Real estate survey 2014: Direct lenders target funding vacuum left by universal banks

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Real estate survey 2014: Direct lenders target funding vacuum left by universal banks

Direct lending for commercial property deals is a niche, but expanding, segment of the alternative financing universe that is plugging the funding void left by a diminished bank lending sector, where deleveraging is far from complete.

With real bank credit remaining well below Q4 2009 levels in all developed markets bar France and Japan, according to the BIS, demand for alternative sources of funding is rising – particularly in Europe.

The funding gap between European maturing commercial property debt and the amount banks were prepared to refinance hit €42 billion last year, according to advisory firm Navigant.

Direct lenders focus on mid-market, secured debt financing transactions that are too small for traditional debt capital markets but require more leverage than banks are willing to provide, usually in the €25 million to €200 million range.

Most direct lenders use a debt fund structure to provide commercial property financing on behalf of institutional investors looking to match long term liabilities, providing attractive returns and higher leverage for borrowers – at a price.

“There’s an increasing amount of alternative money that is targeting real estate, so it’s definitely a growing area,” says Floris Hovingh, director and head of lender coverage at Deloitte. “We’ve seen a number of alternative debt funds being set up, some smaller ones and some larger ones like Partners, Pramerica, and Pricoa.”

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