While mezzanine lending will play an increasingly prominent role in the refinancing of the 960 billion of outstanding European real estate debt, it is unlikely to present an immediate solution to the sector's need for new acquisition or development financing, according to the latest report from CB Richard Ellis (CBRE) Real Estate Finance.
The report highlights that enormous opportunities have emerged for new lenders to enter the mezzanine space and bridge the gap between real estate investors' borrowing requirements and the reduced levels of capital now available from traditional lenders, such as banks. However these much talked about players are still new to the market and with a surplus of opportunities in front of them they will have their pick of investments.
Natale Giostra, Head of UK and EMEA Debt Advisory at CBRE Real Estate Finance, explains: "Mezzanine lending will undoubtedly become a key source of funding for real estate as the industry's hunger for debt and regulatory changes such as Basel III make it more attractive for companies to expand their role in this area. However these lenders, and the drivers that brought them to this market, are still new and we cannot expect them to immediately provide the solution to the funding gap issue.
"For the time being, we expect to see mezzanine lenders continuing to focus on the plethora of available refinancing opportunities typically on assets with existing debt on good quality properties with high loan to value ratios - which provide them with the returns and risk exposure they traditionally seek. As attitudes change and competition in the market increases we should see them branch out into acquisition financing and eventually development financing.
The volume of opportunities available in the refinancing space, where returns are very attractive due to the fact that senior lenders are no longer prepared to lend at high loan to value levels, has so far limited interest in other areas. For acquisitions, mezzanine lenders may look to secondary properties to generate the returns they require and, as Natale Giostra adds, "Lenders are more likely to enter this market when competition increases between mezzanine providers and either prime product becomes increasingly scarce for property buyers or risk appetite increases."
As a consequence of the changes outlined in the report real estate transactions will, in the future, be supported by more complex financing structures. Natale Giostra added: "With the number and type of lenders in the market expected to increase, we see financing becoming even more complex with transactions potentially involving several sources of debt, including mezzanine lending. Each lender involved may have different investment criteria, risk measurement and funding models, all of which will make negotiation terms difficult and companies will have to learn to navigate these successfully."
Source: CB Richard Ellis