Alternative lenders in UK real estate are really making their presence felt now. Insurance companies and non-bank lenders provided almost one quarter of new lending in 2017, according to The Cass Business School’s recent UK Commercial Real Estate Lending report.
Furthermore, non-bank lenders were the ‘most active’, said Cass, because they increased their market share of new origination from 10% in 2016 to 14%. This is mainly due to the broad and expansive universe of non-bank lenders joining the survey or launching new debt funds, it said. Combined, they wrote out £6 bn of new loans.
Reflecting this, private debt funds have begun to figure more often within PropertyEU’s tracker of capital raisings, as can be seen on the following page. The most recent example is TH Real Estate, which held a first in May of its second UK debt fund, Global Real Estate Debt Partners – Fund II (UK), which ultimately expects to raise a total of £500 mln.
Christoph Wagner, director of debt strategies, origination and structuring at TH RE highlights a crucial selling point for a UK debt fund right now. He puts his finger upon how important investors – insurance companies and pensions funds – have medium to long-term liabilities and view the income component of debt investment very favourably on a relative basis.
Investors like real estate as an asset class per se: interest rates remain low, and they like the idea of having equity-like returns but with a more secure position in the capital stack. This has become a much stronger selling point now that people perceive the UK as reaching a very mature point in the cycle. Because interest rates are so low, the cash being thrown off from loans is providing good returns that behave like a bond only better. Incidentally, any real estate strategy that emphasises downside protection or a degree of decoupling from macro-economic and political risks are finding favour with investors at this point in the cycle. Again, from our tracker, Northern Horizon’s oversubscribed Nordic Aged Care Fund would be an example. But debt funds offer the legal protection over and above these kinds of asset class.
Most alternative debt funds seem to have either a niche or claim they are flexible in terms of asset classes, type of loan (senior, mezzanine, stretch, whole), location of asset, and type of business plan (investment, land stockpiling or development). In TH’s case, it lends against a range of property types and either holds whole loans in the fund or syndicates the senior portions.
That approach seems to give it a wide remit, allows it to price competitively for stable properties as well as for property involving a business plan in transition. Having spoken with a number of senior professionals at such UK-focused debt funds of late, including Octopus Property, ASK Partners and Urban Exposure, which raised £150 mln on London’s AIM market in May, it seems the proliferation of debt funds is good for borrowers who make up a significant chunk of PropertyEU’s subscriber base. Choice is helping them locate financing that is the right blend between the cost of debt and speed of execution. The alternative lenders like to highlight how traditional lenders – which obviously still have the lion’s share of the market – are typically slower and offer less certainty. (Banks would no doubt have counter points to this).
Adding to the proliferation of lenders are challenger or new banks such as Shawbrook Bank, Virgin, OneSavings Bank, Heritable Development Finance, OakNorth, and Secure Trust that lend predominantly to small and medium-sized companies. Several factors suggest that the gradual ascent of alternative lenders will continue. On the whole, they are not really deterred by the prospect of interest rate rises, they are working around issues such as Brexit, and there is no sign that traditional banks are upping their game to compete.
But one alternative lender has relayed his belief that some firms out there in the hedge fund or PE sector will come a cropper because of their lending business plans. Another suggested student accommodation is becoming saturated in the UK and that some pain for lenders in that area might surface. But the savvy lenders are assessing risks and underwriting properly and we shall continue to see the strong players thrive.
This column appears in the May edition of PropertyEU Magazine
Robin Marriott is deputy editor-in-chief of PropertyEU