Gap Financing Real Estate

Real estate gap financing

Global financial crisis and the subsequent economic downturn led to significant structural changes in the global real estate market. In particular, three have combined to widen the debt financing gap in today's market: the decline in real estate values and yields; the over-risk of major senior lenders; and. Mortgage investors for commercial real estate in Europe.

The landscape has changed as greater financing opportunities are opening up for Ireland's real estate.

Emerging financing streams and the advent of alternate financiers have led to a fundamental change in the real estate financing environment in Ireland. Investor and developer of Ireland real estate will be particularly interested in our insights into this changing environment and the opportunities it offers. Local bankers have evolved from instability in institutions and the economy to provide considerable solvency to the priority secured loans markets for industrial real estate.

Moreover, foreign bankers who withdrew from non-core banking activities in recessive periods have shown interest in financing Ireland's industrial real estate. National and international legacy banking dominates the mortgage lending segment, where borrower margins are between 3% and 5% above the financing costs, provided their loan-to-value ratios do not rise above 70% to 75%.

Recently, the credit markets for older people have been particularly robust: despite stricter control over capitals and the sector and concentration limitations within which they are operating, they have been very proactive. However, borrower difficulties in reaching the loan-to-value level set by the priority creditors will not be prevented from incurring debts in view of the advent of non-bank creditors who have further enhanced the possibilities for borrower borrowing, in particular in respect of unit tranche credits and meszanine financing.

This relatively new entrant first emerged on the domestic markets as a reaction to a financing gap that had arisen during the downturn due to the repatriation of incumbent banking institutions. In contrast to incumbent banking institutions, which use the inter-bank markets for most of their financing, alternate providers of credit usually obtain equity from large insurers, retirement savings schemes, privately held asset trusts and SWFs.

Indeed, some non-banks have used ISIF (the National Strategic Investment Fund for Ireland, a sequel to the National Pension Reserve Fund). Besides conventional banks, the existence of these alternatives adds further breadth to the indebtedness world. Alternate creditors are primarily engaged in the provision of fixed -rate financing and unit-tier credit facilities that are collateralized against real estate investments.

Financing with mezzanines, which have virtually vanished from the credit markets in Ireland during the recession, has once again become a real choice for those who need financing beyond that provided by a leading creditor. Lenders of interest-bearing loans will take a first- and loss-driven stance and will usually reach an agreement that they will not get any capital repayment while prior liabilities are overdue.

Banks could provide 70% loan-to-value, with a further 10% of debts to be increased by a single provider of credit to fill the gap to the borrower's 20% capital, and a further 10% by a single provider of credit. Obviously, this kind of financing agreement is more costly, as the most risky part of the credit is taken over by the mortgage lenders: they are only repaid after the debtor is a seniors.

For example, borrower could anticipate the spread on distressed debt to be in the 10% to 13% band. The Unitranche is the trademark of non-bank creditors and was established in the USA in the mid-2000s. About three years ago it was launched in Ireland as a completely new offering for the major property financing markets in Ireland.

Combining the both the senior credit and the meszanine credit in a credit line with a unique mixed spread that reflects the weighting of both the maturity and the meszanine credit lines, it is a more common credit line offered by non-bankers. Credit-to-value rates of up to 90% are acceptable to a unitrank borrower, and although prices and charges differ widely from deal to deal, borrower spreads can range from 8% to 12%.

Resumption of financial resources is an essential part of the process of returning to a well-functioning real estate industry in Ireland. Good News is that the financing of investments in and developments of Ireland real estate is back, with one distinction, and with the promise of an elevated level of activities, especially in terms of building and developing.

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