Loan funds and real estate financing market – Finance and banking

With the onset of the global pandemic about two years ago, there was a feeling that new loans in the housing finance market (“REFM’) would cease or be severely reduced as lenders reassess their positions in the market. This was certainly true in part and particularly with established clearers and other lenders within this market. As these lenders negotiated and modified existing lending facilities, it turned out that there was no bandwidth – and perhaps appetite – among the more established lenders (with large loan portfolios ) to take out new loans.

Loan funds had risen to prominence during the last international financial crisis as established lenders cut lending due to a lack of liquidity and a slowdown in parts of the real estate sector. While debt funds have increased their market share in this sector during this crisis, established lenders have maintained their dominant position.

The recent (and ongoing) global pandemic has again seen a change in the REFM and an increase in the position of debt funds in this market. Abolished interest rates, good levels of liquidity, a boom across the UK in residential and commercial property values, but a lack of appetite from more established REFM lenders led investors to bundle assets and to exploit the lack of supply.

Importantly, debt funds are traditionally not limited by hard and fast restrictions; they analyze and approve loans based on individual criteria. Although there has not been a return to the environment where the borrower/lender relationship trumped all other considerations, debt funds are much more flexible with their loan portfolio and are able to offer loans with higher loan-to-value ratios. Regulation has also played a role in the rise of debt funds. Banks are subject to capital adequacy requirements, which means higher leverage loans are more expensive to provide.

So what about the future of this sector and debt funds? It depends somewhat on the clearers’ direction of travel and their willingness to re-engage in these areas of the market as well as the outlook for the UK property market.

In the short term, interest in the real estate market shows no signs of waning and, alongside the reallocation of commercial assets, debt funds will continue to lend and increase their market share in this sector. It is clear that debt funds are here to stay and we will see an evolution in loan deals, perhaps with future loan-for-equity swap positions being negotiated. In the meantime, we can clearly conclude that debt funds are an important (and in some cases, vital) resource for borrowers in the current climate.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.