Private credit fund managers have changed how they work with banks on real estate deals, according to Schroders Capital’s Jeff Williams.
The asset manager’s head of global commercial real estate debt investments said that the firm is now “stepping into the whole capital stack”, which is better for both parties.
“Previously, we may have provided a senior mezzanine loan behind a low leverage bank loan, getting low to mid-teens IRR, but now we’re stepping into the whole capital stack, facilitating a senior mortgage,” he told Alternative Credit Investor.
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“The banks that are still active are really attracted to doing note-on-note financing. So instead of being a senior lender and having the real estate as collateral, the bank will lend money to private credit fund managers to make the loan.”
Williams added that it is less risky for banks to lend to private credit fund managers, as their effective loan to cost is lower than it would have been.
“For them it’s a much lower leverage point,” he said.
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“Furthermore, if we were to default on our loan, they still get all of the collateral as security. And that’s why they get better capital treatment.
“For us, we have total control over the loan so that gives us a good competitive advantage. We can control the whole transaction. We have good relationships with some other lenders but it’s better for us as we have the whole loan and it’s more competitive for us in the marketplace as the borrower doesn’t have to deal with two different lenders – it’s cheaper for them.”
The commercial real estate market has faced a challenging couple of years, amid a high-interest-rate environment, cultural shifts towards working from home post-pandemic, and a weak macroeconomic climate.
However, Williams sees opportunities in the sector, which he says will arise in phases.
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“The first phase is to step in where traditional capital is pulling back,” he said. “We’re seeing material pullback in lending from the banks, or they’re just not showing up to bid on loans.
“On the opportunistic side, we’re focused on development financing. The apartments sector saw a pretty significant increase in supply in certain markets last year but the pull back in bank lending and increasing financing costs will lead to much lower supply going forward. In general the US is short on housing, so development financing is a really good opportunity for opportunistic investors.
“The future opportunity will be in distress in the office sector. It’s too soon right now as we don’t have the transparency as there hasn’t been enough transaction activity. Transactions were down by about 50 per cent last year.”
