Mezzanine pricing is increasingly competitive
The mezzanine real estate debt market in Europe is maturing, driven by increased lender competition and pricing stabilisation, which should generate greater activity in 2011 and beyond according to a new report by CB Richard Ellis.
At the height of the crisis, expecting a surge of distress, lenders sought opportunistic returns of 20%-25% for providing mezzanine financing on core assets in prime locations. At this time, over 100 potential participants expressed interest in the market. However, these types of opportunities never emerged and lenders had to either broaden their investment criteria, adjust their return expectations to better suit the product targeted, or exit the market. Some also chose to gain their exposure by investing indirectly into debt funds.
There are now 69 lenders active in Europe today. While CBRE identified 9 categories of lender, discretionary asset managers (private equity shops, specialist debt funds and other investment funds) account for just over half of all participants (51%). However, it is expected that the market will rationalise further as it evolves, reducing the pool of lenders to a smaller, but committed, core.
The growing maturity of the mezzanine debt market is also evident in a more highly segmented market. As well as providing additional finance on more stable assets, lenders are able to target ‘riskier’ assets (with appropriately priced debt). The market is slowly becoming more diversified with certain players willing to take and appropriately price different types of risk. Across the spectrum of lenders, average returns sought now stand at 15.9%.
Although mezzanine transactions are not widely publicised, CBRE estimates that, on average, loans originated over the last five quarters covered LTVs of up to 75%. There are signs that this level is increasing and the average maximum LTV lenders state that they are currently willing to provide financing for is 82.8%.
The UK and Germany, perceived as having the most liquid markets, are expected to remain the markets of interest to lenders, with France and the Netherlands following on in the league table. Virtually all (97%) of the lenders surveyed would finance UK based assets, although only nine are focussed exclusively on the UK.