An emerging asset class: what’s driving the rise of alternative lenders?
As banks retreat from the property sector, alternative capital providers are coming to the fore.
These financiers are sometimes called ‘shadow banks’, but this is a misnomer. Unlike banks, who take deposits from savers, alternative lenders source funds from investors for the express purpose of loaning them out.
The dynamics of the sector are therefore fundamentally different to the banks: it’s designed to match investors (not depositors) with borrowers.
Why alternative lending is growing
The retreat of Authorised Deposit-taking Institutions (ADIs) from commercial real estate lending has coincided with the rise of alternative lenders, who fill the gap with flexible financing solutions.
This has been a positive development not just for borrowers, but also for the investors who provide the capital.
Private and institutional investors increasingly realise that they don’t need to own real estate to make money; they can finance it as well.
A key difference between ADI and non-ADI lenders is that ADIs accept and make loans with deposits from the general public. They are the custodians of people’s savings.
Accordingly, this attracts a level of regulatory oversight from the Australian Prudential Regulation Authority (APRA). By contrast, non-ADI lenders privately raise wholesale funds to provide to borrowers under their own criteria, and this is currently largely unregulated by APRA. Investors in this space take on a certain level of risk and are rewarded for it.
For example, non-ADI lenders can often accept lower levels of pre-sales for construction projects and allow a lower loan-to-value ratio. They also have the ability to require varying levels of security, from senior, first-ranking mortgages to mezzanine, second-ranking mortgages. Both are secured but have different levels of priority in the case of a default.
In recognition of this higher risk profile, lenders are able to demand a higher risk premium [1], which is one reason investors can benefit from investing in this asset class. The risks are tightly managed, however, with lenders taking security over assets to protect their investment. This is in contrast to asset classes such as shares or hybrids, where all of the invested capital is at risk and shareholders rank last in the list creditors.
Focus on quality investments
As with any growing market, new players are entering this space and creating competition amongst established alternative lenders. However, Qualitas believes that the past decade has set our firm up for success in this environment: we have built trust with borrowers, delivered returns to investors and developed rigorous governance processes.
Having built deep relationships with top tier clients, we are ideally positioned to provide financing for quality projects that aim to deliver strong, risk-adjusted returns for investors. We are positioned at the forefront of the commercial real estate debt sector as it evolves into a mature asset class.
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Disclaimer: This article has been prepared by Qualitas Securities Pty Ltd (ACN 136 451 128) (Qualitas Securities), holder of Australian Financial Services Licence number 342242. Qualitas Securities and its related bodies corporate and affiliates constitute the Qualitas group (Qualitas).
The information contained herein is for informational purposes only and does not constitute an offer to issue or arrange to issue financial products. The information contained herein is not financial product advice. This document has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you should read the publicly available information carefully and consider, with or without the assistance of a financial adviser, whether an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Past performance is not an indicator of future performance.
No member of Qualitas gives any guarantee or assurance as to the performance or the repayment of capital.
All data in this document has been calculated using the most accurate sources available, however any rates or totals manually calculated may differ from those shown due to rounding. Figures may also differ from those previously disclosed due to adjustments made following period end.
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