54 mezzanine real estate lenders classify themselves as ‘active’ in Europe today, versus 69 at the end of H1 2011, according to a new report from CBRE.
The study, which examines the depth and breadth of Europe’s mezzanine lending market, outlines that this fall was anticipated, and that CBRE expects this rationalization of lenders to continue. 59% of all ‘active’ lenders are discretionary asset managers, with four new players entering the market in the last 12 months.
Decisions to retire from the market were largely driven by the inability of some lenders to achieve return rates thought possible 12 months ago. For example, all five family offices active in H1 2011 have exited mezzanine lending, returning to the direct market where opportunities are thought to be easier to source. In the 2011 survey, their average reported return requirement as a group was 19%, the highest of any surveyed.
The contraction in ‘active’ lenders has however not led to a reduction in mezzanine lending levels. In the year to H1 2012, 9 lenders announced 9 commercial property and 9 residential development transactions, representing over €500 million of real estate debt. 2010 and Q1 2011 saw a total of six transactions representing €450 million of real estate debt.
In addition, commitments to mezzanine lending programmes by core, experienced lenders continue to grow, with 6 mezzanine lenders currently raising equity for follow-on debt funds, covering a range of risk profiles. CBRE is also aware of a total of 15 asset managers that are marketing debut debt funds across the region, covering a range of strategies.
Natale Giostra, Head of EMEA & UK Debt Advisory, CBRE, said:
“The overall reduction in liquidity in the European debt markets is impacting on the volume of mezzanine transactions. However, it is encouraging to see growth in mezzanine lending levels as well as the continued rationalisation of the market towards a core of committed lenders. As many mezzanine transactions remain confidential, we expect true activity levels to be substantially higher.
“In addition, we have seen increased interest from the market in raising new equity for strategies including core senior, low and high yield debt. We therefore expect future fund raisings to incorporate a range of debt strategies with flexibility in markets and assets, rather than a single track strategy, which should see a growth in lending capacity and activity over the next year.”
Since H1 2011, mezzanine pricing has slightly contracted, with the average reported IRR reducing to 15.6% (H1 2011: 15.9%), albeit corporate and investment banks and sovereign wealth funds seek returns at the lower end of the spectrum averaging at around 12%. However, loan terms vary greatly from deal to deal. While terms are rarely publicised, CBRE has calculated that the average LTV of deals in the past year to be 77% and average returns in the low to mid-teens. This is due to the fact that fewer deal opportunities have lead to increased competition between lenders particularly for prime assets, which reflects the lower risk profile of the asset and also sponsor strength.
Natale Giostra added:
“The greatest challenge facing the growth of the mezzanine lending market today lies in establishing more realistic pricing mechanisms, as disparity of pricing expectation between lenders and borrowers remains an issue. The scarcity of senior debt will also continue to limit the amount of capital deployed in the short to medium term. To enable them to execute strategies and achieve IRR’s some lenders are now offering short term, that is 1-3 year, stretched senior or whole loan facilities. This bridges the gap left by senior lenders and allows them to capitalise in the high single digit returns.”