Alternative Financing for Real Estate- a New Trend

Zurich November 9, 2016:

Since the 2008 financial crisis, more than € 500 billion of former bank loans were replaced by private debt financings in the capital markets (Source: ECB). This is a growing trend that we can also observe in Switzerland. There are several reasons for this development: the banking regulations around Basel III, the increased requirements for paid in capital for real estate acquisitions, and the growing demand by institutional investors and UHNWI for higher yielding bonds.

According to Preqin, an institutional research firm in the USA, institutional private debt funds secured $85.2 billion of global commitments of which over $ 35 billion in Europe in 2015. Demand for Private debt funds is also growing with investors. At the end of 2015, 86% of investors polled by Preqin were satisfied with the returns generated by those funds and 46% of those polled plan to increase their allocation to private debt in 2016.

Private real estate debt investors have multiple strategies, currently, the most popular one is direct lending, or loans made by private lenders directly to borrowers. Within direct lending, real estate is the most preferred type of collateral. 

What is driving the borrowers demand

From an outside perspective, real estate lending may appear as a commoditized space with a wide spectrum of players such as commercial banks, life insurance companies and investment banks. However, financing is not a one-size-fits-all solution. Direct lending providers fill market gaps by bringing efficiency, speed to market or understanding to unique market opportunities. They often operate in niches traditional banking vacated after 2008 and, in some cases, never returned.Each lender has his own preferences: Life insurance companies, for example, tend to focus on conservative loans for stable commercial and multifamily properties in major metropolitan areas. They seldom venture outside of that path. Banks can lend on both new constructions as well as stabilized assets; the process can be onerous and slow-moving with more internal approval processes and commitment hurdles to overcome because of a tighter regulatory environment.

Direct private debt lenders can be fast and nimble, an attractive feature for borrowers in need to move quickly on a new development or acquisition opportunity. This nimbleness comes at a price, which benefits borrowers and, in turn, investors.

Also in Switzerland, Private debt issuer and private debts funds are playing an increasingly important role in providing financing as an alternative to banks. They source their funding from private or institutional investors that are willing to take the private debt (or private equity) risk that is structured independently by those financing providers.

Different types of alternative Financings

Senior debt refers to first ranking, secured loans used to finance buyout transactions and growth funding. Returns are generated almost exclusively by the current interest/coupon payments.Mezzanine is an intermediate form between debt and equity. It is used mainly for buyouts and growth finance and is often subordinated to bank debt. Returns are made up of several components; primarily current and final interest payments, as well as warrants for shares in the real estate company being acquired, known as "equity kickers".Credit opportunities funds invest in a wide variety of financing structures and situations. Alongside complex refinancings of companies who are cut off from capital markets for various reasons, those funds also specialize in secondary transactions.        Distressed debt funds mostly buy senior secured loans in the secondary market at a discount to their face value. They concentrate on acquiring sound real estate assets from borrowers in financial difficulties.

Premier Suisse Investments: our added Value for Borrowers

We focus exclusively on first class real estate transactions and opportunities for Family Offices and institutional investors throughout Switzerland and abroad. Our Partners have more than 65 years domestic and international capital markets and real estate experience. The pristine reputation of the prospective borrower is as important as the quality of the real estate project. We cooperate with alternative financing providers with a long standing track record, that are client and solution focused and in some cases are regulated by the national securities and banking regulators (e.g. FINMA in Switzerland). We offer our clients seekers of private debt financing a holistic approach, first class client servicing and discretion.

Our Track Record and ongoing Mandates: Private Debt Financing

o CHF 6 Million private debt financing for a Swiss family office

seeking to reduce their capital in a CHF 50 Million commercial property in Western Switzerland

o CHF 14 to 60 Million private debt financing for a Swiss family office for the acquisition of an income generating property in Northern Switzerland, including potential take over of the commercial bank financing

o CHF 25 Million private debt construction financing for a German family office for transforming their existing hotel into a 5* mountain resort/apartment hotel in Southern Switzerland