Royal Bank of Canada, Sun Life Financial Inc grow cautious on commercial loans as slumping economy raises risk of default

Canada’s largest commercial-mortgage lenders, including Sun Life Financial Inc. and Royal Bank of Canada, are turning more cautious as the commodities slump stunts economic growth and enhances the chance of default.

“We’re concerned about the stage in the real-estate cycle Canada’s in at this time – there’s more risk in the market,” Michael Andrews, md of Toronto-based Sun Life’s Canadian commercial-mortgage team, said within an interview in a property conference within the city Tuesday. “We wanted to ensure our portfolio could withstand, for instance, a 25 % drop in prices. Do we think that will happen this season? No. But how about in five years? It’s just prudent to test.”

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 overall a months-long stress test of approximately 1 / 2 of its $8 billion-mortgage portfolio, Andrews said. They tested deal by deal what would happen if property values fell by 25 per cent, with focus on higher-risk loans such as those in Alberta and people with higher loan-to-value ratios. To date, the outcomes happen to be “fairly good,” he said.

Lenders are also concerned about prices in Bc, where foreign investors are purchasing offices at record values, contributing to lower-quality offices sitting empty across the nation as a boom in supply is placed to hit the marketplace.

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Mezzanine Loans

“We’re keeping an eye on B.C., the numbers on some of these acquisitions are difficult to fathom,” John Miron, head of Canadian real estate corporate banking at Royal Bank of Canada, said at a panel discussion. “These foreign investors possess a 30-year horizon and that’s difficult to lend against.” He said Canada’s second-largest bank is making fewer exceptions with regards to underwriting.

Meanwhile, First National Financial Corp. is tightening standards on mezzanine loans and second mortgages and avoiding bridge loans, short-term financing that lets the owner improve a house and is generally repaid once that owner finds permanent financing, according to Jeremy Wedgbury, senior vice president of commercial mortgages.

Bloomberg News