Investors look to alternative lenders amidst ongoing Covid-19 pandemic uncertainty
Faced with unprecedented challenges from the COVID-19 pandemic, real estate investors are increasingly turning to alternative lenders to help meet their financing needs.
The coronavirus has caused uncertainty for both landlords and tenants, with occupiers across all real estate sectors now seeking flexibility in their lease contracts.
And with more risk aversion and traditional lenders retrenching to long income assets, borrowers in need of financing on assets with short-term income are turning to alternative lenders, explains Tom Brook, debt and structured finance director at JLL.
While banks remain the primary source of real estate debt in Europe, alternative lenders are capturing market share by stepping into the gap and helping investors appropriately underwrite and price risk in the face of leasing uncertainty.
“Rewind a decade to the global financial crisis and Europe’s lending landscape was much more traditional. Today’s balanced pool of lenders helps support liquidity and a better functioning credit market,” says Brook, who estimates that around a third of European real estate lending today comes from non-bank sources.
“Debt funds, insurance companies and pension funds are making European inroads – and COVID-19 looks like it is accelerating that diversity,” he says.
In addition, Brook notes that post COVID-19 More purchasers are securing additional income protection from vendors, such as retentions against non-payment of rent or cash escrows to cover vacancy,” he says. “Making sure there’s that security in place allows lenders to alleviate concerns over short-term income risk.”
While Germany’s high liquidity makes it one of Europe’s more traditional lending markets, the wider European lending market has diversified in recent years, becoming much closer to that of the U.S.
Allianz Real Estate, the Munich-based insurer’s property investment arm, recently launched its first real estate debt fund for third parties, with US$324 million (€300m) backing from Bavarian pension fund manager, BVK, while vehicles such as Alantra’s Alteralia real estate debt fund, continue to attract capital.
Pricing the new normal as investors search for alternative lenders
As the world’s financial powers grapple with significant price rediscovery, debt funds and insurance companies have been relatively unscathed.
“Balance sheet lenders can innovate and are able to adjust their returns depending on their risk appetite,” explains Edward Daubeney, EMEA senior director of debt and structured finance at JLL, who says that most lenders have increased their margins to reflect higher risk.
“Many lenders have become more conservative, with leverage and margins being adjusted,” he says, adding that loan pricing for core real estate in Europe has risen by between 30bps and 60bps and for value add and repositioning between 150bps and 200bps. Loan-to-value ratios have also moved, tightening by around five percent.
“There was already less leverage in the system prior to Covid-19 and as a consequence of regulatory change following the 2008 crisis,” says Brook.
“More recently, we have seen lenders seeking lower LTVs to reflect the increased uncertainty on true market value.”
Alternative lenders may provide more flexibility
The flexibility that alternative lenders can provide looks set to play a big part in European real estate lending in the coming months. As will dialogue and collaboration, regardless of lender type.
“There’s certainly a sense that all lenders are now being more thoughtful and friendly,” he says. “However, how all lenders deal with any covenant breaches on existing loans is still too early to judge.”
Alternative lenders are financial channels, processes, and instruments that have emerged outside of the traditional finance system such as regulated banks and capital markets. Examples of alternative financing activities through ‘online marketplaces’ are reward-based crowdfunding, equity crowdfunding, revenue-based financing, online lenders, peer-to-peer consumer and business lending, and invoice trading third party payment platforms.
Peer-to-peer lending, also abbreviated as P2P lending, is a type of alternate lending. P2P is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions.
Alternative finance instruments include cryptocurrencies such as Bitcoin, SME mini-bond, social impact bond, community shares, private placement and other ‘shadow banking’ mechanisms. Alternative finance differs to traditional banking or capital market finance through technology-enabled ‘disintermediation’, which means utilising third party capital by connecting fundraisers directly with funders, in turn, reducing transactional costs and improve market efficiency.
Alternative finance has grown into a considerable global industry in recent years following the financial crisis according to various reports, particularly for small and medium enterprises. For instance, the European online alternative finance market is estimated to have reached nearly €3bn in 2014 and is projected to reach €7bn in 2015.
For the United Kingdom, according to the University of Cambridge and Nesta, the UK online alternative finance market reached £1.74bn in 2014. In comparison, the alternative finance markets in France and Germany reached €154m and €140m respectively in 2014.
Alternative finance activities such as equity crowdfunding and peer-to-peer lending are now regulated by the Financial Conduct Authority in the United Kingdom from 1 April 2014. Peer-to-peer lending investment will be eligible for an Innovative Finance ISA from 2016. In the US, under the Title II of the JOBS Act, accredited investors are allowed to invest on equity crowdfunding platforms from September 2013. The SEC then announced the updated and expanded Regulation A mandated by the Title IV of the JOBS Act to allow non-accredited investors to participate in equity crowdfunding.