By Lewis Jackson

SYDNEY Foreign bank lending to Australian office real estate hit a record high in the first quarter as overseas lenders continued to stump up cash for a struggling corner of the property market out of favour with local banks.

Foreign bank loans to Australian office property rose by A$1.2 billion ($816.1 million) to A$35.5 billion in the March quarter, the highest level in a series going back to 2004, according to the latest data from the prudential regulator.

The data does not identify individual banks, however a separate dataset covering overall corporate lending showed European, Japanese, Singaporean and Chinese banks had led the increase in foreign lending since 2019.

Loans from Australia's biggest banks fell A$2.3 billion to A$83 billion over the same period, similar to levels in late 2021, the data showed.

The shift reflects greater risk appetite among foreign banks, a virtue in a sector where lenders often wait years for delay-prone construction projects to complete before rents flow, according to Jonathan Kearns, chief economist at investment management firm Challenger and a former head of financial stability at the Reserve Bank of Australia.

Australia is a way for these banks to diversify into a market with a good record of economic growth and credit performance, Kearns added. So, as Australian lenders have retreated to the relative safety of retail mortgages, foreign banks have stepped up.

"It's an easier area to expand into than say housing, which is competitive and depends on broker relationships and branch networks," Kearns said.

The flow of money from Asia and Europe is a vote of confidence for a sector where rising rates and the shift to home working are forcing owners to mark down the value of office assets and pay out investors pulling money from office funds.

Dexus, one of Australia's largest office block owners, sold a premium downtown Sydney office in June for a 17% discount to its most recent valuation.

But with foreign lenders now accounting for roughly a third of outstanding office loans following an 82% surge in lending since 2019, they are materially exposed to big losses should office markets suffer a prolonged and permanent downturn.

Asset prices falling by 20% may be enough to trigger loan rules forcing borrowers to stump up more capital, according to a senior executive in loan syndication at a major Australian bank, who is not authorised to speak with media.

Investment bankers say unlisted office prices could fall 20% to 30%, although investors remain divided about how far values will drop.

Sydney was the worst-performing major Asian office market in the first quarter, according to research from global property services firm Jones Lang LaSalle.

($1 = 1.4704 Australian dollars)

(Reporting by Lewis Jackson; Editing by Stephen Coates)