A new $500 million real estate development finance fund has been created in the latest of an increasing number of non-bank lenders looking to capitalise on the big bank’s continued retreat from the sector.
Melbourne businessman Joseph Gersh is behind this fully underwritten fund – to be known as the Gersh Finance Fund – which is planned to pursue first mortgage and structured debt financing in the residential, commercial, industrial and mixed-use real estate sectors. Gersh has stated that the fund will have a focus on residential subdivision projects as well as development finance and restructuring opportunities.
"We think it's a good time. Even at $500 million, we think the business is scalable," Mr Gersh told The Australian Financial Review.
"There would appear a window of opportunity that doesn't appear to be closing soon."
Mr Gersh notes that he’s not the first to notice the potential of the sector. “For prudential reasons, or availability-of-capital reasons, (the banks) were retreating from commercial property development lending," he said.
"So a secondary market developed and developed quite quickly and professionally among a number of houses, many of them in Melbourne.
"The other driver was as interest rates fell there was a hunger for yield.
"But the banking royal commission has had the unintended consequence of forcing the banks to become more conservative, or making them feel they needed to become more conservative.”
There are significant and far-reaching impacts from such decisions. Mr Gersh is aware that as conservatism enters development lending “there will be less stock and prices will go up.”
This is where secondary lenders have been able to find an entry point that has appeased the market; and the sector is growing.
Australia’s big banks, which currently occupy 85% of the $270 billion commercial development finance market, are predicted to slip to a 70% share over the next ten years.
"We're at the start of a structural change," Qualitas head Andrew Schwartz has stated.
"The gap in the market is currently around $30 billion and it's growing. I feel in a decade you may see the banks' participation rate – market share – at 70 per cent, which is still above the UK and the US."
The UK and US commercial real estate markets present a market share of 50-60% in favour of their big banks. While Australia may be tens of years away from a similar state, the big banks are reducing their lending despite growth in the commercial development sector. More ‘non-traditional’ development finance funds, like Mr Gersh’s, are expected to take their place.