3 reasons why alternative lending is taking off in the property sector right now

There's a $60 billion funding gap in the property market and it's an opportunity that Wayne Lasky is pioneering at MaxCap Group. The commercial real estate debt market is still early in its cycle but MaxCap has been well ahead of the curve to provide lending and debt facilities for the real estate sector. Commercial real estate debt (CRED) is a relatively new financial investment class. Borne out of the GFC, this asset operates with good yields and risk-adjusted returns - it's fixed income with a property twist.  

The loans act as fixed income for investors and are secured by a property asset, such as industrial or commercial real estate assets to allow for the capital improvement of that asset. 

MaxCap currently looks at supplying funding to assets all across the development cycle from vacant land to construction and development to established assets that need refurbishments or have redevelopment potential. 

The group recently commissioned research from the University of Technology Sydney (UTS) analysing 20 years of CRED data. This report outlines the opportunity in the commercial real estate debt market as a portfolio enhancer and diversifier.

Here's what is driving interest: 

1. A big funding gap is a new opportunity 

The $60 billion funding gap is largely driven by APRA. Nothing like regulatory intervention to create a market opportunity (you love to see it). 

Over the past three years, APRA has pulled back on commercial real estate. In 2018, the regulator imposed capital provision ratios to de-lever the banks' exposure to commercial real estate resulting in a funding gap for development projects. While the major banks are still the primary lenders to development companies, there are now a vast array of alternative lending options - including companies like MaxCap. Wayne Lasky believes that the impact of these regulatory changes will only come into full effect in 2025, so there's a lot more runway in this market. 

2. Yield hunters who don't want to move up the risk curve 

In a 'lower for longer' interest rate environment, many investors are moving up the risk curve to find yield. So for investors who want reliable income, especially through a downturn, CRED offers a viable alternative. 

According to the UTS-MaxCap report, "CRED returns tend to improve relative to other asset classes during periods of crisis and sustained economic uncertainty and therefore act as a stabilising force in an investment portfolio". 

Adding a 10% allocation to CRED in a portfolio, according to the research, provided greater returns, less volatility and a growing Sharpe ratio.

3. Risk-adjusted returns 

CRED operates in a similar manner to other fixed-income products in that it doesn't take a first-loss position. Unlike investing in property equity, CRED has a no-first loss position. 

Equity is taking a higher risk, receives a higher return, but it is in a first loss position. Debt is higher in the capital stack hierarchy. Real estate debt and real estate equity are negatively correlated. 

The MaxCap-UTS research demonstrates the portfolio benefits of a CRED allocation. The report showed a blended (senior and junior) CRED portfolio achieved 15.8% p.a. returns compared with 9.9% p.a. for an outright commercial real estate portfolio. 

Conclusion

Australian commercial real estate debt is a big portfolio booster, particularly in the current economic climate. New regulatory change, with far-reaching impacts across the industry, means that Australia's lending market is very early in the cycle for exploring alternative lending, so there is little threat from other entrants. 

And with ongoing quantitative easing (QE) and zero interest rate policies in place around the world, it's not just Aussies who have their eyes on the CRED market. Pre-COVID, MaxCap Group secured $600 million in funding from APG, one of the world's largest pension funds with approximately €500 billion in AUM. Offshore investors are hugely interested in this market, especially in Australia - with a sound geopolitical climate and strong property market. 

Find your returns in commercial real estate debt.
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