Investment in Asia Pacific real estate debt is set to grow as asset owners seek alternatives to bank lending.

Historically, most property lending came from banks, however in the US and Europe, banks have gradually retreated from the sector, to be replaced by a range of non-bank lenders, such as private equity funds and insurance companies.

Non-bank lending now accounts for half of all US real estate debt and 40% in Europe. Here in Asia, the percentage is tiny, but is growing as private debt becomes more attractive to both lenders and borrowers.

Simon Smith, Head of Asia Pacific Research and Consultancy at Savills, says: “Debt investments in real estate offer potentially higher yields and downside protection. For borrowers, private debt offers more flexibility, such as higher loan to value (LTV) ratios.”

A number of global investors, including PAG, Oaktree and BentallGreenOak, as well as specialist firms, have been involved in the nascent private real estate debt market in this region and more are set to follow.

Meanwhile, institutional investors, especially those from South Korea, which have invested heavily in real estate debt outside Asia Pacific, are also expected to invest in debt funds here.

Last year, Savills’s sister company DRC Savills Investment Management hired Steve Willingham from HSBC to spearhead its debt capabilities in Asia Pacific. The firm recently highlighted the real estate debt opportunities in Australia, where large banks are reducing their exposure to real estate lending. Private credit is a bigger part of real estate lending than anywhere else in Asia Pacific and has grown over the past decade.

Debt Research Analyst Mohamed Ali says Australian banks are now mainly focused on refinancing and furthermore “recent increases in interest rates will typically restrict banks to LTVs below 50% as they move to protect their liquidity positions. This will result in a funding gap which must be filled by an equity injection or refinanced with higher LTVs.”

While Australia is seen as the best option for real estate debt investment, there may also be opportunities in South Korea or Mainland China. Providing construction loans, especially to asset owners planning sustainability upgrades or higher-yielding mezzanine finance could be successful strategies.

Not everywhere in the region offers the same potential for private real estate debt. Markets such as Japan, Singapore and Hong Kong have well-capitalised borrowers and banks which are supportive of the sector, for example.

Further reading:
Savills Hong Kong Research