Real estate non-bank lending on the rise in Hong Kong

Most loans are confined to en-bloc properties.

It has been noted that real estate bank lending in Asia Pacific significantly moderated after the GFC, leading to an increased demand from investors and property companies for alternative sources of real estate funding in public and private debt markets.

According to a release from CBRE, in view of the tightening real estate lending terms by banks in Hong Kong, non-bank financial institutions are keen to offer alternative lending options.

In Hong Kong, regulators implemented cooling measures to curb growth in commercial real estate. This included the tightening of bank lending for real estate purpose, limiting the loan-to-value (LTV) ratio for commercial property mortgage loans to 40%.

As a result, opportunities emerged for non-bank lenders. While many private equity real estate funds and private investors may suffer from the restrictions, blue chip developers can still raise funds via a number of financing channels, for instance, corporate loans from banks and high-grade corporate bonds.

Here's more from CBRE:

It is observed that international financiers and private funds are keen to provide lending for commercial property acquisitions in Hong Kong. The rates offered vary depending on loan tenor, asset quality and borrower profile. Insurers usually offer competitive loan terms but are strict on the quality of the underlying assets, and are thus confining most lending to en-bloc properties in prime locations with stable rental yields only. Meanwhile, interest rates of loans to private real estate funds and family offices are often higher, but these lenders are less selective on the underlying asset quality.

The situation is similar across Asia Pacific region. International regulators are implementing stricter capital requirements on bank lending such as the Basel III framework, and cooling measures are imposed by domestic authorities to curb rapidly rising property prices.

Ada Choi, Senior Director, CBRE Research Asia Pacific, commented, “the reduction of real estate lending by banks and limitations inherent to public bond issuance have created the undeniable demand for a dynamic non-bank lending market in the region. Given the recent volatility in the Asian stock markets, it can be argued that debt investment can, at opportune moments, provide higher returns than equity in property, and hence has its merits as an alternative long-term investment vehicle.”

“Non-bank lenders have already embedded themselves into the region’s private real estate debt market, with real estate funds accounting for 42% of the region’s property debt investments, and institutional investors making up 20%, according to the Asia Pacific Investor Intentions Survey 2015.

Activities by these new lending sources have redefined the traditional layers of the capital debt structure in response to financing and liquidity demands of both development projects and standing investments across different Asia Pacific markets, while also aligning with lenders’ specific risk-adjusted investment strategies,” Ms Choi added.