There has been a significant increase in the provision of subordinated financing among German real estate investors, according to the FAP Group.
In its latest FAP Mezzanine Report for 2018, the consultant has reported strong growth in the provision of subordinated capital over the last 12 months. The report states that 59 of the 136 capital providers active in the subordinated debt market have provided €3.9 billion ($4.5billion) of mezzanine capital over the last 12 months, an increase on the €2.6 billion ($3 billion) deployed in the 12 months running up to October 2017. The total for 2018 is expected to reach €6 billion ($6.9 billion).
Curth-C. Flatow, founder and managing director of the FAP Group, says the market for mezzanine forms of financing is evolving rapidly: “In view of the sustained historically low interest rate landscape, capital volumes and pressure to invest remain high. It is noteworthy that the market’s appetite for risk is increasing with equity contributions falling by up to 25 percent year on year, capital providers becoming more flexible and capital tranches becoming larger.”
Interest rates on subordinated loans in Germany are also falling modestly, on average. FAP attributes this to the significant competition for suitable investments. Interest rates on the financing of existing property have achieved an average of 7.5 percent so far in 2018, down from 8 percent last year. On development projects they have reached 10.5 percent, down from 11 percent last year.
More than 80 percent of providers now offer capital for existing property up to a loan-to-value (LTV) ratio of 90 percent or more. In general, more capital providers than last year are willing to honor higher lending ratios. In the development space, 81 percent of providers finance projects at between 90 percent and 95 percent of the total investment cost.
FAP has found that capital providers are more flexible when making capital available and are investing in both existing property and development projects in increasing numbers. 54 percent (compared to 52 percent last year) are now active in both segments. Providers are also increasingly recognizing the potential for returns in smaller cities. More than half of the providers questioned for the report now provide capital throughout Germany, including B and C cities, with the latter witnessing an increase of 14 percent in subordinated capital compared to last year.
Capital is also increasingly being provided for special or difficult situations, such as the repositioning of property, value-add scenarios or bridging phases, where traditional bank financing is frequently unavailable or difficult to obtain.
Hanno Kowalski, managing director of FAP Invest, says that family offices remain a stable constant in the market, with a strong presence in the development sector.
“Funds fed with institutional capital are increasingly focusing on this segment,” he says.
“It is striking once again this year that international capital providers continue to play a scarcely discernible role in this market in Germany. The strength of international loan funds lies in the provision of large volumes with conservative LTVs and is primarily benefiting European and/or global real estate financing structures.”
