FAP: German mezzanine tickets are getting larger

The latest research by the Berlin-based advisory firm shows subordinated lenders are benefiting from German banks’ increased caution.

Mezzanine debt providers in the German real estate market are finding opportunities to write larger loans as the country’s senior lending banks exercise caution, according to new research by Berlin-based advisory firm FAP Group, shared with Real Estate Capital Europe.

FAP’s seventh annual Mezzanine Report showed loans of above €30 million are more commonplace than in previous years. In addition, 12 percent of respondents to the firm’s survey reported servicing tickets of more than €100 million, up from just 3 percent in the 2020 survey.

In total, FAP reported a market “sweet spot” of between €10 million and €35 million, up from €5 million to €30 million last year.

But despite the increase in individual loan size, FAP reported that the pandemic has impacted dealflow, meaning the overall number of mezzanine financing opportunities in Germany is down.

“The absolute number of transactions declined in the past 12 months, while average loan amount continued to climb. With growing ticket sizes and an increasing number of debt funds, the market for subordinated finance providers is professionalising,” said Kim Jana Hesse, head of capital partners at FAP Finance.

The report showed there are 155 active providers of subordinated real estate finance in Germany. Although the number was unchanged from last year, FAP said there has been movement, with new entrants to the market and some deliberately abandoning direct lending. The 55 lenders that took part in FAP’s survey provided an aggregate €6.1 billion of mezzanine, down from €6.9 billion in the previous 12 months.

Mezzanine lenders are more inclined to finance existing properties than developments, FAP noted. The average internal rate of return on mezzanine finance for existing real estate is 9.75 percent, slightly down from 2020. However, FAP said there was a wide range of returns on offer – between 6 percent and 15 percent. For project finance, the range narrowed from between 7 percent and 20 percent in 2020, to between 10 percent and 14 percent.

Hanno Kowalski, managing partner of FAP Invest, said: “Subordinated finance providers were mostly able to fill the gap left by the reticence of the banks, and also jumped in when the banks offered loan-to-value ratios that were too low. Bridge financing for project developments until the granting of construction permits, was particularly sought-after in the survey period.”

Kowalski noted that ‘Anglo-Saxon’ investors are aiming to re-establish themselves in the German market. “They want to invest in less popular asset classes such as retail and hotels or even take on NPLs [non-performing loans] that they expect in 2022.”

Demand for whole loans is also growing, the report showed, as providers take advantage of what FAP described as a “lack of coordination” between senior and junior lenders by providing single loan facilities.