Property services firm Cushman & Wakefield has raised the prospect of mezzanine funds facing difficulty in deploying capital this year due to the lack of availability of senior loans to finance property borrowers.
In its European Real Estate Lending Survey – released to coincide with the first day of the MIPIM property show in Cannes, France – Michael Lindsay, head of corporate finance for the EMEA region, said: “The findings of our lender survey show the severity of bank withdrawal from the European commercial real estate debt market over the past year. Looking ahead, the bright star is the increased lending activity and intentions of non-bank financial institutions and the potential arrival of senior debt funds, which will provide some welcome new sources of liquidity. However, with senior debt availability [currently] in tight supply, mezzanine funds may face challenges in deploying capital in 2012.”
For the survey, 78 leading real estate finance providers were interviewed to assess the level of appetite for lending and to identify the trends that will shape the European finance market in 2012. Of the 78 lenders interviewed, only 36 said they would be willing to lend to ‘new customers’ with whom they have had no previous relationship, while a further nine would lend to existing customers only. The total represented a 33 percent drop in active lenders since last year’s Cushman & Wakefield survey. Of the 36 lenders willing to lend to new customers, a significant majority had highly restrictive criteria, with some only willing to lend in central London for example.
The report, however, pointed to the arrival of senior debt funds in the European real estate market as one bright spot. Still, while alternative finance providers will become more established and active, they are not expected to adequately fill the debt funding gap, at least in 2012, Cushman & Wakefield noted. “The emergence of alternative finance providers such as non-bank financial institutions and specialist managed debt funds is slow but improving, as real estate debt investment opportunities in Europe lure investors from across the globe.”
Indeed, this year is expected to see some newly launched funds targeting senior debt only and senior plus stretch senior debt, which will consider both newly originated debt as well as the acquisition of performing and sub-performing loans.
Insurers also have become keener on the debt sector, given the attractive pricing in historic terms and the potentially advantageous capital treatment under Solvency II. Insurers typically are seeking lower-risk debt positions and are willing to underwrite loans or buy debt through the secondary and syndication markets. Pension funds also are becoming increasingly interested in the property debt market, attracted by its higher relative returns when compared with traditional fixed-income investment opportunities.
Providing more detail of its findings, Cushman & Wakefield said only five lenders it contacted were willing to underwrite more than €100 million. In total, it recorded 32 senior debt lenders active in the European market, mostly targeting loan sizes between €20 million and €50 million.