Hong Kong, July 23, 2015 – Real estate bank lending in Asia Pacific significantly moderated after the GFC, leading to an increased demand from investors and property companies for alternative sources of real estate funding in public and private debt markets. CBRE’s Special Report, Asia Pacific Real Estate Debt Market – Tighter Regulation Brings Opportunities, showcases the non-bank lending environment and identifies opportunities and challenges for non-bank lenders across the region. The report illustrates that in view of the tightening real estate lending terms by banks in Hong Kong, non-bank financial institutions are keen to offer alternative lending options.
In Hong Kong, regulators implemented cooling measures to curb growth in commercial real estate. This included the tightening of bank lending for real estate purpose, limiting the loan-to-value (LTV) ratio for commercial property mortgage loans to 40%. As a result, opportunities emerged for non-bank lenders. While many private equity real estate funds and private investors may suffer from the restrictions, blue chip developers can still raise funds via a number of financing channels, for instance, corporate loans from banks and high-grade corporate bonds.
It is observed that international financiers and private funds are keen to provide lending for commercial property acquisitions in Hong Kong. The rates offered vary depending on loan tenor, asset quality and borrower profile. Insurers usually offer competitive loan terms but are strict on the quality of the underlying assets, and are thus confining most lending to en-bloc properties in prime locations with stable rental yields only. Meanwhile, interest rates of loans to private real estate funds and family offices are often higher, but these lenders are less selective on the underlying asset quality.
The situation is similar across Asia Pacific region. International regulators are implementing stricter capital requirements on bank lending such as the Basel III framework, and cooling measures are imposed by domestic authorities to curb rapidly rising property prices.
Ada Choi, Senior Director, CBRE Research Asia Pacific, commented, “the reduction of real estate lending by banks and limitations inherent to public bond issuance have created the undeniable demand for a dynamic non-bank lending market in the region. Given the recent volatility in the Asian stock markets, it can be argued that debt investment can, at opportune moments, provide higher returns than equity in property, and hence has its merits as an alternative long-term investment vehicle.”
“Non-bank lenders have already embedded themselves into the region’s private real estate debt market, with real estate funds accounting for 42% of the region’s property debt investments, and institutional investors making up 20%, according to the Asia Pacific Investor Intentions Survey 2015. Activities by these new lending sources have redefined the traditional layers of the capital debt structure in response to financing and liquidity demands of both development projects and standing investments across different Asia Pacific markets, while also aligning with lenders’ specific risk-adjusted investment strategies,” Ms Choi added.
Average Annual Growth of Bank Lending to Real Estate1 in Asia Pacific
According to the report, while domestic bank lending still remains the predominant source of debt in many mature markets, increased lending selectiveness by banks across the board has heightened difficulties for numerous borrowers. Many players have hence turned to the public bond market as a source of alternative funding, which drove total bond issuance by listed property companies in Asia Pacific to US$33.9 billion in 2014, a four-fold increase from 2011. The growth has mainly taken place in China and Southeast Asian countries ex-Singapore, whereas bonds issued in mature markets such as Japan, Hong Kong and Singapore have been the most stable.
Private real estate lenders looking to take advantage of the funding gap will find more opportunities in emerging Asia due to the strong pipeline of development activity, combined with tight credit lines from domestic banks on project financing.
While the non-bank lending environment in Asia Pacific is profitable and poised to grow, it still involves significant challenges in navigating and managing execution and administrative inefficiencies in emerging markets.
“New entrants into the debt market would be best to seek the knowledge and market expertise of real estate debt and structured finance service providers. They will be able to assist in sourcing and structuring prudent offshore loan opportunities, as well as to set up tripartite agreements with lenders in the case of mezzanine loan providers. Apart from advising on varying licensing requirements across domestic markets, qualified service providers can likewise provide guidance in navigating country-specific challenges such as the absence of legal protection mechanisms for offshore junior lenders in countries like China and the lack of transparency in the property market in India,” Nick Crockett, Executive Director, Capital Advisors Asia Pacific commented.
With full implementation of Basel III in 2019 expected to induce further tightening, and the low level of saturation of the Asia Pacific real estate debt market relative to the US and EMEA, CBRE believes that there is more room for the region’s real estate debt fund structures to evolve and ample opportunity for the pool of lenders to further deepen.
1 Bank lending to real estate includes lending to residential and development projects.
Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.
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