Over the last couple of years, there has been a surge in real estate lending by non-bank lenders as traditional banks started withdrawing from the market. With a mountain of mature real estate debt coming up for refinancing in 2013, the key question for the market is whether these new kids on the block can really fill the void left by the retreating banks.
Who are the alternative funders and why have they entered the RE lending market?
In the five and a half years since the start of the credit crunch, real estate lending has been hit by a serious and increasing nervousness to lend. This nervousness, coupled with stricter regulation and capital adequacy requirements, has resulted in banks deleveraging their real estate portfolios and pulling back from the property lending sphere. Notable players reducing or withdrawing new lending in the market include Eurohypo and Allied Irish Banks.
The void is now being filled by so-called "alternative funders". The key players are insurers, private equity houses and pension funds. Recent examples of these deals include L&G's £121m financing for Unite Group and M&G Investments' £115m financing for iQ Property Partnership (both secured against regional student housing portfolios). It was reported last week that L&G is looking to provide over £1bn of funding to housing associations, starting with a £102m 15 year loan to Hyde. Innovative funding solutions have also been presented by Oaktree Capital, through their dedicated residential lending vehicle, Titlestone, who provide finance for residential development.
So, is non-bank lending the medicine the real estate lending market has been waiting for and will it help to close the funding gap?
Focusing on prime assets
Not necessarily. Non-traditional funders of the pension and insurance fund variety need to look after their own investors and are attracted by the stable and relatively attractive returns offered by commercial property compared with other fixed income investments such as gilts. They are therefore – quite understandably – likely to be highly selective about the asset classes against which they are willing to lend. Alternative funders' appetite for non-core assets still appears to be lacking. They are not necessarily looking to take risks where banks will not: they are simply finding opportunities in spaces vacated by banks, as the latter retreat to try and build up their capital reserves in readiness for Basel III. So whilst their presence in the market is very welcome, in the short term at least, non-prime asset owners will still have to think ever more creatively about their financing solutions.
Interestingly, DTZ's research paper on the Net Debt Funding Gap last November reported that the UK's funding gap is closing at a much faster rate than other European countries and suggests that the our gap could close as early as 2015. DTZ also predict that over this time period, insurance companies will make up about two-thirds of the non-bank lender market.
Watch out for Part II of this series where we'll look in more depth at how certain alternative funders have structured their loans.