Non-bank lenders are reining in their exposure to the hard-hit retail and office segments of the property market amid fears of increased loan defaults from the global pandemic.
Traditional banks may have eased some lending requirements, the hurdles remain high causing developers to seek cash from other non-bank sources.
Although the risk is higher, so are the returns and this has seen a wave of capital wash into the non-bank lending sector from all parts of the globe, including Saudi Arabia, Hong Kong, Japan and South Korea.
While Australia has maintained its safe haven status, the extent of the pandemic has even led many non-bank lenders to reassess their customer profile.
Earmarked as no-go areas for some lenders is the retail sector, which has felt the brunt of falling sales and mall closures, and office developments, which are under pressure as more people opt to work from home.
There are some exceptions with higher profile projects being given funding, but they are seen as more one-offs than the norm.
In Melbourne, Australasian lender and investment manager, MaxCap Group arranged funding for the $120 million “Park Ave” project in South Melbourne through one of its large institutional mandates.
MaxCap has been lender on large-scale construction funding throughout the pandemic committing about $1.5 billion since April, including a $170 million apartment block in Box Hill, Melbourne and a $90 million residential project known as “The Ambrose”, located in Milton, Queensland.
Brae Sokolski, co-founder MaxCap Group, said funds would be advanced to finance the development and construction costs of the mixed-use development at 39 Park Street, South Melbourne.
For non-bank lender Chifley Securities’ principal, Dominic Lambrinos, commercial office space, retail and high-density, high-tower residential developments are now “no-go” areas for his group as the economy rides out the impact of the pandemic.
Chifley Securities, which has about 140 lenders as clients offering loans from $15 million to $50 million, says it has gone from looking at lending on a geographical basis to an asset class focus.
“We are seeing less competition in the market as players have exited and the major banks maintaining their higher hurdles for financing deals, opening the way for Chifley and other remaining non-banks to fill the gap,” Mr Lambrinos said.
“This has given Chifley the opportunity to select fewer, but higher quality deals in the areas of construction, development and land banking.”
Chifley is seeing long-tail growth in hotels and other hospitality operations, retirement villages, boutique residential, medical practices and boarding houses.
Mr Lambrinos said that activity in smaller residential and hotel developments across the eastern seaboard remained strong, but warned that greenfields developments were proving to be very difficult to finance.
“Developers continue to be squeezed by the major banks with low loan-to-valuation ratios and other stringent conditions being placed on them, while non-banks like Chifley are commercial in meeting the majors’ rates and placing fewer conditions on the loans,” Mr Lambrinos said.
In a recent survey by Stamford Capital, it also revealed that the non-banking sector continues to power on, increasing market share and underwriting developments with limited pre-sales.
Half of non-banks surveyed require no pre-sales at all, although a quarter plan to increase this in the next six to 12 months.
The Stamford Real Estate Debt Capital Markets Survey was conducted in February, 2020 and again in August, 2020 after the “first wave” of the global pandemic.
Stamford Capital associate director, Victoria, Barnaby Wilson, said non-banks continued to flourish in this market.
“Last year 34 per cent of non-banks in our survey required no pre-sales and this has jumped to 50 per cent this year – even with COVID’s impacts the non-banks continue to increase traction,” Mr Wilson said.
“It’s getting harder for large-scale developments to secure funding, with banks seeking significant levels of pre-sales.”
Keep up with Commercial Real Estate news.