What the pivot to debt investment means for borrowers

New lending sources are emerging in Asia Pacific’s relatively nascent private debt market

April 20, 2023

Borrowers are finding a larger pool of lending sources in Asia Pacific (APAC) as new alternative lenders enter the fray in the region’s debt market.

But finding the right lender appropriate for the type of transaction can be tricky for borrowers, according to Paul Brindley, Head of Debt Advisory, APAC, JLL.

“There’s an influx of alternative lenders who were not active a year ago but are now prepared to make loans on construction, project financing and more,” he says.

This emergence of new lenders comes amid a strong pivot to debt by investors who are after better yields compared to the less favourable risk-return profile of equity investments.

“The yields on debt can exceed where core returns were,” says Brindley.

At least three in five investors surveyed by JLL are prioritising debt as their top strategy focus in 2023, up from one in five last year.

“Investors new to debt tend to prefer deploying capital in established real estate markets that have sound legal frameworks and a clear enforceability process,” says Rachel Heng, Director, Debt Advisory, APAC, JLL.

Among the top locations preferred by new private debt investors are Australia, Hong Kong, Singapore, and Japan, Heng adds.


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Navigating challenges

Globally, Europe and the U.S. still account for the lion’s share of debt activity, but APAC is playing catch-up, albeit not without challenges.

“Unlike in the U.S. or Europe, the regulatory environment in APAC markets is comparatively more diverse,” says Heng.

In South Korea, for instance, onshore borrowers obtaining offshore funding in excess of US$30 million equivalent must obtain approval from the Ministry of Economy and Finance.

“Each country’s debt market within APAC is governed by its own set of restrictions and approvals, which require greater effort to navigate and affect the ability to scale up as quickly as in other regions,” says Heng. 

Regulatory friction could impact pricing, deterring borrowers and even stifling growth in Asia Pacific debt markets, says Brindley.

“In markets where regulations are stringent, the inefficiency inevitably makes capital more expensive because of the need to navigate added layers of complexity,” says Brindley. “Borrowers will need our market expertise and our knowledge of lenders to structure deals creatively.”

This will be key during periods of uncertainty, particularly in countries hit harder by the volatile global financial markets, Brindley adds.

Take the liquidity crunch in South Korea last year. Policymakers were forced to intervene with a flurry of stopgap measures, including a corporate bond-buying programme, to mitigate the impact of the loss of liquidity which caused the cost of debt to soar in Asia’s fourth-largest economy.

With further rate hikes looming in 2023, borrowing costs may continue to edge up before they go down.

"This gives alternative lenders an opportunity to fill the gap in financing as banks focus on keeping their leverage ratios manageable given interest coverage considerations, amongst others,” Heng says.

Contact Paul Brindley

Head of Debt Advisory, Asia Pacific, JLL

Debt Advisory

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