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APREA: “Void” in Asian property financing

Between the senior lending of banks and the mezzanine loans of private equity, property investors in Asia have few options for leverage, according to panelists at the APREA Property Leaders Forum.

Borrowers in Asia are having to resort to high-cost debt to finance their real estate investments as it becomes increasingly difficult to access senior debt, delegates heard at the APREA Property Leaders Forum in Hong Kong.

Standard Chartered director Marc Bosnyak said on a panel at the event that in the absence of debt types which carry costs somewhere between those associated with senior loans and those associated with mezzanine finance, borrowers unable to secure the former increasingly are resorting to the latter.

“So in our markets borrowers basically jump from senior lending with mid-single digits interest up to the mezzanine lending looking for mid-teen returns,” Bosnyak said. “There’s a large void there.”

After a period of inactivity, in recent months many Asian banks have embraced property lending again, the panel discussed. Nonetheless, many have gravitated to lower-risk lending in order to meet regulatory requirements, according to Bill Doramus, Credit Agricole Corporate and Investment Bank’s vice president for real estate.

Before the start of the global financial crisis, Doramus said banks had been participating at all levels of property lending, from senior to mezzanine finance lending. He did not predict such a lending environment would return anytime soon.

Head of Asia for Prudential Real Estate Investors, Morgan Laughlin, agreed that even banks in the increasingly liquid markets like Japan have kept fairly low on the risk curve, sometimes to the detriment of their returns.

Hence, all non-senior lending has been shifting into the hands of non-bank lenders like private equity real estate firms, which typically require higher returns and thus charge higher interest.

Gregory Wells, managing director for Forum Partners Asia, said that his firm mostly services mid-sized developers that cannot qualify for senior loans. He said his firm’s primary competition is other private equity real estate firms that make pure equity investments.

Even when investors have approached Asian banks with loan structures not quite as risky as those associated with mezzanine finance, many have remained cautious because they are unfamiliar with such higher costing and more demanding debt. Doramus recalls that he was once in negotiation with an Asian bank for three months regarding a senior mezzanine deal, but ultimately the bank backed out because they could not get comfortable with the structure.

“I think a whole lot of deals would get done if there were investors that were looking for that risk-return profile, and I think the senior lenders could get comfortable in that space,”. Wells suggested, however, that few private investors are looking for such returns from financing real estate investments in Asia at this point.