Investors look to alternative lenders amidst ongoing uncertainty
Cross-border investors are set to take advantage of a potential price correction
Faced with unprecedented challenges from the COVID-19 pandemic, real estate investors are increasingly turning to alternative lenders to help meet their financing needs.
Coronavirus (Covid-19) has caused uncertainty for both landlords and tenants, with occupiers across all real estate sectors now seeking flexibility in their lease contracts.
While banks remain the primary source of real estate debt in Europe, alternative lenders are capturing market share by stepping into the gap and helping investors appropriately underwrite and price risk in the face of leasing uncertainty.
“Rewind a decade to the global financial crisis and Europe’s lending landscape was much more traditional. Today’s more balanced pool of lenders helps support liquidity and a better-functioning credit market,” says Brook, who estimates that around a third of European real estate lending today comes from non-bank sources.
“Debt funds, insurance companies and pension funds are making European inroads – and Covid-19 looks like it is accelerating that diversity,” he says.
And with more risk aversion and traditional lenders retrenching to long income assets, borrowers in need of financing on assets with short-term income are turning to alternative lenders, explains Tom Brook, debt and structured finance director at JLL.
In addition, Brook notes that post COVID-19, more purchasers are securing additional income protection from vendors, such as retentions against non-payment of rent or cash escrows to cover vacancy, he says. “Making sure there’s that security in place allows lenders to alleviate concerns over short-term income risk.”
While Germany’s high liquidity makes it one of Europe’s more traditional lending markets, the wider European lending market has diversified in recent years, becoming much closer to that of the U.S.
Allianz Real Estate, the Munich-based insurer’s property investment arm, recently launched its first real estate debt fund for third parties, with US$324 million (€300m) backing from Bavarian pension fund manager, BVK, while vehicles such as Alantra’s Alteralia real estate debt fund, continue to attract capital.
Pricing the new normal
As the world’s financial powers grapple with significant price rediscovery, debt funds and insurance companies have been relatively unscathed.
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“Balance sheet lenders can innovate and are able to adjust their returns depending on their risk appetite,” explains Edward Daubeney, EMEA senior director of debt and structured finance at JLL, who says that most lenders have increased their margins to reflect higher risk.
“Many lenders have become more conservative, with leverage and margins being adjusted,” he says, adding that loan pricing for core real estate in Europe has risen by between 30bps and 60bps and for value add and repositioning between 150bps and 200bps. Loan-to-value ratios have also moved, tightening by around five percent.
“There was already less leverage in the system prior to Covid-19 and as a consequence of regulatory change following the 2008 crisis,” says Brook. “More recently, we have seen lenders seeking lower LTVs to reflect the increased uncertainty on true market value.”
The flexibility that alternative lenders can provide looks set to play a big part in European real estate lending in the coming months. As will dialogue and collaboration, regardless of lender type.
“There’s certainly a sense that all lenders are now being more thoughtful and friendly,” he says. “However, how lenders will deal with any covenant breaches on existing loans is still too early to judge.”
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