There is nothing new about non-bank lenders focusing on the real estate sector. They have been around for a while and the trend has been exacerbated by the ongoing inability and unwillingness of more traditional forms of finance to evolve.
These lenders have typically been funded by high-net-worth individuals or family offices and occasional high street retail banks or funds. In the past three years, however, there has been a significant shift away from this model.
We and many of our competitors are increasingly being approached by institutional funders looking for exposure to the real estate debt market, whether they be a challenger bank, investment bank, pension fund or a hedge fund.
National Australia Bank, Nomura, HSBC and UBS are just four leading names that have backed non-bank lenders in the past couple of years.
There are a number of reasons behind this. The restrictions in place from the Prudential Regulation Authority for high street and challenger banks, along with their relatively low loan-to-value threshold, has increased the reliance on non-bank lenders, making the market hugely attractive to institutional funders.
In a micro-context, the short-term nature of the loan cycle is also appealing to institutional investors. Their exposure to market forces is less of a worry, which is a huge positive, especially in the current market and these uncertain times.
Lending on granular assets diversifies risk. Lending on single large assets is not as appealing to banks as it once was, so short-term asset finance is becoming an increasingly viable option.
Institutional funders gain comfort from the attractive returns and the increased professionalism of the non-bank lending market. Gone are the days of loaning to own or unfair and unnecessary fees. Ethical lending, transparency and highly experienced teams are now really engaging propositions to the institutional mindset.
Rightly, we are seeing increasing regulation restricting retail consumers’ ability to gain exposure to real estate loans via some of the marketplace platforms, affecting the retail capital base of some lenders and forcing them to engage with different funding sources.
As a result of a low and diverse risk profile in a favourably yielding asset class with quick returns within a changing and very professional sector, we are now being approached almost on a weekly basis, with no sign of letting up and little impact from the Brexit-related slowdown.
Guy Harrington is the founder and chief executive of Glenhawk