Non-Bank Lending –Commercial Real Estate

Non-Bank Lenders will be required to fund more than $50 billion in the Australian CRE debt market from 2021-2024.

Around the World:

■ S&P Global estimates that the global private debt market has grown tenfold in the past decade (2011-2021).

■ In 2008, in the US and Europe, Banks held a 55% share of first mortgage lending (Non-Bank Lending 45%). By 2019, this composition had inverted to 21% and 79%.

■ According to the European Central Bank, since the GFC in 2008, “the overall growth in financial assets can almost entirely be traced to non-bank entities which now represent more than half of the total financial asset holdings in the euro area”.

A demonstrated global shift in the deployment of debt via Non-Bank Lenders has seen investors realign their portfolio strategy through:

■ An emergence of demand towards private debt funds and away from volatile equities markets, meaning lower volatility and stable, riskadjusted returns.

■ Overseas investors, particularly Asian domiciled, are taking advantage of Australia’s growing Non-Bank Lending sector. For example, in 2021, Hong Kong investment giant Sun Hung Kai & Co created a $400 million real estate debt fund with a large focus on the Australian market.

Non-Bank Lending Sector Growth In Australia

Source: Ibis World (2022) Historical Forecast

In the Australian Market

■ Traditionally in Australia, NonBank Lenders have had limited exposure to large capital mandates, restricting their market share compared to Banks which have regular access to cheaper and more diversified funding e.g. deposits.

■ The market share of Australia’s ‘Big Four’ Banks in CRE lending is falling, currently at 70.3% in Q2 2022 and well below its 10-year average of 78.2%.

■ Driving the falling market share is a lack of appetite for early-stage construction and land subdivision loans, with Banks restricting first mortgage LVRs to 50-55% compared to their Non-Bank peers which remain at 60-65% LVR.

Given the prevailing local market conditions, coupled with the demonstrated success of the sector globally:

■ Non-Bank Lenders, which are not subject to increased regulation brought about by changes in APRA lending guidelines, are now attracting further institutional capital, for example:

+ Qualitas $700m Australian CRE mandate from ADIA (2022).

+ MaxCap ~$1b Australian CRE mandate from Apollo Global Management (2022).

■ Non-Bank Lending reached a record high of $287.94 billion in 2021-22 and is forecast to grow 16.92% through to 2026-27 ($336.67 billion).

Getting

Target Returns

8.25% to 9.25% per annum, post fees and expenses.