Debt; the challenge for banks

Lending margins on commercial real estate loans continue to come under pressure as the supply of debt capital in the market continues to grow. This has pushed lending margins from these alternative debt suppliers to levels more in line with the traditional banks.

While banks in most instances are still able to offer senior loans at more competitive rates than alternative debt funds, they are handicapped by the capital control restrictions placed on them following the GFC that limit their lending capacity. These capital control restrictions require banks to hold more capital against their loan books, and make their cost of lending higher than it traditionally was. The result has been slower underwriting periods by banks when compared to their debt fund rivals, and more caution towards debt pricing due to the higher levels of risk management in place.

As alternative funders such as insurance companies, overseas lenders and debt funds do not have the same governing rules, they are in some cases able to undercut the banks borrowing rates, especially for higher risk loans. This is a positive for borrowers who now have a wider range of debt finance options than previously on offer as lenders can be more creative with how they take positions within a capital stack.

Basel capital regulatory restrictions on the banks have meant that they are relatively uncompetitive in certain cases in their ability to provide debt, but where this has left a gap, this is largely being filled by overseas lenders and debt funds.