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Banking on non-bank lenders in commercial real estate

  • Written by Matthew Afflitto, Distribution Director at Jameson TTB

The Australian property market is one of the most robust in the world, but, despite our love for home ownership, there is significant under investment in our commercial real estate lending market compared to overseas. A combination of factors now sets non-bank lenders up to experience a spurt of growth as traditional lenders pull back from this space.

According to the Reserve Bank of Australia, non-bank lenders account for approximately five per cent of the total credit market. If market potential comes to fruition, however, that should increase in the next few years. The driving force? Commercial real estate lending. Let’s dive deeper into what’s driving growth.

The GFC legacy

The foundation for this shift occurred more than a decade ago when a spate of risky borrowing in the US, combined with mortgage defaults, became the catalyst for the Global Financial Crisis (GFC). While Australia was fortunate to weather the GFC and avoid a technical recession, the potential for nationwide financial disruption through exposure to subprime mortgages prompted the Australian Prudential Regulation Authority (APRA) to tighten the rules as a preventative strategy to reduce the likelihood of future crises.

The result was APRA’s 2014 communiqué to financial institutions that warned against risky lending and directed lenders to restrict their exposures and concentrations to the property sector to reduce potential contagion and systemic risk in the banking sector. This lending cap was designed to improve the quality of new mortgage lending, slow runaway property price growth and temper investor lending to reduce exposure risk. In effect, however, it limited the amount of exposure that banks could have to the property market and in response to this they became more selective about which projects they funded.

Over the almost-decade since, this has manifested as a growth area for non-bank lenders that are willing to fund the projects that banks cannot, attracting a new investor demographic. Prior to 2014, non-bank lenders largely raised investment capital from large institutional investors and family offices; post-2014, a greater number of ultra-high net worth, self-directed investors, private wealth firms and retail investors sought higher yields from non-bank lending during a period of historically low interest rates. This hunger was exacerbated during the height of the COVID-19 pandemic when the Reserve Bank deliberately reduced interest rates to record-low levels to protect jobs, spur lending and encourage economic growth.

Room to grow

Commercial real estate is an overlooked asset in the Australian property market. Globally, non-bank lenders hold a 48 per cent market share of commercial real estate lending compared with just 10 per cent in Australia; in the US, the rate is 62 per cent. This indicates a significant growth opportunity in this segment.

The other factor is a growing awareness of the areas where non-bank lenders thrive and the advantages they have over banks. For starters, banks have standardised lending procedures, which means that any investments outside of their strict processes and risk metrics – such as property trickier than a family home or non-standardised business or commercial loans – are considered beyond their scope of expertise and therefore funded selectively. In general, non-bank lenders have a more entrepreneurial mindset and see investment complexity as part of their niche and a source of competitive advantage relative to the banks. Their versatility enables them to negotiate customised and bespoke lending solutions and demand a premium in returns.

For the borrower, locking in finance to purchase assets that require more complex lending solutions than a standardised loan is typically quicker through a non-bank lender because they are adept at different investments and experienced at working with structural complexity and being proactive when it comes to risk management. From an investor’s perspective, the ability of non-bank lenders to provide attractive risk-adjusted returns with real asset-backing on investments such as commercial real estate lending opportunities is a real plus.

All this has created perfect conditions for non-bank lenders to flourish in the current economic environment. The forecast for commercial real estate loans is an increase to A$475 billion in 2025 (from A$371 billion in 2020), implying a 25 percent growth rate over a five-year period. As banks pull back on lending to developers, non-bank lenders have begun to fill the void; we are likely to see non-bank lenders increase their share of market on the commercial real estate investment segment over the next 12-24 months and beyond, growing their loans from A$18 billion in 2020 to A$56 billion in 2025.

From an investor perspective, the market is now seeing some of the best risk-adjusted investment opportunities since before the pandemic. If you’re thinking of asset-backed, commercial real estate investment, talk to a fund manager who understands this space, can navigate complexity, and reshape the structure of an investment to ensure you optimise returns while managing risk and preserving your capital.

About Matthew Afflitto

Matthew Afflitto is a forward-thinking and multi-disciplined investment specialist whose experience spans more than 16 years and the raising of significant amounts of capital for firms including Australian Unity Wealth and JBWere. As Distribution Director at alternative asset funds management firm Jameson TTB, his focus is to deliver innovative and value-adding solutions and to build strong relationships with the firm’s investors.

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