Return of the non-bank lender

Return of the non-bank lender

Total Property - Issue 8 2019

Non-bank lending to the commercial real estate sector is set for a comeback, offering an alternative to the big four Australian-owned banks which have had the commercial property debt market largely to themselves following the finance sector fall-out from the Global Financial Crisis (GFC).

A major talking point has been the increasing challenges in securing bank finance – particularly if you’re a developer looking to acquire land which isn’t generating income.

The major banks are under the pump, for regulatory reasons, to reduce commercial real estate (CRE) lending. It is estimated this could result in an A$50 billion funding opportunity by 2024 for non-bank lenders in Australia.

There is likely to be a similar, albeit smaller, opportunity this side of the Tasman, with the Reserve Bank’s proposals for banks to hold more capital likely to further reduce their ability to lend.

This has prompted one of Australia’s largest non-bank CRE lenders, MaxCap Group, to expand into New Zealand in a joint venture with Bayley Corporation and investment advisory firm Forsyth Barr, which will each have a 25 percent shareholding in MaxCap NZ.

They aim to become New Zealand’s premier non-bank commercial real estate lender focusing particularly on property development and investment funding, says Brae Sokolski, MaxCap Group’s co-founder and chief investment officer.

MaxCap Group has originated and managed about A$8 billion of loans since it was established 13 years ago. It currently has around A$3.5 billion of funds under management, which it uses to provide finance.

Sokolski says globally the market share of CRE non-bank lenders sits around 37 percent, and nearly 50 percent in the US. In Australia, it’s less than 10 percent. There don’t appear to be comparative figures for New Zealand, but it is likely to be lower again than in Australia.

Sokolski says this spells a substantial opportunity for alternative funders, whose arrival will open up more finance options for property investors at attractive prices.

Bayleys’ managing director Mike Bayley says the company’s involvement is driven by a need for greater depth in CRE lending.

“Current limitations on commercial property financing from the retail banks are, at times, having a negative effect on market activity and are a source of frustration for clients, particularly developers.

“It prompted us to look for alternative sources of finance for clients. MaxCap NZ will be taking a relatively conservative approach, but it will be able to offer more tailor-made funding options and consider more complex deals.”

Non-bank lending has come a long way since pre-GFC days. There’s now a focus on first-mortgage lending in areas where banks are reducing their exposure, such as development and construction.

As an example, an A$360 million first-mortgage funding facility is being provided by MaxCap Group for the Midtown Centre premium office redevelopment in Brisbane’s CBD.

The sourcing of finance has become much more sophisticated and demanding. MaxCap draws the funds it lends from investors ranging from “high-net-worth” capital clients to institutional and major Australian and global super fund clients.

It recently secured an A$600 million commitment from Dutch pension giant APG to the Australian real estate debt market.

“With returns on core real estate at historic lows, investors are looking at higher-yielding alternatives, which is making well-managed real estate debt a more mainstream investment option,” says Sokolski.

However, he says institutional investors also demand very high-level risk management. All MaxCap loans are subject to comprehensive due diligence and stress-testing.

Mark Farrands, head of MaxCap NZ, who has over 20 years’ banking experience and was previously Auckland regional manager, property finance at ASB Bank, says the company will begin cautiously here as it did in Australia. It will focus primarily on first-mortgage loans of $3 million upwards for investment and development.

“Our initial funds for lending will come predominantly from experienced wholesale (high-net-worth) investors introduced by Forsyth Barr and Bayleys, and we’ve already received very strong interest in CRE debt opportunities.

“Longer term, we are also looking to become a trusted source of CRE exposure for institutional investors.”

Farrands says the main benefit alternative lenders offer is flexibility. “Banks are becoming less flexible with their terms for construction and land funding particularly. Non-bank lenders can take a view quickly on a project and provide terms aligned to the risk in that transaction.”

He says non-bank lenders may also be able to provide more leverage or more accommodative pre-sale requirements for multi-unit developments.

“Given the importance of commercial real estate to the economy, and its structural reliance on debt as well as equity, sufficient access to sustainable, appropriately-priced finance is of critical importance.”

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