THE PROPERTY DEVELOPMENT REVIEW
Flexibility, then, is a key benefit for developers, while CRE debt provides the security required for lender confidence. “Large lenders are often led by volume, so the more vanilla and standard a loan can be, the easier they can push it through the credit department,” Afflitto says, “while CRE debt providers look at it more commercially.” To capitalise on these gaps in the market, Pallas Capital has launched a new lending vehicle, Pallas Funding Trust No. 2, targeting medium-sized CRE loan types of $2 million to $25 million in total. “There is a blind spot in the market in the $10 million to $30 million range—it’s too small to attract interest from larger non-banks and too large for some of the CMBS or high-net-worth funded business, who are capital constrained or have restricted criteria,” Gallen says. “We would never win a shootout on price with the majors but there are a bunch of other factors at play.” NEW ENTRANTS Of course, with such an attractive market it’s inevitable that new players will enter the game. “We saw during the pandemic that there was this mad rush of new entrants coming into the market. It was easy to raise capital, interest rates were low, but the quality of loans might not have been that great,” Afflitto says.
by 31 per cent to $24.1 billion in 2023 compared with the previous year. “The Aussie market is small in comparison to the UK and Europe, hence why it is still in its infancy in respect of the alternate lenders entering the market, and dominated by the banks,” Odom-Haslett says. “In the senior secured space, I don’t think the returns are quite there yet. There is a good opportunity, however, to enter the market and one I can see growing in the near future.”
Matthew Afflitto, distribution director at Melbourne investment company Jameson TTB.
Filling the project funding gaps requires an enormous amount of capital, more than the non-bank lenders have, Cranfield says. “We haven’t had a proliferation of sovereign wealth and institutional capital at low yields,” he says. “Hence why we have been looking for domestic and international capital and investing and educating developers and investors with CRE debt.” BENEFITS OF CRE DEBT MA Financial’s Cathy Houston says she has seen an upward trajectory in CRE debt for developers and investors. “It’s about them becoming more comfortable with the parties providing non-bank lending in the RE space and understanding the way they are managing those loans,” she says.
Zagga Group directors Frank Hageali and Tom Cranfield.
“With those providers we’ve seen them drop out as market conditions have become tougher.” Gallen says that it can be easy to step into the space with a small amount of capital. “But it is difficult to build scale, and it comes down to the quality of your team, which is a barrier to building a business of substance.” Developers themselves, such as Lendlease and Dexus, also have a presence in the space. “As a diversification for some of the bigger players, it’s a good tool,” says Houston. “It’s a relatively stable income stream, they’re in the market already and can assess the risks quite well and it makes sense in terms of a strategy, especially as it hasn’t been a great period for a lot of developers during the past two years with cost escalation, increasing interest rates and so on.” Hageali says that the scale of the market is significant. “Since we first set up the business seven years ago, a large number of high-profile and significant developers have started using and supporting non-bank lenders,” he says. “There is a lot of space for well intentioned, well capitalised and skilled players, and there is still that underlying demand and huge shortage [in both development and finance] which underpins our industry.”
MA Financial’s Cathy Houston and Neil Odem-Haslett of Abrdn.
“From the other side, developers are seeing the non-bank space as a core strategy in terms of financing projects not because they can’t get major bank lending, but the flexibility provided through non-bank lending and our ability to assess projects on an individual basis, rather than sticking to rigid rules imposed by the banks.”
Dan Gallen is chief investment officer of Pallas Capital.
April / May 2024 – 25
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