Since the previous bubble burst, banks tightened their loans Real estate. For example, if individuals request a mortgage, legal entities charge 10% to 20% of the cost of acquiring a home; Before 2008, they could borrow 100% or even 110% and enjoy the holiday after the last purchase. The same thing happened to contractors responsible for buying land, designing the building, and selling the homes. Before the great recession they could ask for a loan to buy the land and now the bank is forcing them to do it with their own funds.
This situation has led to the emergence of debt funds, a new player in the real estate sector. These funds are not evil post-balloon tools that specialize in foreclosures and home purchases. These tools work like banks, lending; but it only specializes in the real estate sector. “It is a business that comes to meet capital needs and financing for projects that banks are not interested in doing. Many want to buy assets, but it’s complicated because there were so many markets focused on it. Stronghold’s CEO, Eduardo Richi, says there is a lack of funding.
Stronghold is a debt fund founded in 2019 by an Irish and British partner. He has a credit line of 100 million euros with the North American investment bank Goldman Sachs.carries out its activities with This company lends capital to build homes and provides bridge loans for real estate transactions. We started to do business with non-institutional investors such as family offices that we know and that we have a relationship”, he summarizes.
Another company that will undertake many operations in the coming months is Velox Finance, which has European and Israeli corporate funds behind it. family officeand specialized in housing promotion and rehabilitation. “Velox Finance is a young fund trying to fill a gap. We will invest 100 million euros in 2023. loan from 750,000 euros to 5 million for small promotions, small and medium-sized developers. There are tons of funds giving out big tickets, but small companies are struggling to find help to finance their projects,” said María Pérez del Valle, the tool’s general manager.
Loans are more expensive than banking
As a small contractor from the Prensa Ibérica group explained to EL PERIÓDICO DE ESPAÑA, the Spanish bank currently demands, among other things, pre-sales of the houses to be built between 50 and 80%. Promotion Also, They do not give developer loans less than 1.5 million euros.nor do they give 100% of the cost of the job. “The bank needs constructive guarantees and therefore the construction firms that will build the project are working hard,” this promoter says. National agencies offer Euribor debt and a spread that can range from 200 to 300 basis points (2% to 3%).
In its place, debt funds require less upfront sales, about 50%, or even less if it’s a very good location. They also don’t lower their minimum ticket too much and prefer to work from one million euros because “working below building costs hinders them”.
Velox Finance lends between 9% and 14%. “Reforming to quadruple a large apartment and sell it by units in Madrid is close to 9, and a greenfield construction is close to 14%,” explains María Perez del Valle. on his behalf Stronghold claims to have no standard pricing: “Where banks provide 4% financing we are 8% or 9% and where banks are 6% or 7% we are 11% or 12%; about 500 basis points over (5%). not”. However, not all of the operations they receive are approved, 9 out of 10 operations are rejected.
Difference with bubble debt funds
Stonghold’s managing director explains how the tools that emerged after the bubble burst and the tools available differ: “Historic debt funds have had an opportunistic profile, with corporate, big buys from banks. We are different in what we do because we finance the investment and prevent our loans from defaulting.. Our focus is to finance and not fail. We’re also smaller in size of our operations and we’re funding smaller developers.”
“Debt funds may sound like bad funds, but no. The developer is a thinking head, knows the market and we provide financing on clear and easy terms. We are companions. Unknowing developer Alternative financing is looking for a partner, but you need to distribute the benefits obtained there. We are not him, we only want a percentage of what we put in and this will allow the profitability of the project to increase”, adds María Pérez del Valle.
According to this General manager Alternative financing from Velox covers 17% of the entire market; In the United States or the United Kingdom, it reaches 50%. “Now you see the bank pulling back and the businessman can’t sit still, he has to chain projects and open up to alternative financing that has a lot of room for growth,” he explains. They assure that they have “lots of capital to finance” from Velox Finance and close 20 trades in the next few weeks.