Home / Alternatives / Post-zero rate lending market opens the path for non-bank lenders

Despite facing rising interest rates, a higher cost of capital and concerns about their borrowing base, non-bank lenders have made their place in the Australian economy in moments like this, when funding is needed and otherwise hard to get, says Thinktank's Jonathan Street.

The extended period of low interest rates leading up to 2023 and the banks’ collective decision to focus more on prime home loan borrowers has set the rise of non-bank lenders into motion in recent years. Rising rates are now testing the entire sector in entirely new ways, squeezing all residential-focused lenders.

For specialist commercial property lender Thinktank, however, there’s still plenty of room to lend.

As higher interest rates translate to declining demand for personal credit, competition remains high from the banks, which benefit from deposit-based funding, as non-bank lenders have been encountering higher costs of capital in global wholesale markets, while analysts are closely watching rising mortgage arrears.

Thinktank – which has focussed primarily on commercial lending to the self-employed and small and medium-sized enterprises (SMEs) since its 2006 inception, although it has since expanded into residential mortgages – has seen only a slight increase in arrears. Co-founder and CEO Jonathan Street attributes this performance to its “sound, conservative” underwriting policies resulting in high-quality credit.

“The past year has been challenging due to inflation, rising interest rates, and a changing economic environment, impacting consumer sentiment and the business sector,” Street tells The Inside Adviser. “However, despite these adverse influences, we have continued to see solid property lending activity.”

While the non-bank lenders account for less than 5 per cent share of outstanding credit in Australia, the sector has been growing rapidly since 2015, according to Reserve Bank of Australia data. Growth has largely been driven by mortgage lending, although more lenders of scale have been moving into financing vehicles, lending to self-managed superannuation funds (SMSFs), and for residential and commercial construction.

“Non-bank lenders tend to be more agile in response to market needs and focus in on borrowers and market segments that seek alternative lending solutions and borrower-specific product offerings,” Street says. “More Australian individuals and firms fit this borrower profile than many might think.”

One result of the slew of rate changes is increased demand from both residential and commercial borrowers seeking equity release and refinance, as clients work with licensed finance brokers to optimise their cash-flow position via property-backed opportunities, he says.

“We have also been experiencing sustained demand in SMSF lending by self-employed borrowers who are seeking to acquire commercial properties for occupation by their own businesses, as well as refinancing out of institutions that no longer offer this product type.”

‘Strong validation’

Despite markets undergoing trial by fire as many borrowers encounter higher interest rates for the first time, Street says Thinktank’s longstanding focus on quality and strong funding relationships has helped it continue to resonate with wholesale and institutional investors while some other lenders are feeling the crunch of bank competition.

“Investors maintained a cautious outlook throughout 2022 and yet still invested in quality programs,” he says. “While a level of uncertainty and volatility has continued in 2023, exacerbated by the challenges experienced by a number of European and US banks, institutional investor support has remained positive, and their desire to invest in Australian loan assets has offered a strong validation of the quality of lending demonstrated by non-bank lenders in the Australian market over a long period of time.”

The vast majority of Thinktank loans are at variable rates, giving investors exposure to the increasing interest rates and yield, which had been harder to come by before May 2022 when near-zero official interest rates prevailed. “Care must be exercised, however, as one consequence of an increase in yield can be higher risk in the underlying credit quality; this is a crucial aspect of the risk-versus-reward analysis an investor must undertake,” Street says.

A rigorous credit underwriting process has helped keep the number of Thinktank’s loans in arrears minimal, as do its longer loan terms of up to 30 years. With arrears levels remaining below historical averages and “at the lower end of what we consider an acceptable band in terms of responsible portfolio management”, he says.

And its portfolio of more than $5 billon is secured by established, income-producing properties in major metropolitan areas that are subject to strict asset acceptance criteria, and low loan-to-value ratios to mitigate potential losses when recovery action becomes necessary.

Private credit investors need to be aware of illiquidity risk, for which they should receive a premium, Street said. Thinktank’s investment products are open to high-net-wealth/sophisticated investors.

“Provided they are comfortable with the experience and track record of the manager, the minimum investment term and any applicable early redemption fees, there are attractive risk-weighted returns on offer across a broad spectrum of private credit products and funds.”

*This story was first published in The Inside Investor.