Despite rising interest rates and inflation, returns on real estate investments are reaching ever lower levels. In Geneva and Zurich, yields of less than two percent are no longer uncommon. Subordinated real estate financing can have an advantageous return for all parties
The definition of a subordinated real estate financing
Subordinated real estate financing is granted after traditional bank financing to release additional liquidity. The key factor here is a reputable market value of the property determined by a renowned real estate appraiser. On this basis, up to 80% credit is then granted for a term of two to three years. As security, mortgage notes of the property to be lent against are deposited with the lender. This form of financing is equally possible for existing properties as well as for construction projects.
Increased returns on construction and development projects
For real estate investors and developers, taking out subordinated financing can significantly increase the return on equity, especially for construction, development and promotion projects. Either existing properties can be mortgaged or the construction or development project can be financed directly by means of subordinated financing. The following calculation example shows the significant increase in return on invested equity: Project creation by means of subordinated financing not only increases the return on invested capital, but also enables additional and larger projects to be realized more quickly. However, the use of more debt capital also increases the risk for the developer. Vacancies after completion, sales difficulties or higher construction costs are factors that must be carefully considered and weighed. Another relevant factor is the affordability of the financing. Due to the increased financing costs, sufficient liquidity must be generated to cover them. Accordingly, liquidity planning is essential.
Increased returns for investors
For some real estate investors, buying at the current low yields is no longer an option. Since there is a lack of alternatives for a medium-term investment, lending in the form of subordinated financing can be an interesting alternative. By lending to an experienced developer for properties in regions with strong demand, the lender can invest liquidity for two to three years at an interest rate that exceeds traditional real estate investment returns. The real estate investor has a lower risk than if a direct investment is made, since an equity buffer is available. The main risks for the investor are, as with all loans, the insolvency of the real estate developer and the development of the market. The subordinated borrower’s note provides a certain degree of security. Should a default occur, the investor must make a claim.
Structuring and access
Corefinanz takes over the structuring, dossier preparation, as well as the capital search in its own network for borrowers. For further information, please contact the Corefinanz AG team at +41 44 269 80 80 or send an e-mail to info@corefinanz.ch.
