The Asian Executive Magazine: ‘Alternative Funding Partnerships’

The Asian Executive Magazine – Winter 2016 Edition

Property developers are having a difficult time when it comes to accessing project funding finance. Despite strong demand-side market fundamentals, including a growing population, low settlement defaults and a tight rental market, it is in some respects more difficult now to procure debt finance from the major banks than during the Global Financial Crisis period.

In anticipation of these considerable headwinds in sourcing debt for development projects, the team at MaxCap Group has been busy bringing innovative non-bank finance solutions to market. For example, MaxCap recently secured a mandate from one of Australia’s largest superannuation funds to provide unitranche funding, also known as stretch senior debt.

There has been particularly strong demand for bespoke debt solutions for large residential developments in inner Sydney and Melbourne, and MaxCap is proud to have provided funding solutions to many new and returning borrowers over the FY16 period; MaxCap lent in excess of $1.1bn across 47 transactions, through structured finance and first mortgage facilities, including unitranche solutions. This strong result and high transactional volume is set against a changing debt capital landscape in Australia – one that will continue into FY17.

The constrained lending market is primarily due to regulatory-driven factors. The Australian Prudential Regulation Authority (APRA) continues to impose increased capital adequacy ratios on the major banks, where the net effect has resulted in reducing their current exposure (83%) of a $200bn commercial real estate debt market, and in turn placed downward pressure on Loan-To-Value (LTV) ratios. The major banks now face substantial challenges to maintain their current loan book levels, with aggregation limits to borrowers and geographic concentration restrictions making securing debt for high density apartment developments a difficult task, even for those with demonstrable experience. Developers are having to contribute a greater amount of equity on new developments. Consequently, MaxCap is already starting to see attrition among developers – it’s becoming uneconomical for them to develop sites.

MaxCap Partner and CIO, Brae Sokolski maintains that “the market isn’t being left to its own devices; it’s really a case of regulators stepping in and decreeing that Australian bank lenders’ portfolios are overweight in property. It’s critical to understand that this is not just a challenge for new local and offshore entrants to the development industry, even established Tier 1 developers are struggling with a lack of access to debt finance.”

However, in the midst of these challenging times there is positive news; institutional capital is beginning to flow into the Australian debt market to fill the void. Some of the world’s most sophisticated global investors are now looking to Australia for strong risk-adjusted returns in commercial real estate (CRE) debt – an investment strategy that is increasingly carving its place as a stand-alone asset class in institutional portfolios.

MaxCap is leading the charge with a number of significant institutional mandates to provide alternative real estate debt solutions. This institutional capital is derived from not only Australian superannuation funds but also from offshore pension and sovereign wealth funds, as well as private equity investment managers and hedge funds.

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