German mezzanine tickets growing in size, but dealflow down

As German banks continue to cautiously retreat from mainline lending, apart from the most prestigious - even trophy - assets, subordinated lenders continue to make substantial ground in property lending, according to the latest research from Berlin-based advisory FAP Group.

FAP's seventh annual Mezzanine Report highlights how mezzanine lenders are writing ever-larger loans, with larger loans of €30m and upwards now quite common. For larger tickets, 12% of the survey's respondents said they were servicing tickets of €100m upwards - a notable jump from last year's only 3% of respondents.

However, the report does highlight how the pandemic has indeed impacted on deal flow, with the overall number of mezzanine financing opportunities down over the previous year.

A total of 55 lenders took part in the survey, collectively providing €6.1bn of mezzanine lending over the previous year. 77% of respondents said they were optimistic about the future of the lending segment - in particular for Whole-Loan lending, which the report said was benefiting from the “lack of coordination” between senior and junior lenders by providing single loan facilities.

According to Kim Jana Hesse, FAP Finance's head of capital partners, “The absolute number of transactions declined in the past 12 months, while average loan amount continued to climb. With growing ticket sizes and an increasing number of debt funds, the market for subordinated finance providers is becoming much more professional." The average loan amount is now between €10m and €35m, up from €5m to €30m last year.

Germany now has 155 active providers of subordinated real estate finance, unchanged from last year. However, this includes some new entrants and others who have quit the market. For example, the report noted that ‘Anglo-Saxon’ investors are aiming to re-establish themselves in the German market, but this time wanting to invest in less popular asset classes such as retail and hotels or even looking at non-performing loans (NPLs) with a view to 2022.

Hanno Kowalski, managing partner at FAP Invest, said: “Subordinated finance providers were mostly able to fill the gap left by the ongoing hesitancy of the banks, frequently jumping in when the banks were offering loan-to-value ratios that were simply too low. Bridge financing, to tide over project developments until the granting of construction permits, was particularly sought-after in the survey period.”

FAP noted in its survey that mezzanine lenders are still more likely to finance existing properties than developments. As for yields, the average internal rate of return on mezzanine finance for existing real estate is 9.75%, slightly down from 2020.

However, FAP said there was a wide range of returns on offer – between 6% and 15%. For project finance, the range narrowed from between 7% and 20% in 2020, to between 10% and 14% now.

Seperately, at a recent media briefing on Debt Finance, the audience heard that residential has been the most in-demand asset class, which often hampers banks as their lending policies are frequently tied up by regulations, opening the door yet further for the alternative lenders.

Martin Bassermann, chairman of the board of lender Helvetic Financial Services, part of CORESTATE Capital Group, said: “In the last 18 months we’ve mainly financed resi in Germany, which is 70% of our portfolio. And 70% is allocated to the top seven cities, safe-haven assets which can withstand any crisis, and the remaining 30% to B cities in Germany, which are strong and fast-growing.”

However, nearly all lenders are giving retail a wide berth, although many lenders are starting to really differentiate between urban convenience retail or grocery-anchored Fachmarktzentren and troublesome out-of-town shopping centres.

Duco Mook, head of treasury and debt financing EMEA at CBRE Investment Management, said: “You cannot put all of retail into one bucket. Investors are making distinctions, and it is time lenders did too. Residential and logistics clearly have been the winners in this cycle, but now lenders need to look again and have to open up to offices and alternative sectors too.”