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Europe
“The truth is, however, that 90% of pan-European credit funds have conditions which simply don’t fit the German market,” said FAP founder and CEO Curth-C. Flatow in a recent note.
Much of the hype surrounding the rise of loan funds in Europe has only limited relevance for Germany, as nearly 90% of the freshly-minted pan-European vehicles are incompatible with the needs and demands of the German market, according to the Berlin-based independent consultancy Flatow Advisory Partners (FAP).
FAP is in a good position to know, as it specialises in procuring and structuring real estate financing deals throughout Germany. The mismatch, says FAP, is despite the German Financial Supervisory Authority BaFin easing regulatory conditions for loan funds last year, giving a big fillip to interest in the financing instrument.
Rating agency Scope says there are 53 loan (credit) funds currently set up and in issuance across Europe, with a target volume of €33.8bn. “The truth is, however, that 90% of pan-European credit funds have conditions which simply don’t fit the German market,” said FAP founder and CEO Curth-C. Flatow in a recent note.
There are several reasons for this, says Flatow. Firstly, some credit funds focus only on senior tranches, but their terms will be too expensive to beat traditional bank or Pfandbrief financing, so that only ‘unbankable’ assets will come into consideration at all. For the junior tranches, many funds demand deals of at least €15m-€25m so that, with loan-to-value of 80%-85% maximum, financing volumes will have to be at least €100m in total. However, given that the bulk of single deals done are well less than this, deal flow will be quite limited.
Many international suppliers also price these junior tranches too high, given return expectations of at least 10%-12% IRR, while most junior capital in German offers only 6%-9%. “That is why we have hardly seen any deals by foreign credit funds in Germany,” said Flatow. “They can succeed in countries like the Netherlands, UK and Spain as these financing markets have different degrees of maturity to that in Germany.”
Another key factor, apart from the absolute size of the market, is the accessibility to the larger deals. "This is where we see the largest obstacle for credit funds to overcome when they initially enter the market", says Flatow. He says that while he's not expecting a boom in the sector, he does envisage more joint financing between alternative financing providers and banks than in the past. "Indeed, we have arranged several such deals in the past year – senior capital from the bank, along with a junior tranche via mezzanine finance", he says.
Flatow said he also sees more opportunities in the provision of whole-loan financing, with the credit fund providing a high LTV capital tranche, thus lending senior and junior tranches from a single source. This has the added advantage of keeping processing and documentation much simpler, he added.
