Private credit sees opportunity in Australia real estate as banks hesitate

Qualitas

05/11/2023 20:00

* 
      Qualitas, PGIM Real Estate expanding private credit
footprint 
    

        * 
      Investors eye meaty returns of high single to low double
digits
    

        * 
      Commercial property bank lending slows to pandemic levels
    

  
    By Lewis Jackson and Rae Wee
       SYDNEY, Nov 6 (Reuters) - Private credit lenders are
increasing their footprint in parts of the Australian commercial
property market, providing alternatives for borrowers as banks
scale back higher-risk lending amid a slowdown brought on by
elevated interest rates.
    The funds available for deals are growing as investors
including pension funds, sovereign wealth and insurance firms
look for meaty returns hard to find in today's equity markets,
especially in the beaten-down real estate sector.
    Australian real estate specialist Qualitas  QAL.AX , whose
backers include the Abu Dhabi Investment Authority, has nearly
doubled funds under management to A$8 billion ($5.07 billion)
since mid-2022, with roughly half the increase since this June.
    U.S.-based PGIM Real Estate expects to deploy a further $1
billion in the country over the next few years, said its head of
Australian real estate Steve Bulloch. 
    "Over the last 12 to 18 months we have seen a lot more
institutional investor interest and many are seeing this as an
attractive entry point to diversify their portfolios," he said.
    The moves are part of the steady growth of non-bank lenders
in a market where four banks, Commonwealth Bank  CBA.AX ,
National Australia Bank  NAB.AX , Westpac  WBC.AX  and ANZ Group
 ANZ.AX , still account for the bulk of all lending.
    At roughly 5% of all financial assets in 2022, non-bank
lenders are a minnow in Australia compared to the International
Monetary Fund's estimate of 50% globally.
    But non-bank lending has been growing, reaching more than
A$600 billion in assets last year, including lenders focused on
retail credit. Lenders are expanding into residential and
commercial construction as banks slow lending or exit, a March
report from the Reserve Bank of Australia (RBA) said.
    
    JUICY RETURNS
        Investors can expect returns from 9% to 11% with the
added security of loans pledged against real assets like condos
or warehouses, often with a 30% to 40% equity buffer, said Paul
Notaras, executive director at Barings Real Estate Australia.
    The juicy returns mean higher costs for borrowers, with the
RBA in March putting the spread over a major bank loan at about
200 basis points for business loans of all types. 
    Yet non-bank lenders are a welcome source of credit at a
time when banks have slowed lending to sections of the property
sector historically seen as high risk like construction, Notaras
said.
    Some 2,213 construction firms filed for insolvency last
financial year, the highest on records going back to 2013, as
builders are sandwiched between higher costs and fixed-price
contracts.
    New commercial property lending by the four major banks has
averaged 1% growth per quarter since June 2022, levels last seen
during the pandemic, data from the prudential regulator shows,
with exposure to offices and residential contracting.  
  
    
   More prudential scrutiny and less risk appetite has led major
banks to prioritise blue-chip property companies, Qualitas
co-founder Andrew Schwartz said.
    "The traditional financiers have pulled back their
loan-to-value ratios, narrowed the type of borrower that they're
wanting to deal with, it's generally harder and you're more
likely to fall into the alternatives sector."
    For build-to-rent residential projects, banks hesitate to
lend more than 40% to 45% against a project's value, while
private lenders could go as high as 65%, Barings' Notaras said.
        Bonds are out of reach for many unrated mid-market
borrowers and property-related bond issuance is at record lows,
with A$299 million raised the year to September, about a tenth
of the decade average, according to Dealogic data. 

    STILL CHOOSY
    Even for alternative lenders, the most beleaguered segments,
such as office and retail, remain tough propositions as higher
rates slash prices and home working and online shopping scramble
the outlook for rental growth.
    Instead, financiers are drawn to companies building for
Australia's chronically undersupplied residential market,
especially in the budding build-to-rent sector, and the
resilient market for warehouses and industrial property.
    A A$1.45 billion partnership between Qualitas and the Abu
Dhabi Investment Authority will focus on the residential sector.
    "We've had more office financing proposals presented to us
than I can ever remember and I can only assume it's because the
banks don't want to do them and big institutions have too much,"
said Qualitas' Schwartz.
    "We say office, interesting but less compelling."
    ($1 = 1.5815 Australian dollars)

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Australia's big banks get cautious about commercial property   
https://tmsnrt.rs/46SB6Is
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 (Reporting by Lewis Jackson in Sydney and Rae Wee in Singapore;
Editing by Jamie Freed)
 ((lewis.jackson@thomsonreuters.com; +61477406822; Reuters
Messaging: @lewjackk))