Boodle Hatfield Property Insights, Dec 2023 - Flipbook - Page 5
Boodle Hat昀椀eld
Property Insights
How developers can reap the rewards
Private debt has increased the availability of tailored
昀椀nancing options. Unlike traditional banks, private
debt funds often specialise in speci昀椀c property types
or niches, enabling developers to secure loans that
are closely aligned with the unique attributes of
their projects without the multiple rounds of credit
committees. This is what gives private debt the edge;
bespoke 昀椀nancing combined with swift execution.
Furthermore, private debt has proven particularly
bene昀椀cial for smaller developers and property investors.
These stakeholders often face challenges accessing
funding through traditional avenues due to their size or
limited credit history. Private debt’s 昀氀exibility and less
rigid underwriting criteria provide them with a lifeline to
昀椀nance projects that might otherwise have remained
unrealised.
Borrower due diligence
Although whether borrowing from a bank or private lender
might appear to give rise to the same considerations,
there are certain idiosyncrasies speci昀椀c to private
lenders which could have disastrous consequences for
a borrower. The two most important are:
•
The ability to fund. There are typically very few
concerns about whether a bank is able to fund future
drawdowns; they are typically well capitalised.
Private lenders will rarely have equivalent balance
sheets but will they be likely to continue to fund
loans? Have they used a special purpose vehicle for
a loan which has very little assets? Inability to fund
could lead to borrowers having to re昀椀nance the debt
in full which is expensive and time consuming.
•
Managing a default. Particularly after the bad
publicity achieved by RBS’ GRG team following the
global 昀椀nancial crisis, banks tend to be reluctant
to enforce. Private lenders don’t have the same
regulatory considerations and could therefore be
more aggressive when the going gets tough.
So how can a borrower mitigate these risks? Due
diligence is key; picking private lenders that are wellcapitalised or have access to signi昀椀cant capital. Many
will also work harder than banks to ensure they are
repaid in full without resorting to enforcement if nothing
else to ensure that their loan is protected. Checking their
track record is vital.
Challenges on the horizon
The lack of standardised reporting and transparency
in the private debt market also poses risks. Investors
may struggle to accurately assess the risk associated
with various loans, potentially leading to misinformed
investment decisions. Ensuring adequate disclosure
and reporting mechanisms are in place will be pivotal in
maintaining market integrity.
There is also an increase in the leverage offered by
private debt. Some private funders are requiring very
little equity to be injected by the borrower and whilst
this enables a wider variety of borrowers to access
projects, it also comes with risks. Having little skin in
the game means when the going gets tough a borrower
might not be willing to invest the time to resolve issues,
as they stand to gain very little, if anything, if a solution
is achieved. It’s critical for private lenders and their
investors to understand these risks and balance them
with the rewards available.
As private debt gains prominence in the UK’s real estate
sector, regulatory oversight has become a priority. As
things stand, lending against commercial real estate
is entirely unregulated. Although borrowers in this
space are typically very sophisticated, striking the right
balance between fostering innovation and protecting
stakeholders is paramount. Regulatory bodies are
increasingly focused on creating a framework that
ensures responsible lending practices, risk mitigation,
and adequate investor protection.
Can private debt and bank debt co-exist?
It’s not all bad news for banks and other traditional
lenders. Investors in private lenders are typically less
interested in the low leverage-low return tranche of a
piece of debt – a space banks are very happy to operate
in. This is presenting both banks and private lenders an
opportunity to co-exist.
Those banks who are ahead of the game are partnering
up with private lenders and offering them leverage. The
bank takes the low loan to value tranche leaving the
private fund to take the riskier 昀椀rst loss tranche. Given the
low risk pro昀椀le for the bank, they are getting increasingly
comfortable with allowing the private debt provider to
originate transactions and manage the relationship
with the borrower. This is potentially a win-win for all
parties. The borrower only deals with one counterparty
but with more leverage than it could get from a bank,
