Global giants have fueled an explosion of non-banking lenders
Global private capitals are keen to take a slice of Australian non-bank lending pie. Early this month, US giant Apollo Global Management has acquired a half stake in leading non-bank lender MaxCap. The deal, known as the largest to date in Australian non-bank lending market, shows global investors’ appetite to pick up slack as big four retreat from lending.
The deal comes amid heady acquisition deals among the non-bank lenders and global institutional investors.
Blackstone, a $US400 billion asset management giant, pushed into non-bank lending space, took 80% stake in Latrobe Financial in 2018. After three years, LaTrobe Financial is considering a trade sale or IPO that is expected to be valued at over $2 billion, as investors’ interest in the non-bank sector surging.
In April this year, Centuria Capital announces joint venture with Bass Capital, which was founded by former UBS and Wingate investors, enables its expansion into real estate debt market. Same in April, listed Hong Kong investment giant Sun Hung Kai & Co, which holds about $7.4 billion in total assets, aims to raise $400 million for a new real estate debt fund to invest commercial and residential real estate in Australia.
Intermediate Capital Group (ICG), a London-listed investment giant who managing $74.5 billion in private capital, has acquired Brisbane-based real estate financier Newground Capital Partners in June, to make its mark in Australia’s ultra-competitive non-bank lending sector.
Record-low interest rates and rising optimism across most real estate sectors are driving capitals chasing higher yields into non-bank lending markets and has fueled an explosion of non-bank lenders offering loan to developers and commercial real estate investors.
What’s driving behind?
1. Major banks staying risk-averse since the global financial crisis
Since the global financial crisis, the major banks tighten up their exposure to riskier assets such as retail shops, shopping malls, hotels, and lower grade offices. The four big banks which controlled 85 per cent of the commercial real estate (CRE) debt market have reduced their exposure to 71.6 per cent. The banks stay at lowest level since the Global Financial Crisis to respond to tighter regulations, higher deposit holding requirements and the Banking Royal Commission.
Analysis from consultancy Plan1 shows non-bank lenders’ share of CRE debt market is surging as the big four banks retreat. Although bank lending’s share is raising, the growth was driving by foreign banks.
2. Residential development loans are largely reined by banks during Covid
Since April 2020, banks’ lending to developers was halted because of Covid for four to five months untilSeptember 2020 according to Ashurst. However, average aggregate margins and line of credit fees offered by banks have increased by 50 basis points since the start of the pandemic, rising from around 3 per cent a year to around 3.5 per cent.
Developers have also had to find significantly more equity to get a bank loan, with average LVR tightening from 62.5 per cent to 50 per cent over the same period. Meanwhile, banks will still do deals if developers meet their parameters such as a very high level of pre-sales before committing to funding, but it’s painful and largely unavailable.
3. Non-bank lenders pick up slack as big four retreat from construction loans & CRE investment lending
APRA data shows bank lending to residential development shrink 10 per cent since covid pandemic, noted by RBA, the pull back in bank lending to developments has been picked up by non-bank lenders for construction finance or even equity investments. e.g., the $150 million equity fund from Qualitas to invest in project by Rich Lister Tim Gurner, to for construction finance or even equity investments.
In terms of commercial real estate side, the major banks are expected to continue focus on prime assets and rebalance their CRE debt portfolio by reducing their exposure to retail and tourism sectors noted by Plan1. According to AFR, non-bank lenders such as the Liberman family-backed Merricks Capital, have also started funding office sectors. Singaporean sovereign wealth fund GIC has committed a $400 million to Sydney based fund manager EG to expand exposure to commercial, industrial, and retail assets.
4. Global private capital chasing yield in low interest environment
Almost all the major Central Banks implemented Quantitative Easing (QE) and have set interest rates to record low. The US Federal Reserve announced on mid-March 2020 to purchase 700 billion U.S. dollars of government debt bonds and mortgage-backed securities from domestic financial institution. Within 7 months, narrow measure of money supply (M1) increased 40%. Such a huge amount of money supply together with low interest rate force US investors to invest in US and flood to foreign capital market.
Australia, as one of the most prudential capital markets and with the best practice of financial regulations during economic recovery, has become among the world’s most active markets for the private capitals who seeking higher yield investment opportunities with low-risk exposure.
For instance, the recent acquisition made by Apollo spreads its wings in Australasia market and provides channel to deploy capital from US market into Australia commercial real estate debt market as it sought to find higher-yielding assets. In such a no yield environment, Apollo’s executives believe the way to earn that excess return is through direct origination platforms in Australia.
The Implications to Wharton
Non-bank lenders, fuelled by domestic large pension fund and global giant investors, are actively expanding their portfolio. For residential developers, with rising optimism across most real estate sectors and surging non-bank lenders compete with traditional bank lenders, it’s expected to see a much better borrowing environment and more negotiation power for developers wanting to take on construction loans.
In addition, we saw non-bank lenders are actively seeking for new deals to fund. Prime development projects with great location are attractive to the non-bank lenders. We also note that non-bank lenders are more willing and have more confidence to provide tailored funding offers, such as removing pre-sale requirement, which is hard to achieve during covid, or establish equity partnership with experienced developers and fund for distressed assets which have great potential to be turned into successful projects.
We also note that non-bank lenders start to search for niche market to expand their market share. For instance, current leading non-bank lenders have intensive competition in funding for large scale prime development projects, while others start to find new funding opportunities in smaller projects with lower risk, such as land subdivision and house construction projects in good location with short term to exit, low requirements on capital outlay and high potential to achieve economic of scale. We expect to see the niche market will attract more attention from rising non-bank lenders.
In Wharton, we invested through capital stack, providing senior debt funds, mezzanine debt, preferred equity funds, and equity funds. We provide tailored solutions to developers meanwhile searching the best investments opportunities that meet investors requirements. Since inception, Wharton Capital has successfully funded over 18 property projects with project value of $718 million and delivered average annual return of 10% to our investors. If you want to learn more about Wharton’s products or looking for project funding, please contact us info@whartoncapital.com.au.
References
Access to finance for developers 'toughest since GFC'
The Term Funding Facility
https://www.rba.gov.au/education/resources/explainers/banks-funding-costs-and-lending-rates.html
CIPAM Market Review
https://www.cipam.com.au/market-review-outlook-june-2021/
Qualitas injects $150m into Tim Gurner's expansion plans
Rush of asset-backed bonds tempts yield-starved investors
Access to finance for developers 'toughest since GFC'
Non-bank lenders feed mortgage bonds boom
Non-banks pick up slack as big four retreat from apartments
Private capital floods back into real estate debt ‘like a boomerang’
Non-banks double business lending share as majors slide
Developers’ big winners in lending battle
https://www.theurbandeveloper.com/articles/developers-big-winners-in-lending-battle