Alternative lenders hold ‘limited’ share of lending pie

Despite an increase in debt funds and other alternative lenders, they have not succeeded in boosting their market share to more than 10%.

Non-bank lenders in the UK only accounted for 13.5% of lending in 2014, although Savills predicts that their market share in the UK could potentially grow to as much as 30% by 2020. For borrowers in the UK looking for commercial real estate loans that run for more than five years and with LTVs in excess of 65%, alternative lenders – who can bypass ‘slotting’ restrictions - are the way to go, said David Lebus, director of debt advisory, UK capital markets, at JLL in London.

‘If you’re a would-be borrower looking for a seven-year loan at a 70% LTV, then you’re not going to go to a traditional UK lender,’ he said. ‘That’s where the alternative lenders come in. They can underwrite longer loan terms fairly quickly. They tend to take on loans of between £25 mln and £75 mln with a bit of hair on them. Some mezzanine lenders will even underwrite a whole loan, just to get their hands on the mezzanine segment and will then sell on the senior debt.’

Despite the increase in senior debt funds and other alternative lenders jostling for a share of Germany’s lending pie, they have not succeeded in boosting their market share to more than 10% of the market in the past two years. As a result, they are now struggling to keep pace with traditional lenders. ‘Margins aren’t high enough for alternative lenders and interest rates are too low for insurers,’ said Frank Nickel, chairman of corporate finance for the EMEA region at Cushman & Wakefield.

Nonetheless, some alternative lenders such as insurers Allianz and AXA have helped to plug the lending gap left by former lenders such as Eurohypo, said Markus Kreuter, the new head of the debt advisory team at JLL in Germany. ‘As such, they increase overall competition in the market but they are limited as to the amount of risk they take on. Debt funds, on the other hand, tend to focus on the opportunistic segment of the market, although they have limited opportunities to grow given the sheer quantity of equity in the market.’

Shrinking margins
Loan margins have fallen over the past 12 months in the UK to between 115 bps and 125 bps for loans with LTVs of between 55% and 65% on very prime offices and retail stock, compared to around 150 bps a year ago, according to Lebus at JLL. ‘The all-in cost now over five years is sub-3%, which is the lowest it has been in the last 25 years,’ he said.

Increasing competition means that ‘the market has got a lot more intense as so many people are trying to lend and yields are still compressing’, said Michael Kröger, head of international real estate finance at Helaba in Frankfurt.

Kreuter at JLL agrees: ‘Margins have become very tight in Germany this year,’ he said. ‘Loan margins for prime assets with a triple A sponsor can be less than 70 bps – I don’t think it can go any lower! The loan margins for secondary assets, such as offices, are typically below 150 bps and residential can be as low as 100 bps.’

For borrowers, there is an upside to increased competition: it has forced lenders to be more flexible regarding loan terms – and not just when it comes to pricing. Flexibility and the ability to repay elements of a loan have also improved. ‘Lenders are competing around that and not just when it comes to pricing,’ Lebus said.

Bailed out lenders bounce back
Many banks bailed out at the height of the financial crisis in 2008 and 2009 have gone on to make a remarkable recovery. Germany’s largest Pfandbrief issuer, pbb Deutsche Pfandbriefbank, formerly known as Hypo Real Estate (HRE), floated on the German stock exchange in July, with shares trading at €11.45. Prior to the IPO, pbb was fully-owned by state-owned HRE, which is 100% owned by SoFFin, the Financial Market Stabilisation Fund set up by the German government following the collapse of Lehman Brothers in September 2008.

HRE had been required to dispose of pbb by the end of this year in order to fulfill a condition imposed by the European Commission for its state bailout. The German government and HRE will continue to hold an indirect stake of between 20% and 24.9% for a two-year period. Pbb has already repaid ‘a sizeable chunk’ of the financial aid it received from the German government in 2009, according to pbb’s co-CEO Andreas Arndt. HRE received a €10 bn capital injection as well as €145 bn in liquidity guarantees during the financial crisis.

Fellow bailed-out German lender WestImmo was eventually sold by Germany’s ‘bad bank’ Erste Abwicklungsanstalt (EAA) to rival lender Aareal for an all-equity amount of €350 mln in February, following a protracted sales process. The deal represented a discount of roughly 50% to its equity book value, which stood at €575 mln in June 2014.

RBS and Lloyds
Over in the UK, bailed-out lenders Royal Bank of Scotland (RBS) and Lloyds Bank have also started to bounce back and are lending again. In total, RBS had a bailout in three tranches amounting to £45 bn during the financial crisis, giving the UK government a 79% stake in the bank. In August this year, the government sold £2 bn in shares, or 6% of RBS, reducing the taxpayer’s stake to 73%. However, if all the shares were to sell at around £3.31 (RBS’ trading price in mid-August), down from more than £5 in 2008, it could potentially result in a loss of up to £15 bn to the taxpayer.

An RBS spokesperson said that a timeline for reducing the 73% stake has not yet been disclosed. RBS has around £25 bn exposure to the UK commercial real estate market and underwrites around £5 bn to £6 bn a year, according to a spokesperson, who declined to provide exact figures for last year.

The UK government has already recouped the majority of the £20 bn it paid to bail out Lloyds Banking Group in 2008. Through two institutional share sales, the government’s stake fell from 39% to 24.9% between 2013 and 2014. The UK Treasury announced a ‘drip feed’ sales plan for shares in the group in December last year, whereby it gradually sells shares into the market. Since the trading plan was announced, the government’s stake has been reduced to 13.9% and around £13.5 bn has now been returned to the taxpayer, according to a company spokesman.

Sara Seddon Kilbinger
Correspondent German-speaking countries