Ashley explained:
"Back in the heady days of the mid-2000s property prices rose inexorably and tenants were in plentiful supply. Against this buoyant background, lenders were happy to make finance available, particularly when they had security over the property assets.
"Half a decade later, we are in a situation where most banks are either unwilling or unable to lend and successfully placed securitisations are newsworthy. As a result, many of those looking for CRE finance have been, or will be, left wanting."
While some commentators have signalled that the void left by bank lending drying up would be filled by a new type of lender, Ashley explained the significant barriers to entering this market.
Ashley said:
"Lending volumes are now back to where they were more than ten years ago despite the fact that the risk and reward balance is heavily skewed towards lenders.
"It is therefore unsurprising that there has been significant discussion about a new breed of lender emerging to fill the void left by banks.
"Unfortunately we do not believe new sources of finance will suddenly become available as the combination of expertise, experience and governance required to conduct this type of activity is not easily replicated."
Ashley argued that while insurers are natural providers of CRE finance, they are also increasingly outsourcing asset management work, even if it is just to an investment manager within the same group.
While these managers are generally experienced in transacting and administering actively managed assets that are traded, they are generally not set up to conduct banking type activity with all that it entails, including direct negotiation with a heavy emphasis on documentation, manual settlement, customised servicing and loan by loan valuation.
There is also an added governance burden for the insurer who needs the ability to both negotiate an appropriate mandate with its investment manager (there is no industry standard) and then govern the relationship afterwards.
Ashley concluded:
"While L&G has recently entered this market, our judgement is that most insurers will not be large enough to be able to support this activity, and asset managers will see this as a time consuming and potentially risky distraction from their established lines of business.
"As a result, we do not see the void in lending availability left by banks being filled anytime soon.
"Ultimately that means borrowers will have to adjust to a dramatically different lending environment, where finance availability is far lower and, consequently, the cost of CRE loans much higher than that which existed before the financial crisis."
