Andrew Stoneman, Triple Point’s head of development finance, says a swathe of distressed property assets are enticing private equity funds, while the lending market has continued a split between traditional and non-traditional lenders.
‘The pandemic has caused widespread disruption across many industries, but few more so than those in the property sector. COVID-19 restrictions have reduced city-based working, and assets such as commercial offices and real estate are at historically distressed levels. Calls for lenders to provide funding have risen sharply, but the private equity landscape has simultaneously undergone substantial change.
Tighter regulation and increased capital requirements imposed on traditional lending banks has created a gap in the financing market. Non-bank lenders are coming to the fore – and they are bringing significant funds with them.
Opportunity
High rates of commercial closures over the past 18 months have led to a swathe of distressed property assets. This represents an enticing opportunity for private equity firms, many of which have considerable dry powder due to a lack of recent activity. A large amount of capital remains uninvested due to deals that had been put on hold or cancelled; property businesses that have been affected by the downturn are now looking like an attractive new home for these funds.
Traditional office space, hospitality venues and even residential property all suffered during the pandemic, and there was much speculation as to how the market would react once lockdown was lifted. Since reopening, we have entered a new hybrid way of living and working. Property investment has returned at pace this year, with Savills reporting that £10.5 billion was invested into UK commercial property in Q1 2021. This is 112% higher than during the initial lockdown period in Q2 last year.
The opportunities in the market are plentiful. Office workers crave a more balanced mixture of home and office life, which will mean a move away from the traditional office set-up to more flexible, creative office space. This need will create more opportunities in the market for the redevelopment of current office spaces, presenting an opportune moment for investors.
However, the financing landscape has itself undergone significant change. Looking ahead, it is increasingly clear that non-bank lenders could be the key to funding the future of property.
Financing gap
The nature of the property market is currently highly competitive, and private equity firms and investment managers will be looking to financing partners to ensure that deals are completed and secured. Whilst this borrowing may historically have come from banks, private equity firms are increasingly looking at other sources as well.
Tighter regulation and increased capital requirements imposed on traditional lending banks have reduced their appetites and capacities to make loans. This has created a gap in the financing market that non-bank lenders are primed to fill. Combined with the search for yield in a low-interest rate environment, this has catalysed the growth of direct lending across the globe.
Non-bank lending
This year has seen the continued diversification of the lending market between banks and non-bank lenders. Whilst banks may remain competitive with their rates for more traditional real estate assets, alternative lenders will be able to plug the gap for those real estate assets that have faced greater covid-19 challenges and that banks may not wish to fund.
Additionally, despite the crucial services that they provide to society, the larger lenders do not typically have sophisticated ESG approaches. This has meant that groups like public sector organisations have remained under-supported.
A further advantage is that, generally, non-bank lenders can also be much faster in making lending decisions and providing funding. However, not all non-bank lenders are made equal, and private equity firms will need to take time to find the right lender to meet their funding requirements.
A degree of “let’s see what happens” is evident as investors assess current prospects in the property sector. Some market participants are still occupied with managing fragile portfolios, but for many this period has presented an opportunity.'
