December 2019 – Constraints on banks’ ability to lend on commercial property present a growing opportunity for alternative lenders to return to the New Zealand market with new funding options, a leading real estate industry figure says.
Bayley Corporation managing director Mike Bayley says New Zealand’s commercial and industrial property market is already attracting increased interest from non-bank lenders, including locally and offshore owned providers.
This interest will only strengthen in response to bolstered capital requirements on banks, he says, lifting the prospect of new alternatives to the big four Australian-owned banks which have had the commercial property debt market largely to themselves for much of the decade following the Global Financial Crisis (GFC).
Mr Bayley’s comments follow the Reserve Bank’s announcement of new requirements for banks to hold more capital. He says these are expected to increase the cost and further constrict the availability of bank finance for commercial real estate.
“Already, a major talking point in the commercial property market over the past year or so has been the increasing challenges of securing bank finance – particularly if you’re a developer looking to acquire a block of land which isn’t generating income.”
This has prompted one of Australia’s largest non-bank commercial real estate (CRE) lenders, MaxCap Group, to expand into New Zealand in a joint venture with Bayley Corporation and investment advisory firm Forsyth Barr, which each has a 25 percent shareholding in MaxCap NZ.
The company’s aim is to become New Zealand’s premier non-bank CRE lender focusing particularly on property development projects and investment funding, says Brae Sokolski, MaxCap Group’s co-founder and chief investment officer.
MaxCap Group has originated and managed approximately A$8.2 billion of loans since it was established 13 years ago. It has around A$3.2 billion of funds under management which it uses to provide finance.
Mr Sokolski says the market share of CRE non-bank lenders sits at around 37 percent globally, and just under 50 percent in the US. In Australia, alternative lending accounts for less than 10 percent of CRE debt funding. There don’t appear to be comparative figures for New Zealand but it is likely to be significantly lower again than in Australia.
He says this means there is a substantial opportunity here for alternative funders and he expects plenty of interest from other Australian non-bank lenders too.
“That’s healthy; competition is good for everyone – it keeps us on our toes and it will be great for New Zealand property investors because it will open up more finance options for them at attractive prices.”
Mr Bayley says non-bank lending has come a long way since pre-GFC “mezzanine” funding days, typically involving second- and sometimes third-tier mortgages. There is now a focus on first-mortgage lending in areas where banks are reducing their exposure, such as development and construction. As an example, an A$360 million first mortgage funding facility is being provided by MaxCap Group for the Midtown Centre premium office redevelopment in Brisbane’s CBD.
Mr Sokolski says the sourcing of finance has also become much more sophisticated. MaxCap draws the funds it lends from investors ranging from private “high-net-worth” capital clients to institutional and major super fund clients.
“With returns on core real estate at historic lows, investors are looking at higher-yielding alternatives, which is making well-managed real estate debt a more mainstream investment option,” he says.
“In particular, CRE debt which offers attractive risk-reward dynamics is increasingly carving its place as a stand-alone asset class in institutional portfolios.”
Max Cap Group recently secured an A$600 million commitment from Dutch pension giant APG to the Australian real estate debt market. This along with the Midtown Centre project, which is being funded by an Australian super fund, are watershed transactions for the non-bank finance sector in Australasia, says Mr Sokolski.
However, he says these type of institutions also demand very high-level risk management. All MaxCap loans are subject to comprehensive due diligence and stress-testing.
Mark Farrands, head of MaxCap NZ, who has over 20 years’ banking experience and was previously Auckland regional manager, property finance at ASB, says the company will begin cautiously focusing primarily on first-mortgage loans of $3 million upwards for investment and development.
“Our initial funds for lending will come predominantly from experienced wholesale (high-net-worth) investors introduced by Forsyth Barr and Bayleys and we’re already receiving very strong interest from this investment sector.
“Longer term, we are also looking to become a trusted source of CRE exposure for institutional investors.”
Mr Farrands says the main benefit alternative lenders offer is flexibility. “Banks are becoming increasingly less flexible with their terms for construction and land funding particularly. Non-bank lenders can take a view quickly on a project and provide terms that are aligned to the risk in that transaction.”
He says non-bank lenders may also be able to provide more leverage or more accommodative pre-sale requirements for multi-unit developments.
“While the risk of over-exuberant lending, as occurred in the lead-up to the GFC, is well recognised, the economic risk of the undersupply of CRE debt capital is poorly understood.
“Given the importance of commercial real estate to the economy, and its structural reliance on debt as well as equity, sufficient access to sustainable, appropriately-priced finance is of critical importance.”