Euro mezz lending returns compress to 15.9%

According to the first piece of dedicated research by CB Richard Ellis, an increasingly competitive mezzanine finance sector in Europe has seen lenders reduce their return expectations considerably since the advent of the credit crunch.

Lenders of mezzanine real estate finance have reduced their average return expectations to 15.9 percent, according to the latest research by global property services firm Richard Ellis.

In its latest research published today, the advisory titan said at the height of the global financial crisis lenders of mezzanine finance – typically loans that bridge the gap between the senior debt and equity capital of an investment – were seeking returns of between 20 percent and 25 percent.

However, with increased competition CBRE said the European mezzanine finance market was maturing, leading to pricing stabilisation brought by a ‘greater convergence between lender and borrower expectations’. As a result, the firm forecasted greater activity in the space in 2011 ‘and beyond’.

The firm said: “At the height of the crisis, expecting a surge of distress, lenders sought opportunistic returns of 20 percent to 25 percent 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.” CBRE said there are now 69 lenders of mezzanine finance in Europe currently.

In recent months, PERE has reported on the plans to lend this kind of finance of firms including Blackstone, LaSalle Investment Management and Duet Private Equity. Earlier this month, Pramercia, the real estate arm of Prudential Finance, raised $804 million for Europe’s largest dedicated mezzanine debt fund to date, Pramerica Real Estate Capital 1.

CBRE included private equity sources as one of nine categories of lender of mezzanine debt but added that, as the market continues to mature, the number of lenders will reduce to a ‘smaller, but committed core’.

The firm added: “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%.”

Typical mezzanine loans originated over the last five quarters covered loan to values of up to 75 percent, CBRE said, but it added that the level was increasing and that the average maximum loan to value lenders are saying they would provide financing to is now 82.8 percent.

The main countries of interest for European mezzanine financiers are the UK and Germany, the firm said.