you again.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.