GLOBAL - Fund manager Cordea Savills is to set up a "potentially very large" property debt business to capitalise on what it said was investors' realisation that banks will not return to the property lending market.

Former Palatium managing director Keith Davidson, who will co-manage the business with ex-Palatium director James Tarry, told IP Real Estate that investors had come to terms with the reality that banks were unlikely to re-enter the lending market.

Investors have also come to terms with significant risk aversion among those bank lenders still active in the market, he said.

"Sometimes there are more stable returns to be had further up the capital structure," he said. "But, from investors' point of view, there is a learning curve involved in moving up the capital structure. If these banks were coming back, why would they bother?"

The new business will invest in both senior and mezzanine debt.

"There are opportunities in all debt spaces - we're as likely to do senior debt deals as to invest in mezzanine," said Davidson, pointing to a recent lack of senior debt investment.

The new business is likely to cover both pooled funds and segregated accounts, with the nascent debt team's initial focus on Cordea Savills' Prime London Residential Development fund, launched last October, which focuses on mezzanine debt and preferred equity-style investments, targeting an annual return of 18-20%.

Davidson said the business would also invest in non-performing loans, given a mandate to do so.

"There are a number of things that can be done in the debt space," he said. "If we had a segregated mandate to invest in non-performing loans, for example, we would set up a vehicle to do it."

Cordea Savills is currently in discussions with investors over the contours of the new venture.

Although Davidson declined to put a figure on its likely eventual size, he pointed to the size of the funding gap left by banks' withdrawal.

"It's too early to say how big the business will be, and it will depend on the market," he said. "But if you look at the amount by which banks have downsized, the opportunity for non-bank lenders is sizeable."