Shadow bank lending on the rise as big four banks pull back

CBA chief executive Matt Comyn said the bank’s commercial loan growth is “primarily concentrated in sectors with better credit quality or market conditions. Exposure to REITS, industrial and Premium/A-grade office is preferred, he said.

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“Office exposures are weighted toward premium/A-grade property with the weighted average LVR maintaining a buffer to the bank’s minimum requirements,” Comyn said.

One of the latest deals is by non-bank property lender Pallas Capital, which has established a new vehicle, Pallas Funding Trust No. 2 (PFT), worth up to $500 million. It is backed by a senior funding facility with funds managed by Ares Management’s Alternative Credit strategy.

Pallas will funnel the money to a mix of pre-development loans, residual stock loans and investment property loans. It will target medium-sized commercial real estate borrowers and expects that most of its loans will be between $2 million to $25 million in total.

Pallas Capital chief investment officer Dan Gallen said this market segment remains under-serviced as it falls between the very narrow lending focus of the major banks.

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“Many non-bank lenders prefer to focus on either minimal CRE loans or much larger loan exposures of over $50 million,” Gallen said.

“We expect to increase lending volumes substantially given the majority of commercial properties have values up to about $35 million, which is precisely where PFT will focus its lending business.”

Pallas Capital has operated institutional lending facilities since 2021 and has loaned about $850 million across over 170 loans through such facilities.

ASX-listed Centuria has also increased its exposure to the shadow banking sector through its Bass Credit business. It has $1.6 billion of assets under management, and of that, $222 million is spread across 13 real estate finance loans.

Centuria Bass is experiencing surging demand for non-bank real estate finance.

Centuria Bass joint CEO’s Giles Borten, Nick Goh

Centuria Bass Credit is the result of a joint venture between Bass Capital Partners and Centuria Capital Group in April 2021. It provides real estate funding to mid-sized companies, entrepreneurs, property developers and investors.

Giles Borten and Nick Goh, Centuria Bass’ joint chief executives, said the lender is experiencing a surge in demand for non-bank real estate finance in the current high-interest rate environment, where many traditional lenders have tightened their loan criteria amid unprecedented demand for residential stock.

“This demand has been met with strong wholesale investor appetite for high returns across a relatively short time period of about 12 to 18 months,” they said.

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“These are the fundamentals that have underpinned Centuria Bass’ 41 per cent annual increase in its funds under management to $1.6 billion. We believe these conditions will be sustained.”

Stamford Capital, another large player in the sector, said rate relief should signal a return of lender confidence, which should further open up access to capital with appetite for higher leverage.

In its latest insights report, Stamford says that while construction costs have stabilised, there is a new “normal” in terms of pricing, with construction costs almost 30 per cent higher than they were before the global pandemic.

“This will impact developers’ ability to deliver affordable stock. The housing supply and demand imbalance will help make residential developments a reasonably safe asset class for developers and investors,” the report says.

“Until rates drop, investors will still be weighing up the cost of borrowing against purchase yields.”

According to Stamford, non-bank lenders can price for risk and offer less conditionality, while banks remain conservative in the prevailing market conditions.

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