Alternative lending steps up as banks stay committed to core

Opportunities have opened up for alternative lenders, particularly in mezzanine financing, as demand for debt accelerates post-pandemic. Nicol Dynes reports.

Across Europe opportunities for alternative lenders have opened up, as traditional banks have tended to focus on their existing clients and on core assets.

“The market has really changed and so has the investment style,” says Vincent Thyrion, partner at RSM Belgium. “We see our customers want more funding from private equity and other alternative lenders rather than the banks.”

“The banks are open, but only for financing really core assets, so a lot of alternatives have come up,” says Daan Reekers, CCO of Adelaer Group. “Whether it’s mezzanine, equity or even senior debt there are other parties in the market to finance real estate. In the Netherlands in particular the banks cannot compete, there is a huge demand for mezzanine and it’s a very exciting time.”

Adelaer is the largest independent advisory firm for real estate financing in the Netherlands and it works closely with German institutions. Other European countries, including Germany, have seen a similar increase in demand for alternative sources of funding.

Demand for debt

“What we see is that the demand for mezzanine financing, but also for senior, is very high,” says Martin Bassermann, chairman of the board at Helvetic Financial Services. “In the real estate market there is a lot of demand for housing but also for offices and logistics and the entire banking landscape cannot possibly cover the demand for debt.”

HFC’s mezzanine funds mainly finance developments at an early stage, covering a three-to-four-year period, so they have not been affected by the pandemic. In fact, quite the opposite, says Bassermann: “The last 12 months have been very positive for our business and we have an extraordinary pipeline of new products.”

‘Resi 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.’

Duco Mook, CBRE Investment Management

The market paused in 2020, when both investors and lenders were forced to take a step back, but experts agree that activity has returned this year and sentiment in the market has become more and more positive.

“Before Covid core lenders like insurance companies or local banks were willing to finance 65% or even 70% LTV loans but now, in the current landscape, they have decreased their lev-erage or require amortisation schedules earlier in the process,” explains Duco Mook, head of treasury & debt financing EMEA at CBRE Investment Management. “This has opened up an opportunity for alternative debt providers in the 55-85% LTV range or even higher.”

Asset class-focused

Lenders are as asset class-focused as investors, and they find it easier to finance a sector that has the wind in its sails. In the last year or so residential has been in huge demand, while leisure, hotels and retail have been seen as no-go areas.

“In the last 18 months we’ve mainly financed resi in Germany, which is 70% of our portfolio,” says Bassermann. “And 70% is allocated to the Top 7 cities, safe-haven assets which can withstand any crisis, and the remaining 30% to B cities in Germany, which are strong and fast-growing.”

What makes the secondary market interesting is that rents in the B cities are well behind the A cities so there is more upside potential, he adds.

“In the Netherlands alone there is a predicted shortage of one million homes in the next 10 years,” says Reekers. “Interest in resi has accelerated as it’s been seen as a winner during and beyond the crisis.”

Investors’ focus on residential has helped the growth of alternative lenders because many banks are tied by regulations and cannot finance resi as a matter of policy.

‘In the real estate market there is a lot of demand for housing but also for offices and logistics and the entire banking landscape cannot possibly cover the demand for debt.’

Martin Bassermann, Helvetic Financial Services

Meanwhile, on the banking side, focusing on core was a good strategy during a difficult time, but now there is a need to move forward and follow how the market will change. “At the moment no one wants to have anything to do with hotels but I am absolutely sure that it will look completely different in a year’s time,” says Bassermann. “We still don’t finance retail at all, but that could change in the future as well.”

All lenders want to decrease their exposure to retail, while investors are beginning to make a distinction within sectors because urban convenience retail, for example, is in a very different category to an out-of-town shopping centre.

“You cannot put all of retail into one bucket,” says Mook. “Investors are making distinctions, it is time lenders did too. Resi 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.”

Both investors and lenders are cautious on the office sector because it has been challenged by the shift to home working during the pandemic. But offices are also worth looking at again, say experts.

“The office is certainly not dead,” says Mook. “Location has always  been important but now it’s become even more crucial, because the office has to be much better than working from home.”

Development opportunities

Both the building and the context have to be attractive, which means there are opportunities on the development side as well, because of the demand for new, healthier and greener assets.

Fintech has already changed the lending business and opened up the market to new possibilities, but there is more change to come. “We are good at finding new solutions and looking for alternatives, mezzanine, equity, asset-backed bonds,” says Reekers. “We’re even looking at blockchain. In 10 years’ time the market will have been completely changed by technology.”

“Private debt is already well-established as a source of capital, but in the next three years there’s a real chance to strengthen even further the position of debt out there,” says Bassermann. “I spoke to a very large German developer last week and he told me he no longer needs a bank.”