- 7th April 2020
- Posted by: DMM
- Category: Mezzanine Finance
Mezzanine finance has become a vital lifeline of funding for many property developers in recent years and enabled many property development projects. However, such finance is a high-risk business for the lender and any downturn in the property market may raise these risks too high.
With the spread of the Coronavirus, COVID-19, the government urged people in March not to move house unless it was absolutely necessary. Naturally, with estate agents closing, the number of viewings has dropped massively as buyers and sellers now play ‘wait and see’. The big question is what long term affect the economic impact of the Corona Virus will have on the property market. Research modelling by property website Zoopla predict a fall in transaction volumes of up to 60% over the second quarter of 2020, compared with same period in 2019.
We have immediately seen many specialist mezzanine lenders withdraw from the market for the foreseeable future while they too do their own ‘wait and see’. However, not all have dropped this lending product and, so far, are prepared to stick it out but based on certain criteria.
From the conversations we have had, there remain a handful of experienced specialist lenders whom are still prepared to provide mezz but expect this to come with strict conditions. The senior lender could be key to the appetite from the mezz lender with the bigger banks such as RBS, Close Brothers, UTB, etc, being preferred over peer-to-peer lenders whom might have more volatile resources.
“The senior lender could be key to the appetite from the mezz lender with the bigger banks such as RBS, Close Brothers, UTB, etc, being preferred over peer-to-peer lenders whom might have more volatile resources.”
The Origin of Mezzanine Finance
Following the last property recession, the leading property development lenders tightened their criteria which lead to mezzanine finance becoming a lifeline for developers. Mezzanine finance bridged the gap between what a senior lender was prepared to provide towards a property development and the developers available cash equity. With senior lenders reducing their lending criteria to perhaps a maximum 65% or 70% of the total development costs (including land acquisition, construction and selling) this left a big void in many cases.
As a consequence, specialist mezzanine finance lenders appeared and provided the top up equity that the developer needed. This was great news for the developer who then could afford to take on a project that otherwise may have been out of reach.
The boom in mezzanine finance grew rapidly with existing property development funders, as well as many new specialist lenders, appearing in the market. The attraction for mezzanine finance lenders was that interest rates were high making an attractive return for investors. Mezz finance demanded high interest rates as the risk levels for this type of lending are also high. A mezz lender will have a second charge security and, therefore, will not get repaid until the senior lender has had their funding repaid.
In summary, we expect there to be many less mezzanine finance products in the market for the time being. Those lenders that are still willing to provide a mezz slice will undoubtably have tight criteria and you should be prepared to pay the price for their risk. Nevertheless, mezzanine finance will remain the difference between a successful funding structure being possible. Should you be seeking mezzanine finance, compare property development finance simply click here!. If you have any questions, then contact at [email protected].