Wed, 20/02/2013 - 19:43
According to most recent publications, the real estate gap for new financing and refinancing in Europe by year the end of 2013 is expected to reach to EUR200 billion, says Swisslake.
These values include EUR107 billion that is intended to meeting the capital reserve requirements for banks, which nearly doubles the funding gap.
These equity requirements are also affecting countries, which previously recorded relatively small funding gaps, such as France, Germany, Scandinavian countries and the Netherlands. It is widely expected that due to these requirements, many banks will either pull off completely or will not renew their commitments. Senior and junior financing are today at a much lower level in the capital stack thus offering investors more security.
Moreover, in the current environment much higher margins can be enforced compared to the pre-crisis era. Demand for this type of loans is high, especially given the fact that many investors are not in a position for new debt financing to deliver a 40 to 50% equity share as required by most banks. It is also expected that in the next 4 years about EUR 1’000 billion of real estate debt is up for refinancing. Accordingly, the potential of attractive debt exposure seems almost infinite.
The highest return potential lies by definition within mezzanine investments. Depending on its position in the capital stack i.e. at which LTV, mezzanine investments can deliver coupons from 7-15%. Furthermore, fees such as workout fees and servicing fees are typically charged on top which reflects a margin and fee potential of up to 40% above values that could have been achieved prior to the crisis. The average share of a typical mezzanine investment within the capital stack stands at 25%.
The benefits that come along debt funds are obvious. Assuming a 50% senior loan, investors are much less exposed than with traditional private equity real estate funds. In addition, due to the nature of debt investments investors typically receive monthly or quarterly interest payments, which can serve as an efficient indicator for successful or failed of investments. However, there are some disadvantages such as the lack of possibilities to influence property management. In addition, the passive attitude of debt funds makes it sometimes difficult for early countermeasures in adverse situations related to the underlying asset.
All in all debt funds are in trend. It is therefore not surprising that amongst all specialised fund strategies in 2012, debt funds were able to gain the most terrain. With 15 new launched funds targeting an equity volume of EUR 7.1 billion debt funds were able to reach a 27.4% market share in terms of the equity volume (2011: 15.9%). Looking at the risk-return profile of debt funds we note that almost all funds are either core oriented (9 funds) or value-add (5 funds). Only one fund invests in opportunistic investments. European debt funds launched in 2012 are mainly focused on investments Germany and the UK. The main reason behind the attractiveness of these two markets lies in the fairly large number of foreclosed banks where fund managers are seeking to acquire the most attractive financing or assets. Another fact that documents fund managers’ strong belief that there will be strong demand for debt funds is the fact that the average debt fund is targeting to raise EUR 473 million which is significantly higher than the average size of European funds that stands at EUR 320 million.
Should the current financing environment remain as it is debt funds are not likely to go away any time soon and are establishing themselves as an integral part of the private equity real estate industry in Europe. The inflated numbers of debt funds are however showing that not debt financing specialist are in the race to attract intuitional capital. Thus it remains to be seen who will manage to get established on the market and raise the targeted equity for their vehicles and who will get stuck in their fundraising efforts. Backing this statement is the fact that there are currently 36 debt funds in Europe trying to raise an aggregate equity volume of more than EUR 20 billion.
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