1. OVERVIEW
Number of lenders contracts as
market continues to rationalise
As predicted, the mezzanine lending market
has contracted over the last 12 months to
54 players actively seeking to lend, albeit
the actual number of lenders who have
successfully transacted is much lower than
this. Closer matching between investor
expectations and the market realities have
pushed some mezzanine lenders out, with
several players reverting back to direct equity
investment strategies. CBRE expects the
market to further rationalise over the course of
2012/2013.
The average maximum LTV lenders are willing
to provide has remained stable at 82.4% (H1
2011: 82.8%). Lenders remain confident in
offering higher-leveraged loans to borrowers,
in some cases up to 90% LTV secured against
good quality assets. However, in reality the
majority of mezzanine loans deployed in
the last year have been at lower LTV levels.
At the same time, return requirements have
fallen slightly to an average of 15.6% (H1
2011: 15.9%). Market evidence suggests a
growing number of deals to have closed at a
lower pricing level.
Slight uptick in mezzanine lending,
with weak senior debt market
hindering activity
Mezzanine lending volume has been
somewhat volatile in the last 12 months.
A slow H2 2011 saw activity focused on
smaller deals, while H1 2012 results were
boosted by a number of large deals. Overall
the publicised mezzanine transaction volumes
totalled over €500 million over the last 12
months, up on the €450 million reported in
H1 2011.
Scarcity of senior debt has impacted on
transaction activity and will continue to
limit the amount of money deployed in the
mezzanine market in the short to medium
term. To address this issue, some mezzanine
lenders are offering short term (1-3 years)
whole loans where senior lenders do not
have the risk appetite, also enabling them to
profit from high single digit returns.
Fund raising initiatives
Over the last year, a number of asset
managers have successfully raised equity
for debt funds covering a wide range of risk
profiles. Interest from this segment has grown
and there are currently 15 asset managers
marketing new debt funds, with a further six
also known to be raising equity for follow-on
funds.
Chart 1: EMEA Mezzanine Lending Market, H1 2012
Discretionary Asset Managers*
Corporate Investment Banks
Non-Discretionary Asset Managers
Hedge Funds
Property Companies
Sovereign Wealth Funds
Total: 54 lenders
* incl. insurance companies which originate mezzanine
loans through their asset management platform
59%
17%
9%
7%
6% 2%
Hot Topics
• Today 54 mezzanine lenders
are seeking to lend across
EMEA vs. 69 reported as
actively seeking mezzanine
opportunities in H1 2011
• As anticipated, several players
have left the market due to a
lack of transaction opportunities
• Competition has pushed
required returns down on
completed deals…
• …despite this, a number of
deals have closed without
a mezzanine piece due
to the disparity of pricing
expectations between lenders
and borrowers
• There are currently 21 asset
managers in the market raising
equity for dedicated debt funds
• New debt funds currently
raising equity to target all types
of debt strategies from core
senior and low-yield debt to
high-yield debt
Quick Stats
H1 2012 YoY
Av. Max LTVs 82.4%
IRR 15.6%
EMEA Mezzanine Lending Market
MarketView
H1 2012
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2. 2
H12012EMEAMezzanineLendingMarket|MarketView
ABOUT THE REPORT
This is CBRE’s second annual investigation into the EMEA mezzanine
real estate debt market, analysing lender appetite and parameters.
This report, which contains information from 73 respondents, has
been compiled by CBRE’s Debt Advisory team. The team advises
clients, ranging from investors and developers to investment funds,
on raising senior, junior and mezzanine financing for acquisitions,
restructuring, refinancing and developments, as well as loan sales
and loan buybacks.
MARKET ACTIVITY
As anticipated in the previous report, the market has rationalised
over the last 12 months and the number of mezzanine lenders has
reduced to 54 (H1 2011: 69), although we understand a number
of these are still to successfully transact a mezzanine deal. During
the same period, 19 lenders have stated that they have effectively
withdrawn from the mezzanine lending market, while four new
lenders have entered.
Interestingly, all five family offices active in H1 2011 are no longer
in the market today. This is due to their higher return requirements
(19% IRR in H1 2011), together with lack of in-house origination
capabilities. This has effectively resulted in these players being
unable to find appropriate transactions that match their requirements.
In the H1 2012 survey, each family office reported that they have
reverted to direct equity investment strategies, where opportunities
are easier to source.
A closer match between investor expectations and market realities
has seen more transactions complete. During the last 12 months,
nine mezzanine lenders publicly announced 18 transactions
(including nine residential development transactions) amounting to a
mezzanine debt volume of over €500 million. Having said that, the
final amount of mezzanine debt deployed will be much higher due
to the private nature of the market and limited transparency.
EMEA Mezzanine Lending Market by Lender Type, H1 2012
LENDER TYPE
ACTIVELY
LENDING
AS %
MARKET SHARE
v 2011
Discretionary Asset Managers 31 59% ▲
Corporate Investment Banks 8 17% ▲
Non-Discretionary Asset Managers 5 9% ▼
Hedge Funds 4 7% ▲
Property Companies 3 6% =
Sovereign Wealth Funds 3 2% ▼
Family Offices 0 0% ▼
TOTAL 54 100%
LTVs
Overall, the average maximum LTV mezzanine lenders are willing to
provide has remained stable at 82.4% (H1 2011: 82.8%). Some
lenders are offering significantly above this depending on the deal.
Indeed, certain mezzanine lenders have publically announced deals
at higher LTVs, for instance, in July 2012 Longbow and Wainbridge
collectively provided a £40 million mezzanine loan for the
refinancing of 120 Holborn, an office building in central London,
taking the total LTV to 90% (supplementing the senior loan of 60%
LTV). The highest single response received for the H1 2012 study
was LTV at 95%.
Our analysis suggests that hedge funds have the ability to offer the
highest LTV - up to an average maximum of 87.5%. This group has
been increasingly active, having publicised a number of major deals
in the last 12 months including:
• SAFANAD’s £60 million of the £100 million mezzanine package
(with LaSalle Investment Management) on 20-21 Grosvenor
Square, London in September 2011;
• Och-Ziff’s £80 million mezzanine loan for the financing of the
Nido student housing portfolio, London in May 2012; and
• Chenavari closed at least two mezzanine and bridge facilities in
Germany.
76.3%
79.2%
80.6%
82.5% 82.8%
87.5%
Sovereign
Wealth Funds
Property
Companies
Corporate
Investment Banks
Non-Discretionary
Asset Managers
Discretionary
Asset Managers*
Hedge
Funds
Chart 2: Average Max LTV by Lender Type, H1 2012
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3. 3
H12012EMEAMezzanineLendingMarket|MarketView
REQUIRED RETURNS
During the last 12 months, mezzanine pricing has contracted, with
the average IRR falling marginally to 15.6% (H1 2011: 15.9%).
Lender remuneration structures through current paid interest and
accrued interest (PIK) have, on average, remained stable during the
same period.
The current paid portion of the interest varies substantially from
lender to lender, with some requiring no current paid interest and
some seeking up to 14%. Others require almost all interest through
current pay, with no accrued interest component. Similarly, the PIK
portion of interest is structured from almost 0% to as high as 19%.
However, only a small number of lenders would structure their
remuneration to include a PIK requirement this high.
Lenders who prefer a higher accrued interest with zero, or low,
current paid interest such as property companies (opportunistic
lenders) can deploy capital further up the risk curve, especially on,
for example, the recapitalisation of distressed development projects.
Lenders (such as sovereign wealth funds) who prefer a high current
paid interest with zero, or low, PIK component tend to target cash
flow producing assets generally associated with plain-vanilla deals
and selective value-added opportunities backed by strong sponsors.
Discretionary asset managers have the appetite for almost all types
of deals. Their range of offering between current and PIK allows
them to cover a wider risk-return spectrum.
Current Pay and PIK Range by Lender Type, H1 2012
LENDER TYPE
CURRENT PAY
RANGE
PIK RANGE
Sovereign Wealth Funds 10% 0%
Corporate Investment Banks 5-7% 0-6%
Hedge Funds 7-8% 5-7%
Discretionary Asset Managers 0-14% 0-15%
Non-Discretionary Asset Managers 5-8% 3-10%
Property Companies 0% 10-19%
AVERAGE 6.5% 5.7%
The final remuneration structure, of course, is dependent on the asset
itself and its risk-return profile. It is important to note that all lenders
require yield maintenance for the period of the facility, with an
expected return on equity multiple of around 1.3-2.0x.
For total IRR, including upfront and exit fees, hedge funds, property
companies and non-discretionary asset managers seek the highest
returns, at an average of 16.9%, again demonstrating their ability to
move further up the risk curve.
Corporate/investment banks and sovereign wealth funds seek
returns at the lower end of the spectrum averaging around 12.2%,
with a single lender from this group reporting the lowest IRR of 9%.
Given the number of active corporate and investment banks (nine)
compared to the one sovereign wealth fund in the market, banks
have a greater advantage in providing the most competitive rate to
borrowers. However, they tend to focus on big ticket transactions
where they can originate-to-distribute, and whole-loan facilities.
10.0%
7.0%
7.7%
6.7% 6.8%
3.0%
5.7%
5.7% 5.8%
14.6%
12.0%
12.4%
16.9%
16.0%
17.0% 16.9%
Current Pay
PIK
IRR
Sovereign
Wealth Funds
Property
Companies
Corporate
Investment Banks
Non-Discretionary
Asset Managers
Discretionary
Asset Managers*
Hedge
Funds
ECO
EXP
STA
FIR
YEA
HA
REC
Chart 3: Average Total Return Breakdown by Lender Type, H1 2012
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4. 4
H12012EMEAMezzanineLendingMarket|MarketView
APPETITE vs. REALITY
Of the 54 mezzanine lenders currently active across EMEA, nine have
publicly announced deals over the last 12 months. Although many
transactions are still not publicised, from the ones that are, we can see
that the mezzanine debt portion has covered LTVs of up to 90%, with
the overall average LTV of the publicised deals being around 77%.
While the pricing is rarely disclosed, we understand the average
returns for these transactions were in the low to mid-teens. This shows
that both average IRR and LTVs for these particular deals were lower
than the reported average in the survey, highlighting the difference
between lender appetite and market reality.
It is important to note that mezzanine lenders’ return expectations
vary on a deal-by-deal basis, as ultimately this depends on the deal’s
risk profile and the amount of leverage they take on. The most active
players are known to have closed transactions at returns below the
average of 15.6% over the course of the last 12 months. Fewer deal
opportunities have led to increased competition between lenders,
ultimately pushing down required returns. For example, CBRE is
aware of transactions which have completed at low-teens and high
single digit returns – mostly on prime UK and European assets. This is
reflective of the low risk and the quality of the asset in question.
Despite an increase in transactions year on year, a number of
investments still close without a mezzanine piece due to the
continued disparity of pricing expectations between borrower and
lender. Where the price is too expensive and/or at par with the cost
of equity, borrowers have preferred to put in additional equity. This
also eliminates the requirement to negotiate with another third party,
in this case, the mezzanine provider.
The majority of the mezzanine lenders covered by our survey have
also stated the difficulty in deploying capital due to the timing and
well documented delays in closing the senior debt portion of the
loan. The struggle in agreeing senior terms and delays from senior
lenders to get credit approval has resulted in some borrowers
targeting mezzanine lenders with the ability to provide short term
senior or whole-loan facilities. Such arrangements are typically
priced at the high single digit mark and are a short term solution in
order to ensure a refinancing or acquisition transaction is concluded
on time.
GEOGRAPHICAL FOCUS ASSET APPETITE
The UK, Germany and France remain the most sought after markets,
with 56% of lenders willing to gain exposure to these geographies.
At 19%, the share of lenders seeking Europe-wide exposure is much
lower, having fallen from 26% in H1 2011, with lenders continuing
to avoid weak southern European economies, such as Spain, Italy
and Greece. However, with the right asset and at the right pricing
and leverage, a deal is still achievable in these jurisdictions.
Pramerica Real Estate Investors’ €40 million mezzanine loan to
Value Retail in March 2012 for the refinancing of their La Roca
Village shopping centre in Barcelona, Spain is one recent example.
A quarter of mezzanine lenders (13 by number) are solely UK
focused (H1 2011: 13%). This change is attributable to the four
new lenders, whose strategy is initially focussed on the core UK
market and existing lenders who have revised their approach to
focus only on the UK.
Selection of Mezzanine Deals, H2 2011-H1 2012
DATE TRANSACTION BORROWER MEZZANINE LENDER(S) LOAN LTV IRR LOAN PURPOSE ASSET TYPE LOCATION
Jul-12 120 Holborn Kailash Properties Longbow + Wainbridge £40m 90% - Refinancing Office London
May-12 Nido Round Hill Capital Och-Ziff £80m 82% Mid-teens Acquisition Student accommodation Across UK
Mar-12 La Roca Village Value Retail Pramerica €40m - - Refinancing Retail Barcelona
Feb-12 Project Teal Blackstone LaSalle £160m* 75% - Acquisition Industrial Across UK
Feb-12 Project Triangle Blackstone LaSalle £204m* 68% - Acquisition Distribution Across UK
Nov-11
9 Residential Development
Transactions
Small/Medium-sized
Residential Developers
Pluto Capital - - - Development Residential development London
Oct-11 Mailbox Brockton Capital + Milligan Pramerica £25m 80%
High single
digit
Acquisition Retail Birmingham
Sep-11 20-21 Grosvenor Square Richard Caring LaSalle + SAFANAD £100m - - Acquisition
Office re-development to
residential
London
Aug-11 Mint Hotel Portfolio Blackstone
Duet (now DRC)
+Partners Group
£75m 65% Mid-teens Acquisition Hotels
UK
Netherlands
Jul-11
Design Centre,
Chelsea Harbour
Marcol Group Och-Ziff £30m - - Refinancing Special purpose London
* Total debt package (including senior)
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5. 5
H12012EMEAMezzanineLendingMarket|MarketView
HOPE FOR DEVELOPMENT?
Our study has shown that a number of mezzanine lenders have
the appetite to transact on development projects. This appetite is
very selective, with a strong focus on Central London, and luxury-
residential or prime commercial assets in particular.
The mezzanine providers active in this space are willing to lend
as high as 90% loan to cost (LTC), with required returns ranging
from 18% to 20% all-in, including a minimum lender equity
multiple. Typically, the remuneration breakdown of the IRR is lender
dependent, but for prime development projects it tends to include
a coupon of around 5-7% with the remainder structured through
PIK. Fewer parties are ready to provide PIK only facilities as lenders
remain risk-averse with lending strategies focused on conservative
finance structures.
Mezzanine loans against development projects have been limited,
with only nine small ticket deals publicised (via Pluto Capital) in the
last 12 months. Although mezzanine debt naturally suits value-
added projects, the lack of appetite in the senior lending market
for development finance is impacting negatively on mezzanine
providers’ ability to transact. Only a selective number of senior
lenders are willing to offer 60-65% LTC often only under condition of
significant pre-lets to strong covenants.
Equity Raising for Debut Debt Funds, H2 2012
LENDER SCOPE GEOGRAPHICAL FOCUS
AEW Europe (UK) Fund to target low-yield and high-yield debt UK
AgFe
Core senior debt fund to target prime and good
secondary commercial real estate
UK
AIG Currently devising strategy for debt fund Europe
CBRE Global
Investors
All types of debt strategies Europe
Cheyne Capital
Fund to target low-yield and high-yield debt
(incl. equivalent paper in secondary markets)
European
(Mainly UK)
Colony Capital Fund will target core senior and low-yield debt
European
(Mainly France)
Cordea Savills
All types of debt strategies (incl. residential
development)
Europe
First Property
Group
Devising strategy for fund: either core senior
debt fund or fund to target all debt strategies
UK
Fortress
Investment Group
Fund will target low-yield and high-yield debt Europe
Forum Partners Fund to target low to high-yield debt Europe
Henderson Global
Investors
2 separate 7-year funds: core senior debt fund
and a low-yield debt fund
European (Mainly
UK)
iii-Investments
Fund manager of UniCredit Group to target
low-yield debt
Germany
Renshaw Bay
Fund to target low-yield debt, but eventually
expand to all types of debt strategies
Europe
Signa Group High-yield debt fund
Germany, Austria
Switzerland
Storwood Capital Fund to target low-yield and high-yield debt Europe
Debt Fund Raising
There are currently 21 asset managers in the market raising equity
for dedicated debt funds, with strategies covering a wide range of
risk profiles. Of these15 are new players in the market and six are
asset managers raising follow-on funds to mezzanine debt funds
raised in 2010/2011.
CBRE expects the announcement of a few additional debt
funds before the end of the year. Some will be from existing
players raising equity for follow-on funds, as well as from new
players looking to gain exposure in the European debt market
through value-added/core-plus, opportunistic or special situation
mezzanine opportunities. Despite this, however, we still expect the
overall number of mezzanine lenders in Europe to contract over the
next 12 months.
Reflective of the current mezzanine market conditions, the newly
raised funds this year (including follow-on funds/second raises)
are covering a wider market scope and offering a wide selection
of products accommodating different investors’ risk appetite –
including senior debt, stretched senior and whole-loan facilities
– not just mezzanine finance. For example, Goldman Sachs
(REPIA) recently announced plans to launch a $3 billion Global
property debt fund to cover a broad risk spectrum, including both
senior and mezzanine loans to target riskier deals that offer higher
potential returns. The fund’s structure would be similar to their 2009
$2.6 billion debt fund, which initially targeted mezzanine debt
opportunities, but subsequently found to be more profitable to
provide both senior and mezzanine debt.
Equity Raising for Follow-on Debt Funds, H2 2012
LENDER SCOPE GEOGRAPHICAL FOCUS
DRC Capital High-yield debt fund Western Europe
Goldman Sachs
(REPIA)
High-yield debt fund Global
ICG Longbow
All types of debt strategies
(mainly high-yield debt)
UK
LaSalle Investment
Management
Special Situations Fund II: high-yield debt fund Europe
MG Investments
2 separate funds: core senior debt fund and
low to high-yield debt fund
Europe
Pramerica Real
Estate Investors
2 separate funds:
low-yield debt fund and high-yield debt fund
Europe
Debt Strategies, H2 2012
SCOPE TYPICAL RETURNS
Core Senior Debt Fund 7%
Low-Yield Debt Fund 8-11%
High-Yield Debt Fund 12%
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