The search for new lenders in Asia-Pacific

Even though some markets in Asia-Pacific have been unaffected by rising interest rates, the region has not been immune from refinancing challenges.

“The refinancing pressure is definitely out there,” says Henry Chin, global head of investor thought leadership and head of research, Asia-Pacific at broker CBRE. “It is coming through. But every market in Asia-Pacific is very different.” 

CBRE estimates there is currently $177 billion of outstanding senior commercial real estate debt in Asia-Pacific, with a debt funding gap of $5.8 billion set to emerge in the region between 2023 and 2025. 

Meanwhile, “we expect to see ongoing price correction throughout the course of 2023,” Chin says. Indeed, market sources estimate the potential drop in asset values across the region could be as much as 20 percent.

The search for new lenders

Refinancing is a particular pain point in South Korea, where interest rates have risen sharply in the last year. The country’s central bank has increased the base rate – which currently stands at 3.5 percent – by a total of 300 basis points since August 2021. Under such circumstances, some real estate borrowers have had to seek new lenders.

For example, German asset manager DWS has historically borrowed from banks and insurance companies, which have the largest lending capacity and provide loans at the lowest cost under typical market conditions. But as those lenders have pulled back, the firm is looking at alternatives – including savings banks and other equity investors – to finance deals, according to Steven Kim, head of real estate asset management, APAC, at DWS. 

DWS is also looking at more creative options, such as plugging financing gaps with other lenders in a maturing syndicated loan. It can also consider a shareholder loan, where the firm secures a loan from existing equity investors in the asset instead of traditional lenders.

For example, DWS refinanced the senior loan of a logistics asset via a unitholder loan in the first quarter of 2023 at a mid-3 percent interest rate for five years. The loan was originated by a local insurance company. 

“If the asset is stabilized, the equity investor can get additional returns from its loan investment and the borrower is able to obtain lower-than-market interest rates from the refinancing,” Kim explains. 

Meanwhile, for IGIS-Neovalue Asset Management – the investment manager jointly owned by South Korea’s IGIS Asset Management and developer Neovalue – banks have now become the preferred lenders over insurers, according to co-chief executive officer Jun Ho Pok. 

“For the last few years, banks didn’t want to lend at a fixed rate,” says Pok. “They always wanted a floating rate, which we didn’t like in a low interest rate environment. But floating rate has become very attractive to us today because we are expecting the rate to come down,” says Pok. South Korea’s interest rate has remained at 3.50 percent since February, with some economists expecting a rate cut by year end. 

Pok adds that, for the refinancing of a Seoul office building, banks now offer five-year loans at a fixed rate in the early-to-mid 5 percent range for 30 months and at a floating rate for the remaining 30 months. By contrast, insurance companies are offering five-year loans at a fixed rate of 5 to 6 percent.

Changing financing terms

As the base rate of financing has increased, real estate borrowers are expecting future loan terms to be adjusted accordingly.

Greg Lapham, head of Australia at manager Savills Investment Management, expects the interest coverage ratio required by lenders will be reduced, given that, as of May, the cash rate in the country increased by 75 basis points over the past year.

Historically, commercial banks in Australia required a property income to interest expense ratio greater than 2x for most investment loans. But some banks had already lowered their ICR covenant thresholds to a 1.75x ratio and, more recently, a 1.50x ratio, according to a JLL report in February.

Although it is not facing imminent loan maturities, Savills IM is in active discussions with its lenders in advance of future refinancings. “As interest rates have gone up in excess of 4 percent, trying to satisfy a 2x ICR is pretty onerous,” Lapham explains. “Banks want their borrowers to be able to service the loan.” 

Apart from ICR, the loan-to-value ratio in Asia-Pacific is expected to drop marginally but remain relatively stable, according to Chin. The only markets that have seen a change in LTV ratios in the past 24 months are South Korea and Australia. The former has dropped from 60 percent to 55 percent while the latter has dropped from 55 percent to 50 percent. 

Asia-Pacific has its fair share of real estate borrowers facing maturing loans amid higher interest rates and falling property values. But stabilizing rates in most markets in Asia-Pacific, as well as traditionally more conservative LTVs, are expected to cushion the blow.