Market Insights
REAL ESTATE DEBT EMERGES AS KEY ALTERNATIVE STRATEGY FOR YEAR AHEAD
Melbourne-based Jameson TTB has supported the development of projects including the $260-million 627 Chapel St tower at South Yarra.
Author: Clare Burnett Urban Developer
As risk-averse banks pull back from lending, a significant opportunity is rising for developers and investors.
property, population growth and a rise in e-commerce. With banks failing to rise to the occasion, non-bank lenders are proving vital. Knight Frank’s latest report found that private capital invested $14.8 billion in Australia’s commercial market, equating to 42.2 per cent of total investment, the highest share on record.
This lending retreat, which has been on the cards for a number of years, is making financial options including commercial real estate debt (CRE debt) an attractive proposition. “Since 2014, the Australian Prudential Regulation Authority has put caps on how much banks are able to lend to specific sectors, so the availability of capital and credit to the property industry is dwindling,” Jameson TTB distribution director Matthew Afflitto says. “That creates a ripe environment for non-bank lenders to provide solutions for those developers looking for capital. “CRE debt offers good risk-adjusted return on your capital, the risk itself is relatively low, and you’ve got first ranking security.” According to non-bank lender Qualitas, Australia needs $115 billion in capital to build enough new homes in the next four years, let alone any other real estate. “If we have a marketplace that is roughly $50 billion currently, and there’s a $115-billion per annum need, filling that gap with more capital from investors in that alternatives bucket is a huge opportunity for the market,” Sydney alternative investment firm Zagga Group director Tom Cranfield says. In fact, says MA Financial managing director for real estate credit Cathy Houston, it’s getting mainstream. “The whole private credit space as an investment class has become less alternate and part of core investment strategies, which it should be,” she says. “The depth of that market is increasing in Australia, which is bringing more stability and more investors coming in.” FILLING THE GAP Globally, says Zagga, the CRE debt market is estimated at $450 billion and growing at about 2 to 5 per cent yearly, underpinned by attractive fundamentals, including an undersupply of
A render of the Pallas Capital-backed Sixty-five Dover, a commercial development at Cremorne.
The head of private credit and commercial real estate lending at the London Stock Exchange-listed global investment company Abrdn, Neil Odom-Haslett, says the UK had experienced similar issues to Australia. “As lenders focus on their existing loan books [due to a significant number of real estate refinancings leading to stress in the market], this creates a funding gap, which for Abrdn is opportunity for our debt funds to lend in a market on asset classes where values have corrected, lending at lower loan to values, and at higher spreads.” Repricing has also limited deal flows in Australia, according to CBRE, which reported that national investment volumes dropped
24 – April / May 2024
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