APRA clarifies its March 2017 letter regarding commercial property lending

To: All authorised deposit-taking institutions
 

In 2016, APRA undertook a thematic review of commercial property lending, in response to market dynamics and indications that underwriting standards were under competitive pressure. 

In March 2017, APRA issued a letter which shared back to industry APRA’s high-level observations and conclusions from the review so industry could benefit from insights gathered from across the sector. In relation to residential development lending specifically, APRA observed at that time that “some ADIs had tightened underwriting criteria for presales coverage following market concerns with regard to settlement risk. ADIs are now generally requiring qualifying presales equivalent to at least 100 per cent of committed debt”.

Consistent with APRA’s supervisory engagement in recent years, APRA clarifies that the reference to presales coverage in its March 2017 letter does not represent a minimum requirement or expectation of APRA. It was a reflection of industry practice observed at the time through the thematic review. 

APRA’s requirements and guidance for prudent credit risk management relevant to commercial property lending are contained in APS 220 and APG 220.¹ They include requirements that ADIs maintain prudent policies and sound credit assessment and approval criteria, which APRA continues to monitor as part of routine supervisory activities. While presales do have an important role to play in a sound credit risk management approach, APRA has not set minimum requirements or expectations for presales in these standards and guidance. 

APRA has already clarified its expectations with relevant ADIs through supervision. The intention of this letter is to support a consistent understanding of APRA’s expectations across the market more broadly.
 

Therese McCarthy Hockey
APRA Board Member