If mezzanine is losing ground, the real question is: why now?

“There’s a definite sense of nervousness in the market at the moment — not just in the UK, but globally — and that uncertainty tends to suppress activity in mezzanine lending,” suggested Stephen Burns, partner at Word On the Street (WOTS).
“Mezzanine finance always waxes and wanes with the cycle: it’s a riskier layer of capital, sitting behind senior debt, and that’s reflected in its pricing.”

Stephen reported a marked fall in mezzanine activity at WOTS, noting the firm hadn’t completed a mezz deal in about 18 months. Developers, he said, were increasingly turning to external investors early on at the deposit stage and then topping up with senior development finance.

Justin Trowse, managing director at Mortimer Street Capital, also noted a drop in appetite from mezzanine and equity houses over the past 12–18 months.

“Traditionally, mezzanine funding bridged the gap between stretched senior debt and developer equity, but we’re now seeing a shift towards more integrated capital stacks, with lenders and investors looking to blend funding layers more closely together,” he explained.

Justin saw wider market conditions as the main catalyst for the decline. Rising construction and professional costs, coupled with softer sales liquidity, had made lenders more risk averse and encouraged them to turn towards simpler, more manageable structures. Meanwhile, he also saw borrowers seeking larger equity contributions to reduce complexity and execution risks.

Chris Whitney, head of specialist lending at Enness Global, explained that while there were still some very solid mezzanine lenders in the market, over the past few years this solution had become less frequently appropriate for those looking to seek higher levels of gearing.

“This shift is largely being driven by the higher cost of funds associated with mezzanine finance and the rise of wider product innovation, which gives developers more flexible alternatives,” said Chris, who agreed that broader macroeconomic environments were playing a role. 
However, many of those involved still see mezzanine lending as a profitable sector. Lance Joseph is group CEO and chairman at Iron Bridge Finance, one of the firms still offering mezzanine finance.

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For him, the reason other lenders had stopped providing this type of finance was simple: experience. He explained that in a climbing market, mezzanine finance was very good for finding returns but, during flat periods, when things become difficult, it was a different story.
“A lot of people in our sector come in thinking it's an easy sector, with easy returns. But they have problematic loans because we're higher up the stack,” said Lance.

“The problem hits them first, and they don't know how to deal with it because they don't have the business experience.”

Issues that come with market downturns could be a problem for those looking to capitalise on mezzanine financing, according to Lance. Whether it be contractors going bankrupt or planning difficulties extending a site’s development time, funders lacking experience may also have a shortage of contacts to overcome obstacles, he added.

Stephen was in agreement that the sector required very particular knowledge.

“It’s a very specialist corner of the market — no one dabbles in mezzanine. It requires technical discipline, and the marketplace itself is relatively hidden, with only a small pool of active providers operating mostly under the radar.”
Justin and Chris both said they had both seen one product become more prominent at the expense of the mezzanine loan.

“I think there’s a clear culprit for the decline in mezzanine usage: the stretched senior loan,” shared Chris.

“This structure allows developers to move higher up the capital stack with a single lender, which simplifies the process considerably. There’s only one negotiation, one set of loan documents, and no need for an intercreditor deed — saving both time and legal costs.”

According to Chris, the gearing available through stretched senior facilities was similar to that of a blended rate of senior and mezzanine debt, but the costs of funds were cheaper overall.

However, Lance noted that while he had seen a drop in the number of lenders offering mezzanine finance, demand for the solution had been ongoing for Iron Bridge. He also highlighted that although mezzanine was essentially “cheap equity”, it had its advantages over standard equity.

“There are a lot of equity providers, such as HNWIs that read the newspapers [and] don't want to invest in property at the moment. So they're pulling out. So, people see mezzanine as a more competitive alternative for equity.”
Mezzanine finance may be offered by fewer providers than before, but for those still active, it remains a versatile financing tool.

“Mezzanine finance is far from dead. If a developer can access very competitive senior debt in terms of pricing, flexibility, and existing relationships, adding mezzanine on top can still be a highly efficient way to get the total funding package in place quickly,” said Chris.
“Combining competitively priced senior debt with mezzanine funding can deliver a blended rate that remains very attractive. For some borrowers, that’s still the best route.”