Commercial Real Estate – financing a resurgent market
With the ongoing growth in the Irish economy leading to a resurgence of the commercial real estate (CRE) sector, it’s easy to forget that the industry has seen a decade of massive change.
The boom saw the arrival of a large number of international banks in Ireland, and the ease of availability of credit from both traditional pillar banks and the new arrivals resulted in huge growth within the industry.
However, this growth was to be short-lived, as the subsequent recession gave rise to the withdrawal of most foreign lenders and the severe tightening of credit availability from Irish banks. It was a time where few were in a position to borrow, or lend.
The resurgence of the Irish economy has once again put the commercial real estate industry to the forefront of a new economic cycle, as the industry assumes a key role in economic growth and development.
However, with Irish banks still constrained in their ability to lend, and with few foreign banks in the market, a new breed of funding providers have stepped up to meet the needs of the market – alternative lenders.
To understand more about the arrival of alternative lenders, it is worthwhile looking at the factors stimulating activity in the commercial real estate industry. These include a general improvement in the economy leading to increased demand for CRE financing, as businesses grow and expand after years of recession.
In addition, large scale NAMA loan sales are continuing, which is leading to borrowers having significant refinancing requirements as they seek to exit NAMA and/or their loan acquirers.
As things stand, traditional banks are still constrained in their lending activities, as they grapple with a number of factors including repairing balance sheets, government ownership, new capital requirements and restrictive internal lending policies. This current position is clearly at odds with growing borrower demand, and alternative lenders have entered the market to provide additional liquidity for borrowers.
One such lender, Origin Capital, was launched in April 2015, and provides senior debt commercial property finance in the Irish market for investment deals in excess of €3m. Since then, the company has credit approved over €200m of transactions, and completed €70m of lending, with further deals close to completion. Origin Capital recently announced a funding agreement with Morgan Stanley which will allow the company to provide funding for CRE projects across a wide variety of asset classes, and also to compete for significantly larger transactions.
With regard to the current trends in the market, CEO Ross Metcalfe highlights the high level of commercial real estate activity in 2016, a trend he expects to continue into 2017 and beyond: “2016 was definitely a very active year in the Irish commercial property market, both in terms of large ticket transactions, such as the sale of Blanchardstown and Liffey Valley shopping centres, and smaller value transactions”.
Metcalfe continues “With a lot of the big ticket sales having been completed, it is likely that a significant number of more granular deals will take place in 2017”.
“We believe this will occur as a result of loan book purchasers seeking to work through their portfolios and have relevant loans either refinanced or repaid. As such, we expect that borrowers will require financing towards the lower end of the value quantum, however we do also expect to see some bigger ticket transactions coming through, as in any typical year".
And what of today’s borrowers? How do they approach the lending process in this resurgent market? According to Metcalfe, cautious optimism is definitely the order of the day.
“Borrowers are more prudent in today’s market; they are more conscious of understanding the terms, conditions and responsibilities that are associated with taking on a new loan” says Metcalfe.
“That said, we’re finding that they are keen to capitalise on the opportunity to grow their business in a more favourable economic environment, so for us it’s about taking a personal approach to help borrowers become fully educated and comfortable with regard to their commitments, whilst supporting their business objectives".
Finally, what differentiates Origin Capital from other alternative lenders in the market place? According to Metcalfe, “While other alternative lenders in the market are limited by the transaction size they can fund and/or the overall fund size they have available for lending, Origin Capital is now the only alternative lender with an unlimited funding line, backed by the resources of Morgan Stanley. In addition, we offer competitive interest rates across a variety of transaction sizes and asset classes”.
To find out more about Origin Capital, visit www.origincapital.ie or call 01 662 9264.