Non-bank lenders find opportunity as banks take a step back

Non-bank lenders are increasing activity in real estate markets globally to finance deals as traditional banks take a step back amidst ongoing economic uncertainty.

Global investors have raised US$16.5 billion of debt capital so far this year, a figure already well on the way to exceed last year’s total of US$16.6 billion, PERE data shows. Among the most active groups are private equity, insurance and superannuation firms, and high-net-worth individuals.

The increased capacity by non-bank lenders comes at a time when banks are increasingly risk adverse and cautious about taking on new clients.

“Alternative lenders are looking to fill a gap that has widened dramatically during the economic crisis due to banks carefully managing their balance sheets and shifting to lower risk property deals with more certain cash flow profiles,” says Matt Duncan, Head of Debt Advisory – Australasia, JLL.

Private funds are moving particularly aggressively. Leading the pack is U.S. private equity and investments giant Blackstone, whose real estate debt vehicle represents nearly half of all funds raised this year after closing an US$8 billion fundraising round in September.

Non-bank lenders relevant to investors

“Non-bank lenders are particularly relevant to investors with assets that are considered transitional, such as those with short-term income holes, refurbishment programs, or for developers with large-scale development projects that have few pre-sales,” says Duncan. “These investors now have access to a wider variety of alternative and increasingly attractive finance products.”.

The hunt for yield
Commercial real estate debt is providing non-bank lenders with comparatively greater risk-adjusted returns than corporate bonds or dividend-paying equities. While alternative-debt investors typically take on greater risk than traditional banks, they can also target higher returns, while sitting with the security of a first mortgage.

“Ongoing borrower demand will continue to draw global debt capital into Asia Pacific, in particular from investors seeking protection from valuation declines amid the uncertainty, and others capitalising on the funding gap for property deals further up the risk curve,” he says.

Diversifying the lending pool
The current situation is reminiscent of the global financial crisis in 2008. Before that, banks held an even more solid grip on real estate lending in some countries like Australia, where the four biggest banks accounted for 85 percent of all lending. Over the last decade, tightening regulation has seen them concede market share to non-bank lenders, particularly following the royal commission into banking misconduct in 2019.

Now, greater capital-holding requirements and existing exposures to weaker sectors is hampering their ability to lend, particularly for riskier assets such as hotels, offices with near-term leasing risks and residential developments.

Bank lending in Australia is now estimated to account for 80 percent of all commercial real estate deals.

The continued flow of non-bank entrants is expected to lead to a more competitive marketplace, such as the U.S., where non-banks accounted for nearly 60 percent of real estate lending in 2019, according to Real Capital Analytics.

Lending in the non-bank sector in Australia is estimated to be worth more than $50 billion.

“Australian real estate investors have been well supported by Australia’s bigger banks for a very long time, and because they’ve been so price-competitive, the market’s kind of calibrated itself to the appetite and risk profile of those banks,” Duncan says. “But the flexibility of alternative lenders is really compelling. There are some very sophisticated players there who are happy.”

Despite COVID-19 travel restrictions, capital is flowing across the globe

British billionaires, David and Simon Reuben, as well as Pontegadea, Zara founder Amancio Ortega’s private real estate investment vehicle, have been major investors in gateway cities from Seattle to Seoul. As well as investing at home in the UK, the Reuben brothers have more recently made a push into Madrid’s residential market, while also buying land in Spain’s Balearic Islands, as well as purchasing a retail property in New York City for US$170 million.

In cities such as London, major deals such as the sale of the iconic Ritz Hotel for several hundred million have involved private overseas capital and assets such as 79 Wardour Street and 118 New Bond Street have been acquired by private Hong Kong investors.

“What this type of capital has on its side is its ability to act fast, with lighter investment committees and often with the ability to buy all-equity,” says Alice Buckingham, Director in JLL’s International Capital Coverage team. “That speed of execution can make the difference at the bidding stage and allows for bigger ticket deals to be considered.”

As well as cross-border capital, local private wealth is also playing its part. In Bucharest, Ionut Dumitrescu’s bought the One Tower in Bucharest for around €75 million in May this year, while in Greece, Ivan Savvidis paid around €202 million for the Porto Carras Grand Resort.

“Across Europe, private domestic capital is a dominant force,” Buckingham says. “They’re familiar with their own market and it often makes sense to stay local.”

Gateway access

Global gateway cities have traditionally been the destination of choice.

“As well as wealth preservation and limited volatility, there’s also the attraction in major cities of familiarity, often via personal holdings such as homes or the fact a family member may already be based there for work or study,” says Buckingham.

And as more private capital competes with institutional investment, the complexity of deals is increasing. “We’re already seeing how much more professional and strategic family offices now are. While some are still motivated by emotional factors such as the desire to hold a piece of real estate in a certain preferred city, there’s a lot more strategic thinking occurring now with appointed or sometimes even in-house expertise helping make that investment decision”, says Buckingham