Lenders Recalibrate as Middle East Conflict Hits Margins

Lenders are still hungry despite a sharp RBA policy reversal, escalating Middle East conflict and mounting regulatory scrutiny bearing down on Australian debt markets.

And it seems risk is being recalibrated rather than avoided, according to Stamford Capital’s annual Real Estate Debt Capital Markets Survey.

Conducted across March and April 2026, the survey canvassed lenders from major banks, non-bank financial institutions, second-tier banks and private lenders.

Four trends were identified as defining the market: the Middle East conflict reshaping risk appetite, the stabilisation of loan margins, a renewed surge in bank construction lending and the mainstream adoption of AI.

More than half of respondents said the Middle East conflict had changed their loan appetite, risk profile or both.

Rising oil prices, with crude pushing past US$100 per barrel, have driven up construction input costs across materials including asphalt, piping and steel.

Borrower feasibilities are already stretched, with lenders now stress-testing loans against further rate increases and scrutinising cost inputs linked to oil price movements.

One lender flagged that war clauses, like those inserted during the pandemic, were appearing in some construction contracts to cover conflict-related cost escalation.

Macroeconomic backdrop has shifted

Three RBA rate cuts in 2025 brought the cash rate to 3.60 per cent. Persistent inflation then prompted three consecutive hikes in early 2026, returning the cash rate to 4.35 per cent by May.

Despite this, 94.5 per cent of lenders plan to grow their loan books, with more than 69 per cent targeting growth of 15 per cent or more.

Loan margin compression, which dominated the 2025 survey, appears to have run its course.

Just 12.5 per cent of respondents expect margins to decrease, compared with 62 per cent a year earlier. Around 76 per cent expect margins to hold steady.

▲ Surging oil prices are driving up costs for asphalt, piping and steel, prompting lenders to rewrite construction contracts.

Stamford Capital managing director Peter O’Connor said there was a “strong margin contraction over the past 12 months, which means there is not really much more banks or non-banks can shave”.

“Relaxing conditions, like loan covenants, presale requirements, deal structure, are a more palatable option than increasing leverage for most lenders,” he said.

Presale requirements continue to ease

The survey found 37 per cent of construction lenders now require zero presales, up from 29 per cent in 2025 and 18 per cent in 2023. The 60 to 100 per cent presale bracket housed nearly 45 per cent of lenders in 2021. That figure has collapsed to just 8.1 per cent.

Banks have re-entered construction lending at pace, with 62 per cent of respondents expecting major banks to increase construction activity, up from 46 per cent in 2025 and just 13 per cent in 2023.

Concern about private credit market practices is also rising, with 83 per cent of respondents expressing at least some level of concern.

ASIC named private credit as an enforcement priority for 2026 and 35 per cent of non-bank and private lenders said they had already been approached or audited by the regulator.

Artificial intelligence has moved from experimental to operational, as 88 per cent of lenders now report using AI at some level.

Leading applications include document review, credit memo preparation and valuation analysis. O’Connor said the technology could reduce time to settlement and generate cost savings in a competitive market.

Apartments lead sector recovery

Residential apartments recorded the strongest early-growth reading since 2021, with 45 per cent of respondents placing the segment in early growth.

The commercial office recovery continued, with 64 per cent rating the sector as recovering. Melbourne and broader Victoria were the most cited geographic concerns, with respondents pointing to land-valuation pressures, a stagnating residential market and the impact of state taxes and levies.

Against that backdrop, O’Connor said the depth of available capital remained a constant.

“For borrowers, there’s still an abundance of capital available, and lenders are willing to be creative to win quality deals,” he said.