06/12/2005 - 21:00

Mezzanine financing mainstream to many

06/12/2005 - 21:00

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Action currently under way by the Australian Securities and Investments Commission against Westpoint Group hasn’t swayed the enthusiasm of many property companies and lenders, who see mezzanine financing as a mainstream way of financing developments.

Mezzanine financing mainstream to many

Action currently under way by the Australian Securities and Investments Commission against Westpoint Group hasn’t swayed the enthusiasm of many property companies and lenders, who  see mezzanine financing as a mainstream way of financing developments.

ASIC is investigating Westpoint’s raising of mezzanine finance through retail investors, and says 900 investors are at risk of losing $75 million in a Westpoint apartment development in Sydney, a claim disputed by Westpoint.

Property finance provider Ashe Morgan Winthrop (AMW) has just bolstered its internal mezzanine capacity to more than $100 million, placing it among the biggest arrangers of mezzanine finance in WA.

AMW WA director John Salter said major mezzanine debt funding was going from strength to strength, driving property investment and development right through the current quiet market environment.

“Mezzanine debt is proving to be the lifeblood for savvy developers and investors who realise that getting into the market now not only lets them take advantage of good acquisition prices but also lets them set their completion timelines for the next upswing that will occur after this current hiatus,” he said.

“We opened a $16.5 million private mezzanine debt fund at the beginning of last year; it was fully lent within a few months and has been turned over several times since.

“Our newly expanded $100 million facility is quite a sizeable mezzanine funding pool, considering the money is only out for the short term, but we believe that we will see it fully allocated within an equally short period of time.”

Mr Salter said there was a false view in some sections that mezzanine debt was less legitimate than senior debt funding.

The BankWest property finance unit has been offering mezzanine finance for almost two years in Western Australia, and chief manager Troy Leber said that, until recently, mezzanine financing had been a very cottage industry.

It had now stepped up to be something that corporates were doing, he said.

“Mezzanine financing is becoming more sophisticated and being done by bigger players – most banks are unofficially doing it,” Mr Leber told WA Business News.

“For BankWest it was driven by our owners HBOS, who believe that the market is chasing down margins and that there are a lot of opportunities to provide higher levels of financing than traditionally offered by a commercial bank, and get higher returns.”

He said there were still very prudent lending criteria, and that mezzanine financing tended to suit residential unit developments best because there was a high level of project control and short project timeframes.

Traditionally, senior (usually bank) debt will extend up to 80 per cent of a project and have a first mortgage over property. Mezzanine finance is riskier as it is lower on the priority list for security, therefore attracting a higher return.

Private development and investment group Hawaiian, whose assets are estimated to be more than $1 billion, provides mezzanine financing as part of its development business.

Hawaiian’s general manager of property development, Stuart Duplock, said the mezzanine side of the business was about investing the company’s own money, not raising money from the public.

“Typically we lend $1 million upwards and returns would be from 15 per cent upwards,” he said.

“We always very carefully assess the risks and where possible mitigate them – we are taking a property development risk, so check the status of approvals and presales closely.

“We are very comfortable operating in that sector, and developers also like it because they can better spread their equity. They sacrifice total return, but better leverage their money.”

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