Canada’s largest commercial-mortgage lenders, including Sun Life Financial Inc. and Royal Bank of Canada, are turning more cautious because the commodities slump stunts economic growth and raises the risk of default.
“We’re worried about happens within the real-estate cycle Canada’s in right now – there’s more risk in the market,” Michael Andrews, managing director of Toronto-based Sun Life’s Canadian commercial-mortgage team, said within an interview at a property conference in the city Tuesday. “We desired to ensure our portfolio could withstand, for instance, a 25 per cent stop by prices. Do we think that may happen this season? No. But what about in 5 years? It’s just prudent to check.”
There’s more risk within the market
The lenders, which finance office towers, warehouses and malls, take steps to protect their mortgage books as low oil prices pressure owners in Alberta, and foreign investors scoop up assets in Vancouver and Toronto at record values.
Sun Every day life is wrapping up a months-long stress test of about 1 / 2 of its $8 billion-mortgage portfolio, Andrews said. They tested deal by deal what would happen if property values fell by 25 %, with focus on higher-risk loans such as those who work in Alberta and those with higher loan-to-value ratios. So far, the results happen to be “fairly good,” he explained.
Lenders will also be worried about prices in Bc, where foreign investors are purchasing offices at record values, and about lower-quality offices sitting empty across the country as a boom in supply is placed hitting the marketplace.
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Mezzanine Loans
“We’re keeping an eye on B.C., the numbers on some of these acquisitions are hard to fathom,” John Miron, head of Canadian property corporate banking at Royal Bank of Canada, said in a panel discussion. “These foreign investors have a 30-year horizon and that’s hard to lend against.” He explained Canada’s second-largest bank is making fewer exceptions when it comes to underwriting.
Meanwhile, First National Financial Corp. is tightening standards on mezzanine loans and 2nd mortgages and avoiding bridge loans, short-term financing that lets the owner improve a property and it is generally repaid once that owner finds permanent financing, according to Jeremy Wedgbury, senior v . p . of commercial mortgages.
Bloomberg News
