January 29, 2021
New Year Update
Happy new year all. Appreciate we’ve all been getting a lot of New Year emails regarding the unprecedented 2020 year that was… but here is our take out from a commercial real estate capital perspective following our regular updates during the COVID outbreak:
- We’ve never seen more alternate capital in market, perhaps non-bank markets have been deeper when the mortgage trusts were swinging pre-GFC but never seen so many active non-bank lenders
- Non-bank capital is cheaper than before March 2020
- Non-bank capital is more aggressively chasing lending opportunities than before March 2020
- Developers and property investors need an adviser to navigate this market or risk missing best product
- Banks aren’t fun but are stupidly cheap
Non-Bank Capital (Construction) – in our 10+ years in business, we haven’t seen a time where there has been more non-bank capital competing for land bank, construction funding and residual stock. New lenders continue to emerge and existing players are flushed with cash. We certainly sense the ‘spend pressure’ from this segment of the lending market. Through a number of debt tender processes over the Q4-2020, we experienced material compression from the initial terms quoted to final offers (up to 3% spread…), leverage in excess of 70% LVR for construction debt and up to 80% for residual stock and presale requirements from minimal to nil. The value is in the deal here and in our strong view, borrower’s are doing a disservice to their project/property if they aren’t engaging with an experienced intermediary with true market coverage (of course Stamford is happy to assist here 😉).
Non-Bank Capital (Investment) – back in April/May 2020 we thought the non-bank lenders playing in the term debt space for commercial property would be flush with loan opportunities in 2021 requiring refinancing from the banks due to LVR and ICR issues. This certainly hasn’t played out to date however we are conscious of APRA’s requirement for the Bank’s to start valuing existing commercial property on their loan books from March 2021 (as and when covenants require). Interestingly, there is still a 3%+ spread from bank term debt interest rates to non-banks however we are aware of a few lending platforms emerging that may bring a lower cost of capital to this space.
Banks – have been all over the shop. Some are dealing with having reached their APRA imposed lending limits. Its jaw dropping to still hear a major bank say, ‘we don’t have capital for commercial property deals until at least Q2-2021!’ Overall, bank margins have increased and their covenant hurdles (presales etc) are difficult to meet. That said, low base interest rates (BBSY) mean the ICR covenants for term debt are being achieved for existing term debt loans. There are a few banks (majors and non-majors) who have been very aggressive in their appetite for term debt deals.We are achieving all up interest rates from ~1.5% p.a. for our clients in this space.
Hoping 2021 provides a bit more certainty to the commercial property market.