GLOBAL - Alternative providers of debt finance are unlikely to plug the gap left by banks exiting the real estate lending market, despite insurance company now making a 14% of the property lending market.

An INREV report on capital sources, published this week, claimed that despite an estimated shortfall of €398bn in debt capital, banks will continue to focus on core assets and markets while alternative sources such as debt funds would be unlikely to exceed €110bn.

The report said the increased cost of debt and more selective lending had compounded the impact of 42 lenders disappearing from the European market as a result of either collapse or parent company withdrawal. According to the survey, 10% of fund managers had failed to refinance at least one asset after a bank lender pulled out of the market.

"The availability of debt presents the greatest challenge for the non-listed real estate funds industry," it said.

Although the debt gap presented an opportunity for alternative providers, debt funds' initial expectation of returns above 20% had been predicated on "a market flood of distressed assets and debts, which failed to materialize".

Subsequent market rationalisation and the setting of more realistic return expectations had resulted in alternative providers narrowing their focus to either senior or mezzanine debt.

Meanwhile, a CBRE report on the senior debt market claimed insurers could eventually make up 15—20% of lenders in a market still dominated by European banks - with the financial institutions claiming a 17% share.

"At one extreme of the market we see increasing confidence and opportunity to grow exposure to real estate lending, especially among insurance companies," said the report, which contrasted increased confidence among insurers with weakening sentiment among banks.

Insurers' loan-to-value ratios of 69% compare favourably with 66.2% in the overall market.

Yet the report concluded that both banks and insurers remain risk averse, with a preference for high-quality assets and conservative financial structures.

Although insurers continue to expand lending capacity throughout 2011, they focused on "very prime" assets and larger lot sizes.

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