Private lending is ripe, seeding a $50-billion harvest in the commercial real estate debt sector by 2024, according to Plan 1 property consultancy research.
The surge in growth is largely influenced by The Australian Prudential Regulation Authority’s (APRA) tougher restrictions on banks and associated tightening of credit conditions.
The Interim update released by APRA in September 2021 signals bank funding of commercial real estate (CRE) will be further restricted from early 2022.
With new reforms regarding bank capital adequacy requirements applying from January 2023, it’s expected these measures will start to be implemented by the banks from next year. Contextually this contributes to the value of the projected non-bank lending growth pool.
Historically, the major banks controlled 85 per cent of the Australian market, now falling to 69 per cent, the lowest since the global financial crisis and the Royal Banking Commission.
According to Plan1 co-founder Richard Jenkins, bank market share is expected to fall further to 65 per cent over the coming years. Asian banks are expected to grow at a slower pace, leaving non-bank lenders to "pick up the slack". Payton Capital’s chief executive, David Payton said the non-bank market has matured over the past three years.
“So we’ve got the combination of growing amounts of debt— previously reported $260 billion, we would say it's closer to $300 billion, anecdotally $50 to $60 billion of that now, is private. If you make a list of the top ten private lenders you get close to that sort of number,” said Payton.
“We think it will grow to around $100 billion in five years, that's our forecast out to 2027,” he said. “Our strategy is to be $5 billion of that within our five-year plan.”
As bank market share trims down, private lenders are slowly becoming a popular first choice.
“What we are seeing is larger development firms that historically would have gone to the big four banks, are now going to private lenders first or second, not last,” Payton said.
The new story is they are now going to private first because of the greater structuring ability, the higher leverage opportunities and the price differential to the banks is nowhere near what it was. “The combination of these factors allows developers to super-charge their return on equity”, said Payton.
Although non-bank lending data is currently limited, the RBA reports the surge in private lending, (particularly in Melbourne) from a range of sources, predominantly funding property investments from personal wealth, foreign money and institutional investors.
Lower levels of pre-sales required by private lenders, is a major drawcard compared to that of the banks, allowing developers to activate projects earlier and accelerate their development pipeline.
Lower pre-sales also provides a significant mitigate to medium term inflationary fallout, including greater than normal escalation of construction costs. That is, developers have the ability to pass on these escalating costs to purchasers by increasing the price of un-sold stock.
With bank lending criteria becoming more stringent and complex, it is paramount to consider aligning with a trusted capital partner for the long term.
Payton Capital, an experienced independently owned CRE debt manager in Melbourne, is one to watch. With 60 years of in the game and having recently expanded into Sydney, the company’s reputation speaks for itself.
With 20 per cent of its shares donated to the Payton Foundation, a charity that advocates for vulnerable people in Australia and overseas, this non-bank lender is a trusted company with heart.
“We are long established and over-subscribed for capital, we connect sophisticated investors with quality property backed fixed income products, and have a capacity that is demonstrated, we’ve done more than $2 billion in funding and we’re experienced and capable,” said Payton.
We’re committed, we’re fast, and we can deliver with absolute certainty.”
Lending all the way up the capital stack in real estate debt, the company can provide small to larger loans, although Payton’s niche sits between the $10 million to $60 million total development cost.
Ettalong, Parramatta and Gregory Hills are some of the Greater Sydney projects currently in the works.
“We are not going out to market and doing capital raisings every time, we’ve got the funds and we can underwrite a transaction every week,” Payton said.
We are writing $50 million to $60 million of loans a month right now, and we’re expecting to grow to $80 million a month over the next quarter with our forward pipeline that’s already committed. Although Payton are primed to compete with the larger echelons of the non-banking lending pool, they prefer to play in their lane, “big enough, small enough”.
“There’s not been a time as the time we are in right now, where we’ve got really solid growth of real estate underpinned by sound fundamentals. We’ve got a low interest rate environment to work with that can be leveraged. If ever there was a time to increase your leverage, it's now.”
For Payton, coming on board is more than transacting money, they operate on a ‘profit with purpose’ mantra, building solid relationships as a capital partner for the long haul.
Payton’s mission statement “Crafting Wealth, Changing Lives” speaks to its desire to build meaningful relationships with all of its stakeholders, including its borrowers. “The changing lives part is not just about the recipients, it's about the participants,” said Payton.
“Those that engage in the journey with us, they change, and I love that piece because that’s where we’re able to create meaningful relationships.”
The Urban Developer is proud to partner with Payton Capital to deliver this article to you. In doing so, we can continue to publish our daily news, information, insights and opinion to you, our valued readers.
