Real Estate Private Debt in France
To simplify historical market mechanisms, one may state that a Real Estate developer could finance his projects and growth through 5-10-year tenor banking debt or using equity. Decrease in interest rates and emergence of new players since 2008 have however allowed for new financing mechanisms to become more broadly used. These new financing means are more expensive but certainly more flexible, such as Private Debt. The Gearing ratio (or LTV) has in this respect decreased from 80 to 60% since the 2008 crisis.
Traditional financing means
Banking debt remains the most efficient and least costly solution for Real Estate developers. Based on France’s National Bank statistics, it is estimated that the cost of debt averages around 1.6% at Q4-17 for these promoters. However, banking debt required strong financial guarantees and strict covenants, sometimes hard to meet for promoters whose operations and financials are often cyclical.
Alternative financing solutions
In order for promoters to satisfy banking guarantees and hedge themselves against breach of covenants, Real Estate professionals are increasingly using private debt, such as senior debt, mezzanine or even crowdfunding and convertible bonds. These alternative financing means complement banking debt and are often later repaid, making them less secure and costlier.
The cost of these solutions may however be beneficial for promoters, notably because it often allows promoters to free up cash flow for the entire tenor of the banking debt, while often allowing promoters to remain in control of their companies. Specialized funds may also allow promoters to bypass rating requirements, making them attractive to new promoters.