Mayfair avoids Central London with second residential debt fund

UK real estate investment manager Mayfair Capital Investment Management has completed a first close on its second residential debt fund, which will focus on London outside of its “highly valued” central zone.

Mayfair Capital Residential 2 (MCR2) has so far received £17 million of commitments. A second close is planned for later this year, which the firm expects will raise a further £20-30 million.

Whereas Mayfair’s first London residential debt fund, which was launched in October 2012, focussed on lending to residential projects in London’s most central zones, one and two, the firm is aiming to avoid Central London with its new fund and instead concentrate on zones two to five.

“Parts of London look highly valued and are vulnerable to further value falls, as the government’s tax changes and other measures are fully reflected in the high end segment of the market and buy to lets,” said Simon Martindale, fund manager with responsibility for investment at Mayfair Capital Investment Management.

“For this reason, we are focusing on backing developers with good track records in developing in Zones 2 to 5 in what we call “affordable” London. Projects will comprise a mixture of apartments and houses and we will be avoiding prime central London”.

MCR2 is aiming to deliver an IRR of 10 percent per year net of all fees, expenses and carried interest. Investors include investment companies, pension schemes and private investors. Five directors of Mayfair Capital have committed equity to the new fund. Although the fund is set up with a five to seven-year life, it is expected to run for only four years.

The first London residential debt fund, MCR1, was launched with £30 million of committed equity. MCR1 made seven investments, of which five have been fully realised, returning 89 percent of investors’ equity. MCR1 is on track to exceed its target of delivering investors an IRR of 15 per year, Mayfair said.

“The funding gap for developers in London continues to exist, with a gap between the amount senior lenders are prepared to advance and the level of developer equity,” said James Thornton, fund director and chief executive officer of Mayfair Capital.

“Each investment will generally be structured on the basis of an interest-bearing loan and a profit-participating loan. We do not, therefore, see ourselves as pure mezzanine lenders, more as property partners to the developers we back, given that part of the return is linked to the success of a scheme,” Thornton added.