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Mezz amid the mess

Credit, or the lack of credit, is on everyone’s minds. For some real estate investors it is presenting an ideal opportunity to provide financing where financing is badly needed.

To describe the task of securing debt financing in today’s market as something of a challenge is perhaps understating the problems many real estate investors are facing.

Since the virtual collapse of the global credit markets last September, lenders have clamped down sharply on their loan portfolios, with almost all organisations severely tightening their underwriting assumptions.

As a consequence the majority of investors face an uphill battle to secure, not even necessarily generous, terms.

And that situation is not expected to improve significantly in 2009, according to a survey of senior US real estate executives released this week.

The latest sentiment rating from the US lobby group, the Real Estate Roundtable, shows that fewer people now believe the credit markets will improve significantly over the next 12 months – with just 55 percent agreeing that debt availability will be “somewhat better” over the coming year than today, against 62 percent in October 2008.

Private equity real estate professionals with whom PERE has spoken with are also asking themselves whether 2010 will be much better.

The credit situation is sobering for one and all, and has seen deal flow slow to a trickle and valuations become almost impossible. However, for some firms it is also presenting an ideal investment opportunity.

As banks turn off the debt spigot, investors with dry powder have found numerous opportunities to be opportunistic, not least in the mezzanine space.

Prudential Real Estate Investors this week announced it was joining forces with Paramount Private Equity founders Andrew Radkiewicz and Andrew Macland to build a mezzanine operation in Europe. It follows on from announcements last year by several firms, including Evans Randall and TowerBrook Capital Partners/GI Partners, that the mezzanine space in Europe and the US was a target for private equity.

The increasing conservatism of banks is proving fertile ground for capital willing, and able, to fill the gaps in the capital stack (with fairly expensive money).

And those gaps will need filling for some time. According to one US private equity real estate acquisitions professional banks won’t fully return to the fray for several years, and even then they won’t come back to the same extent as was seen during the boom of 2005 to 2007. “The credit markets won’t come back to what they were,” he said.

For owners facing debt maturities over the coming 12, 24 even 36 months, therefore, private equity real estate firms wielding mezzanine capital could prove a key source of financing.