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The only way is up for non-bank lending

Jun 21, 2019
Managing a well-diversified portfolio with commercial real estate debt

By Bronwen Gora

The non-bank lending sector is now a permanent fixture on Australia’s $300 billion commercial property and lending landscape but misconceptions still exist around the issues of for whom and what it is most suitable.

“A common misconception is that non-bank lending for commercial and development real estate only applies to mezzanine finance or those with bad credit,” says Tony Moussa, director of corporate finance for KPMG, one of the largest companies now advising property owners and developers seeking finance from the alternative sector.

“Yet non-bank lending has evolved in Australia to become increasingly more competitive, and we are seeing many blue-chip deals and lenders emerge.”

Traditionally, it was the more unusual, complex or risky commercial developments that would see a non-bank lender pool their own capital and often funds of cashed up individuals to furnish mezzanine finance deals. However, today’s regulatory pressures on banks have sparked a somewhat rapid shift by non-bank lenders to offer more secure first mortgage or “senior debt” lending as one of the big four banks would have in the past.

The major triggers were tighter rules introduced by the Australian Prudential Regulatory Authority (APRA) along with ramifications of the Hayne financial services royal commission which last year saw banks’ commercial property exposure decline by $557 million (.03%) to $176.9 billion.

While large deals have become part and parcel of the alternative lending sector, with local developers arranging deals of $250 million to $500 million and even into the billions with non-banks, the largest problem borrowers find is simply selecting the correct lender in the first place from the vast number of operators that now exist.

Mr Moussa says borrowers need to become more aware of the bespoke and customised nature of non-bank lending.

When offshore lenders bypass banks and go direct to borrowers they can be more flexible on certain terms. Depending on credit metrics and the amounts involved borrowers may be able to enjoy the luxury of negotiating with only one lender.

However local borrowers may not be aware there is initially more legwork and research involved in finding the right lender than when dealing with the mainstream banking system.

“There is a lot for local borrowers to navigate because every lender has a slightly different approach,” Mr Moussa says. “They will have slightly different terms, and some lenders may have limited resources on the ground locally.” Hence the rise of independent advisors who have made it their business to immerse themselves in the market to the extent they can successfully structure, arrange and negotiate deals with non-bank lenders to best suit a borrower’s circumstances.

Chifley Securities was among the first non-bank lenders to establish a professional property development group providing construction finance without the requirements of pre-sales and added security necessary when dealing with a major bank.

The company’s heady growth in the last five years and diverse work  is indicative of the increasingly significant role of alternative lenders: after launching in 2014 with an initial funding pool of $480 million, Chifley financed 72 loans ranging in size from $15 million to $50 million over this financial year on developments typically ranging in size from 20 to 100 apartments, town homes and land subdivisions amounting to total loans of over $2 billion. Chifley private finance now also finances special assets including the development of hotels, medical centres, student accommodation, and build to rent projects as well as industrial and commercial property.

Chifley principal Dominic Lambrinos points out the firm follows strict guidelines around the quality of projects and clients.  “We fill a niche in the market by basing our lending decisions on existing asset values, risk profile and prospects of the commercial property projects,” Mr Lambrinos says.

“Many borrowers have entered the private finance space over the past two years as banks tightened their belts and some of these borrowers have struggled with rates and fees especially when they are slightly higher than banks. On the other side, private finance terms are easier to comply with, LVR’s are higher and the time to settlement is much quicker than the banks.”

This sector is due for even more expansion, too, observes David O’Connor, investment director at non-bank lender MaxCap Group which has managed in the realm of $7 billion of Australian commercial real estate debt since launching in 2007. Non-bank lenders account for about 37% of the global market and around 48% in North America, yet in Australia they have amassed just 10% of the share.

Mr Lambrinos says ultimately “it’s a commercial decision to go ahead or not.”

“When the banks aren’t lending, private finance is filling a void to complete a project that otherwise would never go ahead,” he says.