Alternative sources of capital

When investors and project developers need outside capital, banks are no longer the only option.

The numbers won’t bring joy to traditional banks: only 2 percent of European real estate investors expect the volume of financing by banks to increase significantly in the near future, and 19 percent anticipate a decrease. In contrast, 74 percent of the real estate professionals surveyed believe that alternative institutions outside the banking world will be more important for financing commercial real estate. 69 percent expect the same for debt funds.

These findings from a survey of European real estate investors published by the auditing firm PwC and the Urban Land Institute in October 2017 under the title “Emerging Trends in Real Estate 2018” clearly show that the international financial market is in a period of transition and that traditional banks no longer have a monopoly in real estate financing. Increasing numbers of investors are taking advantage of “more opportunistic approaches to occupy a niche,” observes Anke Herz, Team Leader Debt Advisory at JLL Germany. And Manuel Köppel, CFO at BF direkt, which specialises in the financing of real estate projects, says that “alternative financing is becoming more important.”

However, this market is still not very transparent, and no precise information about the volume of alternative financing instruments is available. Köppel ventures an estimate for Germany, putting the market share of alternative providers of financing at 10 percent, which could rise to 30 percent in the not-so-distant future. Examples of alternative sources of outside financing:

Debt funds

Attractive for both sides
Even senior secured loans need not necessarily originate with a bank: they can also come from debt funds. These are generally international funds that collect money from institutional investors and channel it to borrowers. Investors who put money in the funds will enjoy relatively high but safe returns. Borrowers in turn can also use the funds to access outside capital without involving their principal banks, “for example, when things have to move very fast,” says Manuel Köppel of BF direkt. Fund investors are primarily interested in “whole-loan funds, which make senior secured loans,” adds Lahcen Knapp, CEO of the Swiss investment manager Empira, which itself has created several debt funds. “This is how fund initiators can finance the necessary initial portfolio.” Debt funds provided at least €47 billion for real estate in 2017, according to an estimate by Creditreform, a provider of business information.

Mezzanine financing

High risk, high return
In architecture, a mezzanine is an intermediate floor of a building. In the world of finance, mezzanine capital is a hybrid of debt and equity financing. “Mezzanine financing plays a particularly important role in development,” says Manuel Köppel. “However, specialised funds are most active in this area because institutional investors generally avoid direct investments in subordinated loans.” Mezzanine funds of this kind usually offer interim financing for 12 to 18 months, according to Empira CEO Knapp. The associated risk can be very expensive, with interest rates often ranging from 12 to 14 percent. On the investor side, insurance companies like to participate in mezzanine funds. There are regulatory reasons for this, according to Lahcen Knapp: “The Solvency II rules require insurers to hold a larger amount of capital for direct investments in real estate. But for mezzanine funds the capital requirement is only 3 percent.” Many family offices also like to get involved in the mezzanine business as backers.


Pooled capital
Private investors are particularly fond of investing small amounts – often just a few hundred euros – in subordinated loans to project developers through crowdinvesting platforms. For example, the developer Wagner Group was able to use the Exporo platform to put together more than €2 million to improve an existing office building in Frankfurt am Main. Crowdinvesting has yet to break the double-digit million limit, however. Still, experts are paying close attention to further developments. “The Crowdinvesting platforms are also developing B2B tracks,” says JLL expert Anke Herz. Paul von Drygalski, Executive Director at EY Real Estate, is also a fan: “Even professional investors are seeking attractive returns from crowdfunding.”

Corporate bonds

Good for the big guys
The DAX-listed company Vonovia, the portfolio holder TLG Immobilien, the housing investor ADO Properties – the list of major real estate firms that have recently issued corporate bonds goes on and on. This lets them avoid negotiating with financial institutions and get the money from the capital market instead. “This way they gain access to capital under very advantageous conditions,” observes Manuel Köppel. It can also mean coming into contact with crowdinvesting: FCR Immobilien – a German investor specialising in retail properties – has been distributing its corporate bond, which pays 6 percent interest, over the crowdinvesting platform iFunded.

Promissory note loan

Long-term and inexpensive​
Promissory note loans are also in vogue right now. The VW subsidiary Volkswagen Immobilien, for example, recently issued a promissory note loan with an average term of 10.5 years and a volume of €107 million. The interest rate in this case varies between just over 1 percent and 2.75 percent. Promissory note loans are large long-term loans that are very similar to bonds, with banks, insurance companies and other institutional investors making loans in return for promissory notes. The interests of the banks also play a role in this, as Manuel Köppel of BF direkt explains: “Some banks prefer to act as arrangers and place the financing with investors instead of carrying the loans on their own books.”

Forward Purchase

Getting buyers on board
Project developers can cover their capital requirements by selling their projects early on, known as a forward deal. For example, Union Investment has acquired a residential and commercial project in the 22nd district of Vienna which will not be completed until late 2019. Other investors are increasingly willing to make early financial commitments in order to secure the properties they want. Note the difference between forward funding, in which the investor pays instalments as construction progresses, and forward purchase, in which the purchase price isn’t paid until the property is handed over.

By Christian Hunziker

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