Investment Highlights | Q1 2017 07 The Australian Prudential Regulation Alternative Authority (APRA) monitors and Lending Sources regulates lending standards by the ADIs (both domestic and foreign) Offshore Life Insurance and and in March sent a ‘warning shot’ to non-ADI banks Superannuation Funding these institutions regarding lending practices for commercial property. APRA pointed out that commercial property lending has historically been a source of significant loss for banks, both in Australia and overseas. The letter’s intention is to ‘encourage’ domestic and foreign banks to tighten their risk outlook for commercial Capital Private Funds property deals. A heightened risk Partnering outlook by the banks invariably leads to lower lending volumes, or at least Remembering that the previous slower growth in lending. yield compression cycle ended Taken at face value, APRA’s actions when access to debt for commercial could be seen as the nail in the coffin property deals was virtually for the cap rate compression cycle impossible (the ‘credit crunch’) – and in Australian markets. The private at a time when yield spreads were capital market, however, is seeing close to zero – alternative lending an opportunity to capture returns in sources will allow the commercial our property market that have been market to work through APRAs somewhat elusive, and is filling the lending restrictions. Bond spreads void that the banks are creating. This for Prime Grade office are 338 bps, is seen as a win/win for Australia’s a full 100 bps above the long term commercial property market, as average, suggesting that some yield this private capital gets access to compression is still ahead of us in the returns in a low yield investment major markets. environment, and solid deals with good underlying fundamentals can still occur with these alternative debt sources.