London-based Hoong Wey Woon, partner with financial services firm Alantra, believes non-bank providers of real estate debt in Europe are thinking creatively about how they structure loans as they compete for the most attractive financing opportunities.
Woon, who specialises in mergers and acquisition, equity and debt capital raising advisory for Alantra’s real estate clients, spoke to Real Estate Capital about current trends in the European property credit market.
How has the covid crisis impacted the supply of real estate debt?
There was a lack of supply after the initial covid lockdowns, but that lasted for just two months, and supply bounced back. Now, commercial banks are lending, but only into asset classes they really like, or to existing clients. We have secured loans from commercial banks for new clients, but it is difficult to do so, especially from the UK clearers.
Banks’ loan size is typically limited to €50 million, so a €100 million loan requires a club of lenders – unless it is for logistics, or a trophy asset. It is a problem for borrowers, although the debt funds have filled that part of the market.
Is competition between non-bank lenders intensifying?
Lots of capital has been raised by the funds. It feels like every other private equity firm has raised a debt fund. Several of them did that in anticipation of lots of opportunities and high returns, but that period of tight lending market liquidity was so short that they are now playing in a very competitive market. They are desperate to lend and so pricing has come in.
We recently went out to market for several build-to-rent buildings – we were being quoted 7.5 percent margins at the height of the covid crisis, which came in to 5.5 percent as we came out of the first lockdown. By November last year, pricing was around 4.5 percent.
How are non-bank lenders competing to deploy capital?
They are becoming more creative and providing what I would call structured finance. They are trying to find solutions for their clients which will allow them to deploy the capital they have raised and achieve the returns they want. That might mean creating, for example, an 85 percent loan-to-value development facility that flips into an investment loan at a certain point, with the fee structure changing at that stage. There is so much money out there that lenders need to be creative to deploy it, because there is a limited number of deals in the market.
There are lenders providing whole loans at 75 percent LTV, and even as high as 85-95 percent. I have also seen LTVs north of this recently, and not necessarily provided by opportunistic funds. Such loans are usually written against operational assets with a range of conditions attached. Leverage levels rising as debt funds have large amounts of capital to deploy.
How do the debt funds view development finance?
In my experience, development debt became easier to source towards the end of 2020 and into 2021. The lenders are essentially taking the view that it will take two years to build the asset, by which time the covid crisis will be over, whereas an investment loan requires deploying the capital immediately in uncertain market circumstances, unless you are lending into one of the hot sectors, like logistics.
Do you expect to see significant growth in Europe’s non-bank lending market?
I think we will see the launch of more sector-specific lenders. We are also seeing debt fund lenders aiming to expand their loan books by raising loan-on-loan type capital to enable them to double their portfolios. We are seeing increasing amounts of such activity and have recently advised several funds in this area.
Alantra advises on non-performing loan sales. Are you seeing activity shift to northern Europe again?
We are active currently in Cyprus, Greece and Spain. We have not seen distress come through yet in the UK or other northern European countries. However, there has been a pick-up in Ireland as buyers of post-financial crisis NPL portfolios do secondary trades of parts of the loan books they bought. I think more is coming in northern Europe, as a result of covid, but not the avalanche people were expecting – for now, at least.