French student housing attracts its first mezzanine loan

Cheyne Capital has supported Oaktree-backed local specialist Kley with a €27m mezzanine facility.

A French student housing provider has sourced financing including mezzanine debt, in what is thought to be the first example of junior debt being written in the country’s student accommodation sector.

Kley Group, which is backed by private equity firm Oaktree Capital Management, sourced the mezzanine loan from London-based lender Cheyne Capital. The junior facility, of around €27 million, adds to a senior loan of €105 million, provided by Natixis, in a pool with SCOR and Crédit Foncier de France, which have historically backed Kley.

The total €132 million debt financing will enable Kley to refinance properties that are currently owned and operational. It will also back the launch of new student housing projects being planned.

“We will use this new debt financing for our assets in France, with a focus on prime cities such as Bordeaux, Lyon, Lille and Paris,” Kley’s CFO Jonathan Cally told Real Estate Capital.

He added that the financing has a classic structure that allows the group to improve its leverage ratio by partnering with lenders providing different types of debt according to risk levels. Although the French debt market is liquid for senior loans, sourcing mezzanine debt from local lenders appears to still be challenging.

“Student housing is emerging in France, that’s why we have partnered with a UK mezzanine debt provider, which is more comfortable underwriting this kind of risk and assets,” Cally explained.

Cheyne’s head of French origination Raphael Smadja, added: “It was an attractive opportunity to back Oaktree which is first mover in France on an asset ‎class supported by strong market fundamentals.”

Kley was created by alternative investment management firm Oaktree in 2014, when France was the world’s fourth largest destination for international students. Regulatory changes introduced at the time supported further international student inflow, with an increase of almost 32 percent to 310,000 students from 2014 to 2015, according to data from Campus France.

Today, official figures show that France is home to more than 2.5 million students, which makes it Europe’s second largest higher education population. With growth of 16.4 percent to 2.9 million expected by 2025, the need for student housing will be acute. Although the rate of purpose-built student accommodation provision in the country was up 15.4 percent last year, a shortage of around 850,000 units still remains, data from Savills show.

Demand for student housing in the country has attracted investors, with prime yields in the region of 4.25 percent. Closely tied to development activity, student accommodation investment in France increased by 245 percent to €169 million in 2016, according to Savills. Investment volumes are expected to reach €250 million in 2017, exceeding their 2013 peak for the first time.

Investment volumes in French accommodation, however, are far below those in Germany – Europe’s biggest student market with 2.7 million students. German investment transaction volumes reached €750 million in 2016 and are expected to surpass €1 billion in 2017.