Disappointing returns forcing lenders out of mezzanine market
Lower-than-expected returns and meagre transaction opportunities will push more mezzanine lenders out of the market despite an increase in lending, according to a CBRE report.
The report, which counts 54 lenders currently active in the market compared with 69 in 2011, noted the departure of five family offices returning to the direct market.
CBRE attributes their exit to unrealised average return expectations of 19%, against average returns “in the low to mid-teens”.
It noted a bifurcation of the market between opportunistic lenders deploying capital further up the risk curve – in recapitalisation of distressed development projects, for example – and those, like sovereign wealth funds – which are seeking a relatively modest 12% return – targeting income-producing assets and “plain vanilla deals”.
It also noted four new entrants over the past year, all discretionary asset managers.
This group, which accounts for 59% of all active lenders, “has the appetite for almost all types of deals”, the report said.
“We expect the more opportunistic mezzanine players – for example, property companies with their higher return requirements – will [exit the market] as pricing continues to rationalise,” it said.
“Those with the ability to easily and effectively price mezzanine loans at a market-driven price, such as discretionary asset managers, with their flexibility in remuneration structure, will be the core players in the market.”
The report claimed pricing expectations remained unrealistic, while scarcity of senior debt limited opportunities in the mezzanine space.
Funds raised this year include those targeting senior debt, stretched senior and whole-loan – a reflection, according to the report, of current mezzanine market conditions.
It cited a Goldman Sachs’ plans to raise a $3bn (€2.3bn) global debt fund that is likely to include both senior and mezzanine loans.
Would-be and existing lenders are currently fundraising for six follow-up mezzanine funds with a range of strategies, and 15 debut funds targeting core-plus, value-added, opportunistic and special situation opportunities.