Real estate lenders across Canada are reacting to the unprecedented challenges presented by COVID-19. Monetary policy and quantitative easing should have theoretically pushed the cost of capital to historical lows, however it has become clear that cheap capital does not equate to accessible capital. Uncertainty in the market has given rise to less liquidity and an increase in the cost of capital for many institutional lenders, despite the efforts of the government and central bank. Institutional lenders have accordingly increased their spreads by 50 – 200 basis points across the board, often offsetting the Bank of Canada’s overnight rate reduction. The domestic banks and credit unions have been doing what they can to work with borrowers, including by honouring commitment letters and in some cases LOIs that have already been issued.
"Cheap capital does not equate to accessible capital"
Meanwhile, lenders are being consumed with relief requests from their existing clients. Most lenders are working with qualified clients by allowing them to defer principal payments for 3-6 months. For those clients that have been most significantly affected, such as those in the hospitality sector (current occupancy rates are <10%), many lenders have been allowing both principal and interest deferrals. Processing these relief requests has affected lenders’ ability to underwrite new deals in a timely manner, and in some cases their capacity to take on new business altogether.
As institutional lenders are becoming increasingly selective, many owners and developers are looking to mezzanine/private lenders to satisfy their capital requirements. These lenders are still actively looking at new deals, specifically those funds that have return thresholds they need to satisfy for investors that therefore cannot afford to not deploy capital. However, even these lenders are proceeding with caution. Leverage ratios have been scaled back, especially on asset classes with exit opportunities that are most subject to future market conditions (i.e. development land). Most of these groups are further restricting their lending geographically and across asset class. Hospitality and Retail are sectors that many lenders are avoiding altogether, while there is still a strong appetite for Industrial and Multi-Family. Overall, a much greater emphasis is being placed on deal fundamentals; namely borrower experience, strength of covenant, asset class, and location.
To those real estate owners and developers who are looking for financing, there is still capital out there. Prospective borrowers are turning to mortgage brokers to obtain capital and keep their costs of capital down through creative capital structuring and leveraging well-established lender relationships. For example, there are currently opportunities among foreign lenders who have committed capital to Canadian real estate and are still looking to push deals out; Canadian real estate is still looked favourably upon by foreign investors due to the relative political stability. Constant communication with lenders is imperative at this time, as the debt capital markets landscape is changing by the day. Avina Capital hopes to be a reliable source of information in the current atmosphere of uncertainty.
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