Debt market to make comeback

THE cost of bank margin loans for commercial property borrowers will be kept at the high end, between 3 per cent and 4 per cent above the cash rate, for at least another year, forcing real estate investors to seek funds from alternative sources.

At the height of the property boom in 2004 margin lending was popular because the banks were willing to lend at rates competitive with the official interest rate. But the differential ballooned as property markets started to tumble.

From mid last year to early this year, with the global crisis in full swing, calls were made on the margin loans. That forced many investors to sell shares and property to meet the calls. It was this debt, made up of unsecured medium-term notes and commercial mortgage-backed securities (CMBS), that brought the sector to its knees.

However, the CMBS market has started to thaw recently, allowing trusts to organise long-term financing at more competitive rates.

Last week Macquarie CountryWide Trust completed the first Australian CMBS issue in two years, selling $265 million worth of notes.

The banks say maintaining the high margins ensures their own balance sheets will be shielded from further property collapses.

Many banks were highly geared to commercial property, such as Suncorp Metway, which bankrolled the growth in the Gold Coast market. The bank, now saddled with loans that in some cases will never be repaid, has closed its book to any new property developer.

But property companies need lines of cash to keep growing, so they are now returning to the CMBS market, rather than the traditional big four banks.

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