FAP: Germany’s mezzanine providers report influx of inquiries

In its latest annual report, the adviser said subordinated finance is increasingly important to the viability of development and acquisition deals.

Non-bank providers of subordinated real estate finance in Germany are fielding a growing volume of loan requests due to increasing caution in the banking sector, according to the findings of FAP Group’s Mezzanine Report 2022.

The Berlin-based adviser said mezzanine debt provided by alternative lenders is becoming a key determining factor in the viability of development projects and real estate acquisitions.

“In many cases, banks are no longer the predictable partner that developers and investors have relied on in the past,” FAP said in the report. “Even solid, low-risk and professionally prepared projects are now financed only to a limited extent. Pre-letting rates, the borrower’s level of equity and the structure of general contractor agreements have become more important as a result.”

FAP identified 159 non-bank capital providers active in Germany’s subordinated real estate loans market – a slight uptick from its 2021 report, when it noted 155 active lenders. It saw a continued decline in the number of institutional investors involved in direct lending and an increase in the number of active debt fund managers.

In total, 55 subordinated debt providers took part in FAP’s survey. They reported an aggregate lending volume of €5.5 billion in the 12-month period preceding the survey, which was conducted between March and June. The total was down from €6.1 billion, similarly originated by 55 lenders, in the 12 months preceding the 2021 survey.

“The numbers reflect the industry’s hesitation in the current market environment,” said Hanno Kowalski, managing partner of FAP Invest, the advisory arm of FAP Group.

“Investors are biding their time and holding back on new investments,” he continued. “At the same time, the current situation is creating a lot of opportunities for subordinated capital providers because not investing is not an option either. Banks’ hesitance and the rising interest rate level are stoking expectations. We are thus expecting a significant rise in new business over the coming years.”

FAP said more than half of respondents expect the market for mezzanine financing to ‘develop positively’ despite the overall performance of the real estate market. “Anglo-Saxon investors in particular see an opportunity in the German market and are correspondingly optimistic,” FAP said.


FAP reported the average overall interest rate for financing existing buildings through subordinated debt amounts to 10.33 percent, slightly higher than 9.75 percent in the previous year’s report. The interest rate range for mezzanine capital was reported to be between 7 percent and 15 percent – similar to the range reported in the 2021 report. For development finance, the reported range was between 9 percent and 15 percent. It added that the wide range illustrates the diverse spectrum of capital providers in the market.

Kowalski said survey participants were considering interest rate rises at the time of the survey but had not yet implemented them. He added an increase in rates would likely be visible if the survey were repeated today.

On leverage, FAP said loan-to-values on mezzanine loans for existing real estate go up to 84.5 percent on average, around three percentage points below the average recorded in the 2021 survey, which it said was attributable to risk discounts in the current market.

The absolute maximum LTV in the market is 90 percent, although FAP noted most investors are not prepared to support very high LTVs. For developments, FAP said loan-to-cost ratios go to 87.5 percent on average.

FAP said whole loans are increasingly in demand, partly due to rising interest rates narrowing the spread between the two financing options. Whole loans are found in an LTV range of 70 percent to 75 percent.