statistics selected Feature: adis commercial Property Exposure Limits September 2016 (released 29 November 2016)

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1 statistics selected Feature: adis commercial Property Exposure Limits September 2016 (released 29 November 2016) AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

2 Disclaimer and Copyright While APRA endeavours to ensure the quality of this publication, it does not accept any responsibility for the accuracy, completeness or currency of the material included in this publication and will not be liable for any loss or damage arising out of any use of, or reliance on, this publication. Australian Prudential Regulation Authority (APRA) This work is licensed under the Creative Commons Attribution 3.0 Australia Licence (CCBY 3.0). This licence allows you to copy, distribute and adapt this work, provided you attribute the work and do not suggest that APRA endorses you or your work. To view a full copy of the terms of this licence, visit Australian Prudential Regulation Authority Page 2 of 9

3 ADIs commercial property exposure limits This selected feature contains new information on the total amount authorised deposit-taking institutions (ADIs) have committed to lend ( exposure limits ) for the purchase, improvement or development of commercial property. This information provides a more complete measure of the total commercial property exposures of ADIs, compared to the more frequently published statistics on actual exposures. APRA has published these new industry-level statistics to assist understanding of the credit risks arising from commercial property lending. A focus on exposure limits is also consistent with how many ADIs measure their commercial property lending portfolios for internal management purposes. On the basis that exposure limits are a more complete measure of commercial property exposures, APRA proposes to introduce these data in Quarterly ADI Property Exposures (QPEX) from the December 2016 reference period. Commercial property exposures Commercial property exposures exist when a facility has been provided for the development, acquisition or improvement of landed property (real estate), where the servicing and repayment of the facility is dependent on the cash flows generated by commercial property. These could be by the property itself, through sale or rental income, or from cash flows generated from other properties owned by the borrower 1. Two key measures of ADIs commercial property exposures are exposure limits and actual exposures. Exposure limits are the aggregate of all claims, commitments and contingent liabilities arising from on and off-balance sheet transactions with the counterparty. This includes the outstanding balances of all loans and advances, all unused off-balance sheet commitments and the credit equivalent amounts of all market-related contracts (e.g. interest rate hedging contracts). APRA has not previously published exposure limits statistics. Actual exposures includes the aggregate of all claims and commitments on-balance sheet plus the credit equivalent amounts of off-balance sheet claims and commitments, defined in Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112). This measure does not fully capture the undrawn commitment arising from on- and off-balance sheet transactions. The actual exposure is always less than or equal to exposure limit, as the credit equivalent amounts defined in APS 112 are less than or equal to 100 per cent of the limit. Likewise, the actual exposure is always greater than or equal to the onbalance sheet amount. APRA publishes actual exposures statistics at an industry-level in QPEX as commercial property exposures. 1 Commercial property exposures reported under Reporting Standard ARS 230 Commercial Property Exposures (ARS 230) excludes lending to: individuals or family trusts for investment residential property; and to private companies or trusts where the residence is occupied by directors or principal beneficiaries. Australian Prudential Regulation Authority Page 3 of 9

4 Industry highlights As at 30 September 2016: ADIs commercial property exposure limits were $309 billion, 19 per cent higher than actual exposures of $260 billion; the categories with the highest aggregate exposure limits were office property ($87 billion) and retail property ($69 billion), together comprising over half of total exposure limits; and exposure limits to land development / subdivision and office experienced the greatest growth for the year to 30 September 2016 (12 per cent and 10 per cent respectively). Basis of analysis This feature presents industry-level analysis based on information reported to APRA by all ADIs: banks, building societies and credit unions 2. In particular, the feature analyses data reported on Reporting Form ARF Commercial Property Exposures (ARF 230.0) for the periods from March 2004 to September 2016 on a consolidated group basis. This form collects information on ADIs commercial property exposures, categorised into: office; retail; industrial; land development / subdivision; other residential; tourism and leisure; and other commercial property. All ADIs submit ARF to APRA twice each year: as at 31 March and 30 September. From December 2008, a sample of banks have submitted ARF quarterly. The sample comprises banks with the largest commercial property exposures, which in total make up approximately 99 per cent of total ADI commercial property exposures. For the June and December quarters from December 2008, APRA has estimated the remaining one per cent of ADI exposures using previous quarters data. A copy of ARF is available on the APRA website 3. Commercial property exposure limits Past downturns in commercial property markets have had significant negative impacts on a number of Australian ADIs and overseas banks, highlighting the need to subject the sector to ongoing prudential supervisory attention. Releasing data on exposure limits allows for more robust analysis of ADIs commercial property exposures. The statistics published by APRA in QPEX, and much third-party analysis of ADIs lending, are based on ADIs actual exposures. However, exposure limits capture the aggregate of all commitments and claims arising from transactions an ADI has with its counterparties and the credit equivalent of market related contracts. Exposure limits are the amount an ADI has committed to make available to a borrower. It represents the potential actual exposure should the facilities be fully drawn. In practice, not all lines of credit are fully drawn throughout the life of a facility, and contractual terms may, for risk management purposes, prevent a borrower from accessing all committed funds at once. For example, the availability of funds may be contingent on milestones in a construction project, or funds may be provided in instalments over time to match borrowers needs. 2 Banks are required to report all commercial property exposures greater than $250,000. Building societies and credit unions are required to report all commercial property exposures regardless of their value. 3 reporting-forms-and-instructions-adis.aspx Australian Prudential Regulation Authority Page 4 of 9

5 Analysis During the immediate aftermath of the global financial crisis, ADIs actual exposures to commercial property fell from a peak of $249 billion in March 2009 to a low of $202 billion in December Since then, ADIs actual exposures have returned to previous levels. Actual exposures grew by 9 per cent over the year to September 2016, to a new high of $260 billion. As at September 2016, commercial property exposure limits were 19 per cent higher than actual exposures; $309 billion compared to $260 billion. Commercial property exposure limits grew by 8 per cent ($22 billion) in the year to September Commercial property exposure limits have been growing steadily since March 2012, albeit not at the rate seen prior to the global financial crisis (chart 1). ADIs exposures relating to office and retail property have the highest exposure limits. Exposure limits to office property were $87 billion at 30 September 2016, 28 per cent of total commercial property exposure limits (chart 2). Exposure limits to retail Chart 1: Growth in ADI's commercial property exposure limits $bn % Sep 2006 Sep 2008 Sep 2010 Sep 2012 Sep 2014 Sep 2016 Actual exposure (left) Exposure limit (left) Year-on-year limit growth (right) 100 Chart 2: ADI's commercial property exposure limits by category $bn Office Retail Industrial Land / Subdivision Other residential Tourism & leisure Other 4 Analysis presented in this feature excludes other ADIs. Australian Prudential Regulation Authority Page 5 of 9

6 property were $69 billion, 22 per cent of total commercial property exposure limits. Exposures related to land development / subdivision had the highest growth in exposure limits for the year ending 30 September 2016, growing 12 per cent to 25 billion (chart 3). This category includes financing for land banking, land for subdivision and pre-development upon this land, and features a large amount of financing for commercial projects for residential dwellings. The growth of exposure limits for land development / subdivisions averaged 13 per cent per year over the past three years, the highest of all categories 5. The office category had next largest growth rate over the year, with exposure limits growing 10 per cent to $87 billion. Over the past three years, the average growth rate for the office category was 7 per cent, lower than the rate for total commercial property exposure limits (8 per cent). The category with the second highest three year average growth rate was other residential, growing 13 per cent per year to $49 billion. This category has seen recent growth driven by financing of construction for homes and apartments 6. Chart 3: Year-on-year growth in ADI's commercial property exposure limits, by category Land development / subdivisions % Retail Office Other residential Sep 2011 Sep 2012 Sep 2013 Sep 2014 Sep 2015 Sep Average compound growth rate 6 Refer to footnote 1. Australian Prudential Regulation Authority Page 6 of 9

7 Available statistics Exposure limits for each commercial property category for the past five quarters are shown in the attached table. A full time series to 2004 is available on the APRA website 7. APRA is proposing to introduce commercial property exposures limits data in each edition of QPEX from the December 2016 edition. The nine data items on commercial property exposure limits in the attached table will be published for each ADI industry segment in QPEX at an aggregate basis 8. APRA is not proposing to publish any additional data at an individual institution level. APRA seeks feedback from users on the value of the proposed inclusion of additional statistics in QPEX. In addition, APRA welcomes further suggestions on potential ways to enhance or expand the statistics that APRA publishes. Written submissions should be forwarded by 20 January 2017, preferably by to: Important disclosure notice publication of submissions All information in submissions will be made available to the public on the APRA website unless you indicate that you would like all or part of your submission to remain in confidence. Automatically generated confidentiality statements in s do not suffice for this purpose. Respondents who would like part of their submission to remain in confidence should provide this information marked as confidential in a separate attachment. Submissions may be the subject of a request for access made under the Freedom of Information Act 1982 (FOIA). APRA will determine such requests, if any, in accordance with the provisions of the FOIA. Information in the submission about any APRA regulated entity that is not in the public domain or falls within the definition of Protected Information or Protected Document in section 56 of the Australian Prudential Regulation Authority Act 1998, will be protected by this section. Manager, Banking Statistics Australian Prudential Regulation Authority GPO Box 9836 Sydney NSW statistics@apra.gov.au 7 Quarterly-ADI-Property-Exposures-statistics.aspx 8 The industry segments in QPEX are: major banks; other domestic banks; foreign subsidiary banks; foreign branch banks; building societies; and credit unions. Australian Prudential Regulation Authority Page 7 of 9

8 Attachment: ADIs' commercial property exposure limits (excludes 'other ADIs') (consolidated group) Quarter end Sep 2015 Dec 2015 Mar 2016 Jun 2016 Sep 2016 ($million) Exposure limits Office 79,109 83,393 84,959 86,351 87,409 Retail 62,937 66,082 67,645 66,935 69,121 Industrial 31,652 32,910 32,813 32,441 33,495 Land development/subdivision 21,959 22,888 24,166 24,996 24,559 Other residential 44,498 46,780 47,917 49,184 49,109 Tourism & leisure 9,460 9,293 10,022 9,417 9,489 Other 37,285 34,613 36,221 37,649 35,962 Total 286, , , , ,145 of which: in Australia 242, , , , ,190 A full time series to 2004 is available on the APRA website: Australian Prudential Regulation Authority Page 8 of 9

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