Q&A: How do real estate debt markets view residential?
Lisa Attenborough, Partner, Capital Advisory, reveals how the real estate debt market has evolved in recent years and where residential sits in the new landscape.
2 minutes to read
Are there specific property types that lenders are more willing to lend against today, and where do the different residential sub-sectors fit in here? Has that changed in recent months?
A key feature of the real estate debt market over the past two years has been the polarisation of appetite across the various sub-sectors and a ‘flight to quality’.
Lender appetite within the residential and logistics markets has strengthened since the onset of the pandemic due to the resilient nature of the income. A number of lenders with dry powder to invest are chasing the same deals, hence debt pricing has tightened across these favoured sectors.
In terms of residential sub-sectors, lenders have demonstrated strong appetite for build-to-rent (BTR) development finance and stabilised BTR investment finance, particularly for top tier sponsors.
What about future appetite for lending to residential? How do you expect the pool of lenders to evolve over the next year?
There is far more breadth and depth to the real estate debt market now than there was pre-Global Financial Crisis, with more than 200 active lenders including clearing banks, investment banks, global insurance companies, overseas banks, challenger banks and debt funds.
Our sources have advised that the second half of 2021 and the start of 2022 has been the busiest time on record for many debt funds as they seek to fill the void left by more traditional lenders, who have focussed on servicing their existing client base rather than originating new business.
Lender appetite for residential is expected to remain robust driven by the significant supply-demand imbalance.
What impact is sustainability having on access to real estate financing?
Since the onset of Covid, sustainability has quickly risen up the agenda to become one of the most important factors in determining a lender’s appetite. Consequently, there has been a marked increase in lenders offering ESG-linked real estate finance.
Green finance focuses on lending against green property or enabling retrofit projects that will lower a building’s carbon emissions. Sustainability-linked loans, on the other hand, are all about incentivising borrowers to become more ESG-focused.
In an attempt to drive positive change in buildings, many ESG-linked loans now offer economic incentives to borrowers if the asset or borrowing entity in question satisfies a set of pre-defined sustainability KPIs. These financial incentives, often in the form of margin discounts, vary on the scale and cost of the green initiative.
An increasing number of lenders, particularly those backed by institutional capital, will only finance assets with strong ESG-credentials. It will become increasingly challenging to finance assets with poor ESG-credentials.