Three key trends shaping the non-bank lending sector

Non-bank real estate lenders have experienced volatile lending conditions in recent years, but the market currently faces a new set of challenges. Charles Allen at London-based investment manager Fiera Real Estate even noted to Real Estate Capital Europe that the latest economic challenges facing the market “will be the first real test” for debt funds since their emergence.

Lenders agree that long-term factors such as demographics, sustainability, the growth of artificial intelligence and potential deglobalisation will determine how real estate is used in future. But non-bank lenders are also capitalising on the uncertainty created by rising interest rates, and there are arguably opportunities abound for those that have already raised capital. Here are three key trends shaping the non-bank lending sector.

1. Banking on uncertainty

The volatile macroeconomic conditions have led to lenders exercising caution in the higher-rate environment. Banks may still be lending, but if the European Central Bank’s survey for the first quarter of 2023 is any indication, there has been a substantial tightening of credit standards for loans or credit lines to businesses, and more of the same is expected throughout the year. 

Banks are unlikely to increase their risk appetites at a time when there are questions about the health of some in the sector, following the failure of three US regional banks which led to the rescue-purchase of Credit Swisse. This adds to the argument that more turbulence is to be expected. As Paul Ashworth, chief US economist at analyst Capital Economics, put it: stresses on small US banks could create an “adverse feedback loop” in commercial real estate, causing more defaults, a fall in capital values and a further tightening in lending standards. 

Alternative lenders and non-bank organisations have been taking advantage of this tightening of belts from European banks. Toronto-based Slate Asset Management is one such manager. Real Estate Capital Europe reported in March that the firm was looking into expanding its real estate credit business into Europe just two years after entering the US property debt market. 

BNP Paribas Asset Management had a similar idea when it announced it was bringing its third real estate debt fund to market in April. The Paris-based manager confirmed it has begun fundraising for its Luxembourg-domiciled BNP Paribas European Enhanced Real Estate Debt Fund, aiming to raise up to €300 million to target senior loans – between 60-70 percent loan-to-value – across Europe.

2. The market favours the bold

It is widely agreed that those that have already gathered capital are in a more favourable position than those fundraising. The economic uncertainty has been far reaching and led to challenging conditions to garner capital. There is, however, evidence of managers continuing to attract investor commitments. 

Aukera Real Estate is one such example. The firm announced a €150 million, seven-year mandate for its existing debt fund from an unidentified German insurer for a ‘super senior’ strategy to issue loans at below 50 percent loan-to-value in April. The German investment manager said it plans to launch its first ever pooled fund this year, with a target volume of €250 million. The €150 million mandate brings Aukera’s capital raised since its 2020 launch to €1.3 billion.

Similarly, Munich-based real estate debt fund manager Lenwood Capital and H&A Global Investment Management, a holding company of German private bank Hauck Aufhäuser Lampe Privatbank, began fundraising for a pan-European residential credit fund of up to €350 million in May. Fundraising news may be down in today’s market, but it is certainly not out.

3. High and low

Lenders at the Deutsche GRI 2023 conference in Frankfurt, which Real Estate Capital Europe attended in May, indicated that they want to support clients, albeit with a keen focus on debt yield, rather than loan-to-value, and on micro-location. The German multifamily investment market, in particular, has been a casualty of interest rate rises in 2023, partly owing to these investments’ low initial yields, which make it difficult for buyers that use high levels of debt, as rising borrowing costs led to negative leverage. Such metrics, says credit rating agency Moody’s, make for a new kind of vulnerability.

Loan pricing has increased across European markets, as shown in the latest findings by London’s Bayes Business School. In the Bayes UK Commercial Real Estate Year-End 2022 Report, in which 81 organisations were surveyed, including 37 banks, 11 insurers and 33 other non-bank lenders, lending margins increased across sectors, with pricing for loans on prime assets up on average by 4 percent to 7 percent. 

Nicole Lux, senior research fellow at Bayes and the report’s lead author, told Real Estate Capital Europe in April: “Bank pricing for senior debt has increased, and debt funds have adjusted downwards due to more competition among them and are now closer to the banks. There is now less differentiation between banks and alternative lenders in the senior debt space.”

According to Lux, the report also showed a divergence in the quality of loan books between smaller lenders with loan portfolios of below £1 billion (€1.1 billion) and more established, larger balance sheet lenders with more than £5 billion on their books. The report showed the weighted average default rate of portfolios of larger lenders was 1.5 percent, compared with 8.2 percent for smaller lenders. It also noted 41 percent of loans in smaller lenders’ books have an LTV of more than 60 percent, compared with 14 percent in larger lenders.