Logistics & Industrial Capital Markets 2024 Outlook Report

What are the key trends within the debt market?

The Commercial Real Estate (CRE) debt market is experiencing largescale disruption from non banks entering the sector In a challenging global economy, paired with the local market facing rising funding costs and falling valuations driven by the central banks’ fight against inflation, a funding gap opportunity is increasingly clear in Australia between the traditional major banks and the ever-growing non bank sector. Following the well-established paths in the US and Europe, the expanding non-bank sector is driving both increased competition and diversification in the CRE lending market. This diversification is providing more choices for borrowers and creating competitive tension on both the cost of debt as well as lending appetite/terms. In addition to this, adding more long-term debt capital to the sector, such as insurance/pension funds and private equity (often via non-bank distribution channels), is helping improve capital availability across the cycle. Consequently, unlocking the most competitive debt (across both pricing and terms) has become increasingly challenging for many developers/asset owners, with the sourcing of non-traditional funding sources (often offshore) becoming increasingly complex and requiring specialist knowledge. In a fragmented and changing landscape, global capital advisors are becoming critical to access the right capital structure, including debt.

Private credit provides a natural interest rate hedge for investors with solid risk-adjusted returns in the current inflationary environment for those who can appropriately price for risk and avoid loss of capital A significant catalyst in fueling growth for the Australian non-bank sector has been the rapid rise in the cost of capital and the flight to variable-rate based debt returns (which have quickly adjusted) compared to equity returns (which it might be argued still have some adjustment to come). In many instances, current debt returns on a risk adjusted basis are comparatively more attractive for investors. However, this should be a transitory phenomenon as CRE equity returns begin to reflect this higher cost of capital. Another driver has been the increased lending conservatism of the large Australian banks, particularly in development/construction finance, driven by increased industry regulation. In many cases, private lenders are not subject to this increased conservatism, with the big banks’ exit, creating a vacuum for private debt to step into, pricing for this risk, and growing their market share.

37 | CUSHMAN & WAKEFIELD | LOGISTICS & INDUSTRIAL