Why alternative lenders are expanding into real estate markets

Non-bank lenders are increasing activity in real estate markets globally to finance deals as traditional banks take a step back amidst ongoing economic uncertainty.

Global investors have raised US$16.5 billion of debt capital so far this year, a figure already well on the way to exceed last year’s total of US$16.6 billion, PERE data shows. Among the most active groups are private equity, insurance and superannuation firms, and high-net-worth individuals.

The increased capacity comes at a time when banks are increasingly risk adverse and cautious about taking on new clients.

“Alternative lenders are looking to fill a gap that has widened dramatically during the economic crisis due to banks carefully managing their balance sheets and shifting to lower risk property deals with more certain cash flow profiles,” says Matt Duncan, Head of Debt Advisory – Australasia, JLL.

Private funds are moving particularly aggressively. Leading the pack is U.S. private equity and investments giant Blackstone, whose real estate debt vehicle represents nearly half of all funds raised this year after closing an US$8 billion fundraising round in September.

“Non-bank lenders are particularly relevant to investors with assets that are considered transitional, such as those with short-term income holes, refurbishment programs, or for developers with large-scale development projects that have few pre-sales,” says Duncan. “These investors now have access to a wider variety of alternative and increasingly attractive finance products,” says Duncan.

“Australian real estate investors have been well supported by Australia’s bigger banks for a very long time, and because they’ve been so price-competitive, the market’s kind of calibrated itself to the appetite and risk profile of those banks,” Duncan says. “But the flexibility of alternative lenders is really compelling. There are some very sophisticated players there who are happy to take on a little more risk.”