What are your thoughts on mezzanine finance market at the moment?
Mezzanine finance remains an important link in the chain of property development despite the industry seeming to have shrunk over the past year.
This contraction is due to the uncertainty in the property market, caused by various factors including Covid, high inflation/interest rates and the war in Ukraine.
Some of the knock-on effects of this uncertainty include:
- some lenders ceasing to lend altogether, some pivoting from mezzanine into senior development lending, or even becoming a developer
- many investors (HNW/funds) becoming nervous about deploying their capital and choosing to refrain from lending until more stability has returned to the market
- remaining lenders lowering their LTVs, with many increasing rates, to adjust to the new risks being faced
There is certainly appetite to lend, though transactions need to be more robust than they were before.
For example, when house prices were rising and build costs and interest rates were stable, lending up to 75% LTV could be justified.
It would now be more prudent to lend at circa 70% LTV as interest rates and build costs increase, while house prices are coming down.
How busy are you as a mezzanine lender?
We’ve had a busy year overall, completing our largest loan to date in March, but 2023 has seen transactions come in waves rather than as a steady stream.
January started off quietly but moving into February the number of enquiries picked up significantly.
Leading up to the MIPIM and SKIPIM events, we had a couple of quieter weeks, but once everyone shook off their hangovers, the level of enquiries increased dramatically.
Another vital reason we’ve been kept busy this year is because we’ve forged strong relationships with — and earned the trust of — many brokers and debt advisors across the UK.
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We have also had several bridging loan enquiries hit our desks since the start of the year and that has kept us active, while uncertainty remains in the property development industry.
Has the demand for mezzanine lending increased/decreased?
The demand for mezzanine lending appears to have increased over the past year.
Senior lenders have reduced their LTVs, reducing the threshold for a mezzanine loan being required.
Many senior development lenders are now at 60-65% LTV when they were previously at 70%, with some capping their lending at 50-55%.
This means that mezzanine lenders have the opportunity to fill the funding gap up to the 70% LTV level, with loan amounts of 5-20% of a scheme’s GDV being required.
Since many developers don’t have additional equity to put into their transactions, mezzanine lending has become a key component in getting their developments off the ground.
What does this mean for the market?
The fact that developers often like to obtain high levels of gearing on their projects means that demand for mezzanine finance should remain strong for the foreseeable future.
Even if a borrower has sufficient capital to invest, the opportunity cost of taking a mezzanine loan and investing the additional capital in another project, could far outweigh investing it all into one project.
As build costs and interest rates start to reduce — and there is more stability in the property market — I expect to see more lenders return to the mezzanine finance space.
The key is for borrowers to understand the lenders in the market.
It would be preferable to use a principal lender who makes all their own informed decisions and acts honestly and with integrity.
Borrowing from lenders who use third party funds adds an additional layer of risk for the developer.
The Mezz Lender offers the security of knowing that we have plenty of capital to fund a loan once it’s been agreed, and that once we issue our heads of terms, they are the terms that the borrower will complete the loan with.
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