Why has there been an increase in demand for mezzanine finance in recent years?
Macroeconomic and geopolitical headwinds, along with significantly increased regulatory and capital requirements for banks, have affected the risk appetite among senior lenders, which has subsequently led to lower leverage offered and opened up a middle ground for mezzanine providers to step into. Brokers and developers are recognising that the blended rate — when working with a senior debt funder and mezzanine provider — is typically cheaper than sourcing a stretched senior debt product. Existing relationships and intercreditor agreements, which funders should have in place, make the process far more streamlined and straightforward than it was before. Beaufort has worked with many high street banks, challenger banks and alternative funders to essentially be able to offer clients whole-loan solutions.
Do you think we’ll see a large number of new entrants in the coming years? Is there room for more players?
Beaufort has been around since 2013 and we have seen new entrants come into the market at regular intervals since then. However, while I wouldn’t expect there to be a large number of new mezzanine providers in the coming years, I would still expect there to be a steady flow until the next property downturn. Those firms which stand the best chance of success will be the lenders which continue to provide the best possible service to their development partners and work with their clients collaboratively throughout the cycle. The wider global economic climate will affect capital flows in the coming years.
- DFT roundtable: Aggressive business plans, development delays and managing expectations
- How to present a mezzanine finance deal
- Keeping discipline in the current market is key for lenders and developers alike
Have you noticed more senior lenders becoming more open to working with mezzanine lenders? Why is this?
In the wake of the global financial crisis, quite a few senior lenders took the view that they didn’t want their clients to borrow from mezzanine lenders, instead seeking considerable cash equity stakes from property developers. Over the past few years, though, attitudes have changed somewhat whereby most senior debt providers now acknowledge the benefits of working with mezzanine lenders to assist clients in obtaining greater leverage, while at the same time protecting the senior lender’s position through an intercreditor deed with the mezzanine lender. The UK structured market has matured, and senior lenders do seem much more open to working with mezzanine financiers.
How can development lenders add value to brokers and developers in the current market?
To really add value to property developers in the current market, or indeed at any other time in the cycle, lenders need to be able to give fast, clear and consistent responses to financing requests. Too often lenders change the price, leverage and/or security package while a deal (typically very slowly) makes its way from the heads of terms stage through to financial close, which can be disconcerting at best and, at worst, leaves property developers unable to complete.
What areas of the property development market do you believe are underserved and why?
While most property asset classes seem to be reasonably well-catered for in the market, senior/retirement living remains underserved. Although this can no longer be considered a new or emerging asset class, nevertheless there remains an overarching concern, in some quarters, given the length of time it typically takes to sell or rent the end product. The concept remains sound and we continue to be very supportive of this asset class at Beaufort — we actually see great opportunities with the advent of technology, coupled with changing sentiment towards home ownership and elderly care in the UK.
What will be the biggest challenges for the development finance market this year?
The ‘B word’ remains a significant challenge given the uncertainty it has created throughout the market — although, here at Beaufort, we haven’t reduced leverage/increased pricing. Another issue would be contractor solvency and performance. With increased labour costs, a shrinking labour market, record employment and a weak currency to import goods for site materials, contractors are facing a difficult landscape to navigate and lenders will need to scrutinise their client's choices more than the industry has been doing to date — choosing a tier 1 contractor isn't always the answer.
How did you get into the industry?
My first job was working at Barclays Bank, which I ended up doing for 31 years. However, the first dozen years were spent in local banking before getting a move to head office in the bank's specialist property finance team in the mid-to-late 1990s. It was great to get into real estate finance at that time, funding both property development and property investment throughout the UK, and I’ve worked on some landmark schemes, including financing Millennium Point in Birmingham. I’ve been in the property sector for over 20 years now and love the dynamism of this industry.
If you didn’t work in finance, what would you be doing?
Not sure I've quite got the patience for it, but I always fancied the thought of being a property developer — recognising that my passion for sport was never going to amount to anything serious! My favourite board game when growing up was Monopoly and when I first got into property finance at Barclays, there was that lovely moment of realisation when I became the banker for real and once a month I would in effect ‘pass go’ and get my salary paid. Seeing clients then buy land, build houses and hotels and all other asset classes — for example, student accommodation, which has been one of my specialisms — has been wonderful.