FAP’s mezzanine survey – consisting of 53 of the current 146 investors active lenders –depicts an agile, flexible and stable market for subordinated financing in Germany. The results suggest capital deployed has been stable over the last 12 months, as well as growing international interest in the German real estate market and rising margin pressure.
Curth-C. Flatow, founder and managing director of the FAP Group, explains:
“The market for subordinated financing is agile and dynamic! We are observing a stabilization at a high level. While the growth rates forecast by us have almost been reached, the average volume has increased.
“Companies, especially from the Anglo-Saxon region, which have withdrawn from the German mezzanine market, have been replaced by other international investors and funds. International interest in the German real estate market is growing, explicitly also for the debt segment. The growing number of market participants is currently leading to increased pressure on margins. Consequently, the expectations for interest rates and returns have been and are often disappointed.”
Mood positive, euphoria has cooled down
The results of the survey and the accompanying investor interviews show: Investors are in a positive mood, but the euphoria of past years has cooled down. Overall, investors and financers are becoming more reserved due to the evaluation of the market cycle, the margin pressure, the price development of land and construction costs. It is becoming increasingly difficult for investors to find suitable deals, to price them with an appropriate risk/return ratio and implement them within the specified budget. The number of deals is lower, but the volume tends to be higher.
Hanno Kowalski, managing director FAP Invest, explains:
“In order to be able to realise deals, investors have once again become more willing to compromise. Requirements on ‘hard’ equity capital are diminishing and are often compensated by guarantees or e.g. higher pre-sales quotas.
“The project-immanent risk potential can often no longer be differentiated via the interest rate. A mixing and compressing of the forms of financing is taking place. The boundaries between the different forms of financing, in terms of interest rate expectations and hedging requirements, are becoming blurred. In the meantime, mezzanine capital has now taken on a vital function: Without mezzanine, there are no more deals; they are now a ‘normal’ part of financing, practically a core product. Investors and capital providers are forced into greater flexibility. As a result, trust and security aspects play an even stronger role than in the past. Such funds are thus becoming more and more interesting from a risk perspective.”