Like many other things in life, from fashion to music, the real estate industry is notoriously cyclical. Having been in the industry a long time, navigating multiple cycles, it can seem like history is repeating itself. But just as you might see your children wearing clothes and listening to music that are strangely reminiscent of your own youth, it is worth remembering that while trends often come around again, they generally evolve and adapt to fit a different context.
Keith Breslauer
Today, the scene looks set for another wave of new agile lenders to enter the real estate market, almost a generation after swathes of private equity and debt funds started providing finance to the sector when banks pulled back, particularly from smaller and more complex projects, in the wake of the 2008 global financial crisis (GFC).
New challenger banks and so-called alternative lenders with real estate expertise have grown exponentially ever since. Today, the scale of these players is massive. Globally, the top 50 debt funds raised $275bn (£200bn) in the five years to the end of 2023, with the top 10 accounting for 43%.
Many of the debt funding opportunities lie with value-added refurbishment projects
But they have so much dry powder that it has to be deployed via direct, big-ticket lending deals – usually £75m-plus – which can be few and far between, or via indirect strategies, such as providing funding lines to smaller lending platforms, which then have to follow tighter lending rules and a more lending-by-numbers, tick-box approach.
Adding value: refurbishment projects offer financing opportunities for non-mainstream lenders
Shutterstock / M Niebuhr
Ironically, many former niche lenders have grown too large to serve smaller projects, once again opening up the very financing gap they first existed to fill for borrowers.
Even for those prepared to lend smaller amounts, the market adjustment of recent years has reduced risk appetites, with interest rate rises and asset repricing leaving legacy loans and projects with issues on the
books again. And regulatory pressure means big banks are still reluctant to lend in the volumes they once did.
In short, we have gone full circle. Almost 20 years after the GFC, new alternative lenders with real estate expertise, ready to support borrowers on niche value-added development projects, look set to be rewarded.
Across UK property sectors, there are major supply-demand imbalances for high-quality space. Supply has been constrained, with fewer construction starts in the past few years thanks to Covid, build-cost inflation and the higher cost of finance – all factors that have also made refurbishment more attractive than new-build projects and viable for those with the right skills.
Refurbishment opportunities
Meanwhile, demand for capital to upgrade assets so that they comply with looming ESG deadlines remains unabated. Many of the debt funding opportunities therefore lie with value-added refurbishment projects.
However, a lot of projects offering the best rates of return may only need development, construction or refinancing loans of £20m to £60m – too small for many of the larger alternative lenders and still too risky for traditional lenders and those shackled by legacy loan issues.
More than ever since the GFC, borrowers need nimble lenders that understand the market, can astutely assess scheme viability and provide flexible debt. For smaller schemes undertaken by those with less experience, there is also value in working with a lender that is prepared to act as a partner, supporting borrowers with development expertise, for example.
This is why we have embarked on creating a significant new business in real estate credit, targeting investment opportunities across the UK and Europe. This new area of our business builds on our long-standing success in value-added and opportunistic real estate investing, focusing on debt opportunities across sectors at a time when so many borrowers with great projects need finance.
We are not planning on targeting large projects, because we do not want the pressure to deploy capital in larger transactions; enough people are doing that already. We would rather work alongside developers that we have existing relationships with and new ones that have credit needs for smaller value-added developments where excellent returns can be unlocked. Today’s generation of value-added borrowers needs a new generation of lender.
Keith Breslauer is managing director of Patron Capital