Our ability to distribute commercial real estate debt has rarely been greater. This is being driven by a combination of a now well-established distribution infrastructure, an active underlying market and ongoing strong appetite from debt investors – particularly major institutions and overseas banks.
When I first took up my role heading the Lloyds Group’s commercial real estate business two years ago, I was convinced that commercial banks needed to make a transition from being big holders of risk offering up a single balance sheet product to nimble solution providers offering clients access to a diverse range of capital options.
At the time, in an interview with Estates Gazette, I likened the new commercial banking model to the role an investment bank typically plays and indeed we now find ourselves competing for transactions against some of the global names from that sector.
But the commercial banking version of a distribution-led model is more nuanced. When we distribute, we typically retain a significant portion of the debt to cornerstone the deal. This allows us to manage the lending group over time, maintaining a sensible dialogue with the client and giving confidence to debt investors that a well-embedded relationship bank remains involved.
We believe that the success of any one market participant is increasingly determined by the quality of the partnerships it builds and we see it as our responsibility to curate for our clients’ benefit a group of high-quality capital partners. And this cannot be done on a one-off or transactional basis; rather, it takes a careful, patient and conscientious effort and so the relationship ethos we bring on the borrower side is just as relevant when building investor partnerships.
However, in many cases, a bank balance sheet remains important for clients. This is particularly the case for development finance or other deals where frequent interaction with a lender is required or where there is a nuanced business model that may not be readily appreciated away from the relationship context. So it is important to have flexibility and to be open with clients on the pros and cons of each funding path.
While it is clear that other commercial banks are gravitating to a similar model to our own, we believe the trend has much further to run. Low returns on balance sheet lending are likely to drive banks to move to provide origination and structuring expertise while reducing capital commitments.
Ultimately, this should bring greater market stability as a more diverse investor base underpins the supply of commercial real estate debt and it should be good for borrowers who can access different forms of capital well-tailored to their needs.
Looking to the future, distribution will remain an integral part of our approach. It drives the strong return on capital our business generates, provides a broader range of solutions for clients and makes for better bank balance sheet management.
The commercial banks operating in commercial real estate are evolving – and for the better.
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John Feeney is managing director and global head of commercial real estate at Lloyds Bank
