With aggressive regulatory measures prompting U.S. banks to backtrack on
loans for commercial real estate projects, development planners—especially
those specializing in condominium projects—are turning to foreign
sources to find ideal financing terms compared to their domestic options.
Following Basel III—a global, voluntary regulatory framework on bank
capital adequacy, stress testing and market liquidity risk—U.S.
banks have been reluctant to approve construction lending based on the
concern that doing so may activate a requirement to retain increased capital
on their ledgers. These domestic banks, however, are anticipating Trump’s
potential rollback of some onerous regulations for the industry, which
would likely result in a subsequent revitalization of their lending activity.
Still, the persistent lag in U.S. loan availability has led a significant
number of real estate developers to seek funding from abroad. Foreign
firms have responded accordingly by ramping up their U.S.-based lending
activity after recognizing the lucrative opportunity to fill this finance gap.
Legal experts note that because U.S. banks that extend loans to real estate
development typically factor in the added expense of maintaining more
capital on their books, developers may save several percentage points
in loan interest by opting for a foreign financier instead. This scenario
is particularly true for the split between the initial mortgage and the
given developer’s equity—the piece that’s usually the
most expensive to acquire.
Both Chinese-based pre-existing funds and the country’s major banking
institutions including Bank of China and Industrial and Commercial Bank
of China have significantly escalated their U.S. real estate lending activity.
Whereas construction loans from a U.S. bank typically costs developers
anywhere from ten to fifteen percent, comparable plans can be obtained
abroad for as little as six to ten percent. The Chinese government, however,
has levied currency transfer restrictions in an attempt to prevent its
investors from diverting their capital to the U.S. real estate market.
The reluctance of U.S. banks to extend construction loans stems from regulations
under both the domestic Dodd-Frank Act and the international Basel III
requirements. As a result, the majority of U.S. banks consider condo construction
loans to be highly volatile per Basel III, which mandates that lending
institutions must have an excess of 50 percent of capital on the books
for any High Volatility Commercial Real Estate (HVCRE) loans.
There is a certain amount of uncertainty within the industry as to what
triggers the HVCRE requirements, which has led U.S. banks to avoid approving
loans destined for condo development plans. New hospitality construction
projects are similarly experiencing difficulty in obtaining U.S. banking
loans and have also turned to foreign firms willing to fund those much-needed projects.
Although Chinese companies have been particularly active, financial institutions
from various other countries have ramped up their U.S. real estate portfolio
as well, including major German financial players like Allianz and Deutsche
Bank, who find the existing lending gap in the U.S. a viable alternative
to the hyper-competitive German market. Additionally, European bankers,
most notably Societe Generale, Deutsche, and Natixis, have been funneling
capital into the commercial mortgage-backed securities (CMBS) lending
marketplace—a significant number of which will be due in 2017.
Regardless of the increased foreign participation, the looming question
is how much the U.S. banking industry will be deregulated under the Trump
administration and what potential effect it will have on both domestic
and overseas lenders. If there is deregulation, the momentum may shift
to remove the current incentive for foreign banks to fund U.S. real estate projects.
For more information contact
Kevin Kim directly.