The domestic banking sector may have been spooked by the global financial crisis, but in reality it has suffered very little. In fact, the crisis has provided a convenient excuse for increases in fees and margins as banks cry poor, claiming that the cost of funding has increased. While this may have been true during the midst of the credit crunch a year ago, with the Government guarantee and decline of volatility in credit markets this excuse no longer holds weight. The banks current policy appears to be one of short term profiteering at the expense of the out-of-favor unlisted property sector and its unheard investors.

Unlisted property funds are being forced to roll over their debt at margins up to 3 times greater than had previously been applied. Conditions attached to these loans have been tightened significantly and if breached are used to force the payment of penalty interest and fees. Funds are being forced to sell properties at the bottom of the market as banks demand repayment of their capital. Unfortunately the banks also refuse to lend to potential buyers, ensuring a continued fall in commercial property prices. This sets up a chain reaction of value destruction as sales force negative revaluations of other properties. As property values are revised downwards property trusts are in danger of breaching loan covenants, setting off another round of penalty charges and interest rates, forced sales and revaluation.

The lending policies of major banks may well cause the financial collapse of the $60 billion unlisted property sector with potentially catastrophic results. A collapse in commercial property prices would result in insolvency for many funds leading to an increase in bad debts for the banks. More importantly, however, the superannuation and retirement savings of many thousands of Australians would be decimated.

It is in the interest of Australia’s banks to promote economic stability within the commercial property market, to preserve investor confidence and build asset values long term. Major Banks should be encouraged to take a longer term, through-the-cycle view of property portfolios and review management bonus policies based increasing interest rates and fees.