CBRE stated that these factors are encouraging catalysts for investors to seek greater debt exposure and create more transaction activity. Reportedly, there is an increase in the number of investors who are now lending against Asia Pacific real estate assets rather than taking equity positions. In addition, after increasing interest rates by the US Federal Reserve, certain Asia Pacific lenders have adopted a more cautious approach to real estate.
“We are seeing increased demand for investment in real estate debt across the region. Tighter lending conditions in some markets have created opportunities for less traditional lenders, and a number of investors feel there are more attractive risk adjusted returns in debt vs. equity. We see some clients also taking a more strategic medium term position in the capital stack via debt,” says Tom Moffat, Executive Managing Director, Capital Markets, Asia, CBRE.
Specific developments can be seen in leading economies such as China, India and Hong Kong. In China, the report notes that slowdown in residential sales and a nationwide de-leveraging campaign indicates that global investors are gravitating towards development loans, junior and mezzanine debt as well as NPLs. CBRE says China’s real estate NPL pool is worth nearly $20bn. Now, Chinese real estate developers are providing opportunities with growth prospects and returns of up to 20%. However, only 40% of the mid-size developers in China are operating with positive cashflows, says the report.
Meanwhile, in neighbouring Hong Kong, CBRE notes that while investment activity was high was lower LTV levels by traditional lenders are creating opportunities for mezzanine financing. In India, one of Asia’s fastest growing property markets, domestic residential developers continue seeking alternative funding channels as banks tighten liquidity for project financing. Developers now engage with equity partners instead of issuing mezzanine debt. Since 2015, Indian-focused real estate debt funds have raised more than US$ 2.0 billion to provide development debt financing to local residential developers. More recently, international investors are also expanding their exposure in India via debt investment.
However, these opportunities could also indicate the possibility of new challenges cropping up, and investors must be cautious. “The inevitable maturity of Asia Pacific’s debt market comes with associated risks and challenges typically of an alternative asset class. As most current opportunities in the real estate debt space in Asia Pacific are still in mezzanine debt and development loans, it is critical that investors fully understand the assets they are underwriting,” says Dr. Henry Chin, Head of Research, Asia Pacific, CBRE.
Another reason for investor interest in debt is the changing composition in the real estate stack from traditional bank loan as well as an equity format to one where mezzanine finance and preferred equity are growing in importance, stated the CBRE report.
Different debt investments available in Asia Pacific are positioned along different points along the risk spectrum, which investors are building into capital allocation strategies. Also, non-bank financiers such as insurance companies and pension funds are entering this space especially in Australia.
These new strategies boost loan to value ratios, or bridge short-term cash requirements for projects. In Asia Pacific, activity in this category is being propelled by private equity real estate funds and debt funds.