Have you seen an increase in popularity for mezzanine finance? If so, why?
Yes we have. A lot of lenders have pulled back from stretch senior lending, and so there has been greater demand for senior and mezzanine finance from investors who want to achieve maximum leverage for their capital.
At the same time, pricing has come down on senior lending and, as a result, more often than not, you can now achieve a lower blended rate across senior and mezzanine finance compared with funding the whole deal with a stretch senior loan. Put simply, it gives investors the opportunity to realise higher gearing and lower pricing, so it’s not surprising that it’s becoming more popular.
Are any asset classes seeing real growth at the moment?
We’re seeing a lot more enquiries for student housing developments and put this down to two main reasons. There is a lot more demand from investors to invest in the regions, and student housing provides a reliable source of tenants in these areas. Additionally, there has been growth in the number of overseas students coming to study in the UK.
What areas of the property development market do you believe are underserved and why?
Permitted development rights have become such a big part of the development sector in the last few years and a consequence of this is that there is now a shortage of offices in a lot of regions and good commuter towns. I think that lenders are missing a trick by not putting an office development product together.
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Are lenders becoming more cautious with any asset classes or locations?
Prime central London is one area where lenders have pulled back and become more cautious. We have also seen lenders pull back on higher gearing for loans on properties where sales values are more than £1,000 per square foot. This is down to the liquidity of the units and the demand for sales.
What will be the biggest challenges for the development finance market this year?
In the current environment, exit routes are being more closely scrutinised. The sales market has softened, so it’s imperative that developers properly appraise a site and prepare for potentially needing to refinance at the end of the development loan, rather than looking purely at the GDV. With the uncertainty of Brexit still looming, the cost of labour and materials could also prove to have a big impact on the viability of a scheme.
What is the most interesting case you’ve dealt with?
We recently placed a deal where the client was let down by a lender on a £30m facility. We were able to work with multiple parties to structure a deal where a senior debt lender co-funded the senior debt alongside a high-net-worth individual on a first charge, and a mezzanine lender then sat behind this, taking the borrower up to 96% loan to cost.
We were comfortable with this approach because the exit strategy was to hold on to the asset for rental income, and this income was enough to repay the senior debt lender, the high-net-worth investor and the mezzanine finance provider.
If you weren’t a broker, what would you be doing?
I’d probably be a property developer!