Why alternative lenders are expanding into real estate markets

Private debt funds are plugging a gap left by commercial banks as COVID takes its toll

November 10, 2020

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 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 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,” says Duncan.

The hunt for yield

Commercial real estate debt is providing 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 alternative lenders, particularly following the royal commission into banking misconduct in 2019.


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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 to take on a little more risk.” 

Contact Matthew Duncan

Head of Debt Advisory – Australasia, JLL

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