Black economic empowerment (BEE) enabler Property Partners is heading a consortium that has launched a property finance company, Triple Play Capital. It has a R2-billion target for BEE mezzanine finance in its first year.
Mezzanine finance is crucial to large-scale empowerment property development. Few BEE property investors have capital to make up the difference between what the bank lends them and the cost of a development. Mezzanine finance makes up that difference - usually between 20% and 30% of the project - and broadens BEE property investment opportunities.
It is called "mezzanine" because typically it is needed at an in-between stage of financing between equity and mortgage debt. The mezzanine financier puts the money into the project after it has been granted the principal loan from a bank. It combines equity and debt at a cost to the project of between 4% and 7% a year more than the mortgage debt. It must be repaid after a few years through the refinancing of the property. If the project fails, the bank will be the preferred creditor and the mezzanine financier could lose all his money.
Triple Play Capital's target R2-billion will bring the total of mezzanine finance available to R4,5-billion. Rand Merchant Bank and a black consortium recently launched Makalani, a financier which will raise up to R2,5-billion through a JSE listing.
The combined amount could back as much as R20-billion worth of property investments over the next year or two. Most of it will be allocated to listed funds, to acquiring part of government's R120-billion portfolio, and to partnerships in large corporate portfolios.
Triple Play will provide three levels of property finance, says Property Partners CEO Stuart Chait. This will cover principal debt such as first mortgage bonds, mezzanine finance and equity finance, for which Property Partners has raised R600-million from offshore investors.
"Banks in SA are conservative property lenders compared with those in other countries," says Chait. "And that is giving us our opportunity.
"It's high-risk money, but it's property risk, which we understand," he adds. "And our property knowledge and ability to transfer skills to BEE property investors will, in any event, reduce that risk."
But mezzanine finance comes at a price. The project pays interest on the debt and the financier takes a large chunk - up to 50% and sometimes even more - of the shareholding. Even at this price, though, it can be attractive to developers and investors. This is particularly so in a rising market, when even if they have their own capital, they can use mezzanine finance to spread their investment over more projects.
BEE mezzanine finance is attractive to those who offer it because it gives them a bite at some juicy property deals that otherwise would be restricted to BEE players.
Chait says Triple Play's policy is to support black property investors who have a minimum 50,5% of a project after all finance is in place. "So our investment will usually be in black-owned, rather than BEE, projects."
Chait was a founding partner in SA's first major BEE company, Mvelaphanda.
Financial Mail
Publisher: Financial Mail
Source: Inet Bridge
