The long and the short of Asia private debt


Market dislocation means lenders to Asia-Pacific real estate can hit equity returns, says Gaw Capital’s Kenneth Gaw and Foster Lee, but private credit will remain a valid strategy once the dust settles.

Market dislocation and banks becoming more reluctant to lend to the real estate sector is opening up new opportunities for private lenders. Gaw Capital’s seventh Gateway Fund, which has raised equity of $3 billion, is pivoting towards a private debt strategy, to take advantage of the current state of the market.

However, the Hong Kong-based manager also believes there is a long-term opportunity in private debt in the Asia-Pacific region. Kenneth Gaw, president and managing principal, and Foster Lee, senior director, private credit investments, talk about the drivers of the strategy and the opportunities in real estate lending in Asia-Pacific.


Q. What is the situation now in Asia-Pacific real estate markets and how does that support a private debt strategy?

Kenneth Gaw: As widely known, interest rates have risen significantly and at a faster pace than anticipated. This flipped a lot of Asia-Pacific markets into negative carry territory, where cashflow is lower than borrowing costs. Furthermore, cap rates have not kept pace with rising interest rates.

There are exceptions, such as Japan, where interest rates have not increased, and China, where interest rates have started to come down. There are also certain sectors and niches where positive carry still exists.

This has led to traditional buy/sell markets becoming stagnant. However, asset owners require liquidity for refinancing or other purposes, and banks are not highly liquid. As a result, private credit has emerged as a vital source of liquidity for asset owners who prefer not to sell. There is a demand for mezzanine loans and senior credit from non-bank lenders.


Q. What sort of borrowers are looking to tap the private credit market for financing?

Foster Lee: The private credit market attracts a diverse range of asset owners, including mainland China developers, family offices, high-net-worth individuals, private equity firms and property companies. We also observe deals across the entire spectrum of real estate sectors, encompassing residential, office, industrial, hospitality, logistics warehouses and more.

In terms of transaction types, we have encountered mezzanine, senior debt, stretched senior, as well as construction finance opportunities. There are opportunities to lend on bare land, assets which have been completed but not yet stabilized and stabilized assets – the full range of opportunities. We can lend against bare land, completed but not yet stabilized assets, and stabilized assets – covering the full spectrum of opportunities.

Last year, we reviewed over 100 potential transactions, and the number of deals reaching my inbox has significantly increased compared to 2023. However, I must note that the overall quality of opportunities has decreased, necessitating more rigorous screening processes.


Q. What types of transaction offer the best opportunities for private lenders?

FL: We are highly flexible and accept any risk below equity, depending on the credit matrix and financing structure.

We focus on lender-friendly jurisdictions with a proven enforcement system. As an equity investor, we have our own asset management team and are not afraid of managing the asset ourselves if necessary.


KG: Currently, we favor lending to Hong Kong and mainland China. For China, the structure must allow for easy offshore enforcement, most likely in Hong Kong. Korea is another jurisdiction we like, with a proven enforcement mechanism and suitable deals and returns.

Australia is another proven market for private credit, offering suitable returns. Singapore and Japan have a suitable enforcement environment but lack the same degree of distressed opportunities.

Hong Kong, in particular, has been interesting because even senior credit can generate equity-like returns due to market dislocation.

Certain types of borrowers, even those with clean, debt-free assets, are unable to obtain bank loans due to their credit rating and banks’ stretched real estate portfolios. This has created opportunities for mid-teens returns on senior loans.

In Korea and Australia, we are also seeing equity-like returns, but typically involving construction risk. For instance, we have provided construction loans for industrial and logistics assets in Korea.

Liquidity is low, providing an opportunity for good returns when transitioning from construction loans to term loans. In Australia, we have focused on residential transactions with pre-sales but are still under construction.


Q. What are the typical loan terms and returns available? Are you prepared to loan to own’?

FL: We prefer loans with terms of up to two years. Returns depend on location, asset quality, stabilization status and also loan type. In Sydney, stabilized liquid assets can yield at least 11 percent, while mezzanine loans range from 15 percent to 18 percent. Returns in Korea tend to be slightly higher.


KG: Coming from a private equity background, our preferred outcome is loan repayment, moving on from the loan. Nevertheless, we consider scenarios where we may end up owning the asset in the event of a default. It is important to assess the liquidity and necessary work involved in managing the asset.


Q. Typically, in the broader private credit market in Asia, personal guarantees are more common than elsewhere, is this the same for real estate?

KG: Yes, especially in Hong Kong and China, personal guarantees are standard. Certain types of borrowers are unable to access traditional bank financing, creating a market dislocation. It is customary for private credit lenders to request personal guarantees, and borrowers are willing to provide them.


Q. How long do you expect the window of opportunity in Asia-Pacific real estate private debt to remain open?

KG: Currently, we are lending from our equity fund, using our balance sheet for deals that aren’t suitable for the fund, and placing them with family offices. We are also exploring the possibility of a dedicated private credit vehicle.

There are two strategies here: the current opportunity for equity investors to enter private credit and achieve equity-like returns due to market dislocation and shorter loan terms, allowing for capital recycling. These returns resulting from market dislocation won’t last forever and we anticipate another 12 months of runway.

There is also an opportunity to build a longer-term dedicated real estate private credit business. Once private credit becomes entrenched in the real estate market, it will be a permanent feature as it is in the US and Europe. However, returns will change with the market cycle.


FL: Commercial banks are tightening their lending policies, which will favor private credit in the longer term. The regulatory environment is becoming tighter and that will continue.


Q. What is driving that bank tightening on real estate lending?

KG: Regulators aim to prevent one sector, such as real estate, from creating systemic risk. Since the global financial crisis, top banks in Australia have become more stringent in lending to the real estate sector due to regulations from the Reserve Bank of Australia. This has led to the emergence of private credit companies in Australia. We are seeing similar trends in other parts of Asia, including Hong Kong.


Q. Are real estate equity investors broadly warming to this Asia-Pacific debt opportunity?

KG: They see it as a good opportunity for the equity fund while waiting for interest rates to fall or for cap rates to reflect interest rates. Our investors, large institutional real estate investors, are comfortable investing in both equity and debt. We believe this strategy offers the best risk/reward profile in the current market.

Of course, if interest rates decrease rapidly, this particular strategy may change. However, we still see a long-term opportunity in private real estate debt in the Asia-Pacific region.