Why lenders are funding niche property debt platforms

Credit lines for specialist lending platforms are becoming a sought-after investment.

Interest in providing funding lines to the property sector’s emerging specialist lenders is proving strong for institutional investors hungry for yield and for banks seeking exposure to the granular lending undertaken by such firms.

In recent months, capital providers have written credit lines to specialist property lenders, particularly in the UK market. In September, for instance, LendInvest sourced £150 million (€172.4 million) from investment bank Nomura and alternative investment manager Magnetar Capital to grow its residential development finance arm. A couple of days later, London-based bridging finance provider Glenhawk announced a £75 million funding line from UK challenger bank Shawbrook and an undisclosed global asset manager.

“Every week we have a bank coming to ask how to lend through us. We have noticed a big increase in challenger banks and pension funds offering funding lines to us,” Guy Harrington, the firm’s chief executive and founder, tells Real Estate Capital.

As Glenhawk plans growth for next year, the specialist lender is targeting new funding lines ranging from £100 million to £300 million. “I’m sure we will be approached by other institutions next year, like big asset managers or international banks,” he adds.

Harrington argues that some banks are increasingly moving away from direct lending and deploying their capital through alternative lenders like them. As banks face tougher regulation and more restrictions to deploy capital, a credit line to a specialist lender means a much faster deployment, he argues.

Institutional investors that may lack their own origination structures but are willing to take on real estate debt exposure are also interested in providing funding lines to specialist lenders. “We want to partner with specialised finance originators in Europe, including real estate debt providers, who have the right experience and capabilities to give us exposure to well-structured, properly underwritten loan portfolios,” says Alan Shaffran, senior portfolio manager of Magnetar Capital’s fixed income business in Europe.

Amid the current low-return environment, fixed income investors like Magnetar are seeking attractive yields in real estate debt versus other asset classes.

“Institutional investors are clearly attracted to the specialist lending space because they are looking for income. Compared with other asset classes, yields in the traditional bond market are very low, while in equity markets there is a huge amount of volatility,” says Rod Lockhart, managing director of LendInvest Capital.

“They are looking at alternative credit markets and seeing the opportunity to invest in products providing fairly stable return and solid income streams, such as property debt,” he adds.

Returns from these funding lines depend on several factors, including the risk profile of the loans the specialist lender is originating, its track record and its ability to support the growth of the business in the coming years, says Roger Cattermole, head of real estate and securitised products, client financing solutions, at Nomura. “We have seen senior lending opportunities ranging all the way from Libor plus 150 basis points to Libor plus 700bps as a high-level indication,” he adds.

More complex financing routes, such as warehouse facilities to back mortgage originators with the aim of securitising the loans later, can also provide extra margin when these loans are sold into the capital markets.

“There’s an incentive for selling loans off a warehouse funding line into the RMBS [residential mortgage-backed securities] market, the pick-up could be in the region of 50bps to 100bps,” Lockhart says. In November last year, LendInvest sourced a warehouse facility from Citibank that allowed the fintech firm to provide specialist buy-to-let loans over two years. Although the size of the facility was not disclosed, it is understood it topped £200 million.

The small-scale specialist lending market remains relatively nascent, with most being established post-financial crisis, to fill gaps in the underserved parts of the property lending market. Today, some of these lenders are increasingly introducing innovative products, incorporating technological developments and leveraging their ability to be more nimble than traditional players. Along with other sources of capital, such as equity, lenders are requiring funding lines to achieve their growth targets and, so far, institutional investors have been keen to back them.

“As long as there are specialist lenders originating loans that offer attractive risk-return profiles and have credible business plans to achieve the growth that institutional investors require, we expect that interest from such investors will remain strong,” Cattermole says.