Investor interest in mezzanine debt secured by property has risen significantly in the past 12 months, according to Wingate Group joint managing director of property Mark Harrison.
Harrison said mezzanine debt was used by property developers and investors to bridge the gap between senior debt and equity, a gap that had widened significantly since the global financial crisis (GFC).
"Post the GFC, the returns generated by mezzanine debt secured by property have been greater and the risks associated have significantly reduced, which is largely due to the banks scaling back on lending and property valuations returning to much more realistic levels," he said.
"Prior to the downturn, banks were extremely bullish about property lending and stretched themselves in order to compete with the foreign banks and other investment banks, which forced mezzanine providers to move further up the risk curve."
He said now foreign banks and some investment banks had withdrawn from the market, and Australian banks had scaled back lending, a liquidity shortage existed that had created greater need for mezzanine providers.
"Where banks may have lent a developer, say, 75 per cent of the property value in the past, they're now lending closer to 55 to 65 per cent to reduce exposure," he said.
"This has created less risky opportunities for mezzanine lenders because in the past they would have provided finance above the 75 per cent provided by the banks, whereas they're now lending behind the reduced senior debt levels, which also significantly lessens the risk if property values drop."
The current state of the banking sector in Australia had created a unique asset class in terms of a mezzanine debt product, which enabled investors to earn higher returns of between 15 per cent and 25 per cent, and all of Wingate Group's offerings in that space had been highly sought after, he said.
