A study commissioned by Imperial Blue Finance on mezzanine funding has shown that the market is strong due to the benefits of short term lending.
It was found that throughout the end of 2014, more developers - 90% of whom has been turned down for funding by their usual lenders - were approaching brokers for help.
According to Imperial Blue, banks remain largely reluctant to partake in lending and will tend to lend only on low-risk projects with low leverage.
Surveys carried out by large property agencies have suggested that brokers offering a variety of innovative sources of finance are likely to not only prosper but help solve the current issues in the UK property development market.
To help brokers learn more about one of these alternative forms of funding, Imperial Blue has set out, below, exactly what Mezzanine Finance is all about…
Mezzanine finance provides a second layer of debt funding to bridge the gap between the level of senior debt (which would typically be provided by a bank or fund) and the developer's own equity investment into a property development transaction.
It is typically secured via a second charge.
Mezzanine finance is more expensive than senior debt, but less expensive than the developer’s own equity.
It also allows the developer to minimise their equity contribution to just 5-10% of development costs, which significantly increases returns on equity invested.
It is therefore a critical source of finance in today’s market that bridges the gap created by the funding provided by senior debt, and the developers own equity.
There has been a significant reduction in senior bank lending in recent years, and as a result, utilising mezzanine finance has become increasingly valuable.
Property developers have found that their once reliable senior debt providers could no longer meet their complete funding requests.
Even today, with the property market having grown throughout the course of 2015 so far, the willingness of senior debt providers to lend is more limited than it once was, and whilst stretch senior debt is common, more arduous rates and conditions are being imposed on developers.
Mezzanine providers therefore remain ever-present due to periods of volatility as well as its advantages when being combined with other finance packages.
The frequency of short-term bridging loans, for example, has increased dramatically in reaction to the reduction of short term lending by banks.
Competition in the market has driven down the returns expected by providers of funding.
In 2011, the average return was >25% and in some instances hitting >35%, whereas by 2013, this figure was between 20-23%.
The rate offered by mezzanine lenders does vary with the level of experience of the developer and the risk of their project; however, rates have still been on the decline.
Imperial Blue aims to provide market-leading rates at this time, with rates from 15%.
Leave a comment