New lenders fill financing gap in Asia Pacific real estate

Tighter lending conditions in APAC are attracting a flurry of alternative sources of debt capital to real estate

June 12, 2019

Although local banks remain the first port of call for many of the region’s developers and investors, lenders from abroad have been playing a bigger role. For example, in Australia foreign banks have increased their total commercial real estate loan exposure by 136 percent from December 2015 to December 2018, according to Australian Prudential Regulation Authority.

“We are definitely seeing more global investors lending in Asia Pacific real estate,” says Fergal Harris, head of debt advisory, Asia Pacific, JLL. “Against the mature and competitive private debt markets in North America and Europe, credit markets in Asia present a relatively untapped opportunity.”

Harris points to China, Australia, Vietnam and Indonesia as growing markets. U.S. investor Starwood Capital in May did its first debt deal in Australia, providing AU$220 million in development debt financing for a student accommodation project in Melbourne’s central business district.

The borrower, Scape, was advised by JLL’s debt advisory team.

“Pockets of opportunity are opening across the risk spectrum and we expect the growing pool of non-bank lenders to continue to take market share in the coming 18-months,” he says.

Narrow base of non-bank lenders

Private equity groups, pension funds and insurance companies are among the investors switching into debt. But traditional real estate investors are also actively looking to lend against projects banks have shied away from.

“Real estate investors have huge amounts of capital to deploy and are using debt to access non-performing assets or other distressed projects,” he adds.

While much of the capital being raised to date has targeted mezzanine development loans in Australia or development finance in India, Harris believes that funds will expand their mandates in 2019 and beyond.

Junior notes or other subordinated instruments will become popular in Australia and India as residential development starts start to slow and mezzanine loan opportunities dry up.

And the absence of other well-established avenues for core debt in Asia Pacific, such as CMBS and REITs, will lead to more senior debt funds in markets like China, Australia and New Zealand where there is less appetite from banks at the bottom of the capital stack.

Growing interest in China

Offshore investors are also focussing on debt in China’s real estate markets. In February, Singaporean real estate giant CapitaLand announced that it had raised US$556 million for its first China-focused debt fund, which has a target capitalization of US$750 million.

At the time, Capitaland estimated that there were approximately US$70 billion of commercial real estate loans in China due to expire – and likely require refinancing – within the next five years.

It must be borne in mind that markets in Asia Pacific tend to pose greater political and economic risks than the U.S. and Europe.

“The region’s multiple currencies and nations with completely different political agendas, levels of transparency and market maturity, has kept the lending environment quite local,” says Harris.

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