real estate finance - Christmas round up
16 December 2011
For much of 2011, developers and investors have been concerned
by what they perceive to be a general withdrawal by lenders from
the market for the funding of commercial real estate
development.
The Property Banking Forum, a joint initiative from the
Investment Property Forum and the Association of Property Bankers,
recently published a
report on UK development finance. It turned up some interesting
results and we have summarised the highlights below.
Who is doing what?
Of the 29 lenders and 24 property companies surveyed, the forum
revealed that 11 lenders (including 5 UK lenders) have already
concluded transactions this year. The remaining lenders confirmed
that they either had no plans to provide development finance (10
lenders) or else showed "encouraging signs for lending in the
future" (8 lenders). Interestingly, 5 of the insurance companies
and one mezzanine fund who were surveyed confirmed that they have
no intention of providing any development funding, although they
indicated that they would be prepared to participate in forward
funding arrangements.
Availability of development finance
The report also revealed that, whilst development finance was
obtainable, its availability was regarded as selective and
expensive, with many developers now taking the view that they would
"have to adapt their business models to survive". Of the banks
surveyed, 16 of them expected to lend in excess of £2billion of
development debt in the UK in 2011, both at levels below £10m and
also at the £10m-£50m threshold. Whilst some lenders indicated they
would be prepared to lend in excess of £50m, it was reported that
this would only be for the very best sponsors who could offer
excellent development opportunities and that, in these limited
circumstances, the ceiling for lending would peak at £125m.
Interestingly, 13 of the lenders surveyed revealed that they were
happy to lend regionally, somewhat dispelling the myth that
regional lending is often more difficult to obtain.
Speculative funding remains, unsurprisingly, a particular
challenge for borrowers, many of whom confirmed that they will
actively consider preferred equity in the event that banks are not
willing to lend at all or in sufficient amounts.
Preferred development sectors
6 of the 16 active lenders confirmed that they were prepared to
lend in the office, retail, industrial, residential and hotel
sectors. Perhaps unsurprisingly, the strongest areas of interest
were office and retail, but the report also suggested that there
was a wider level of interest across all property types, which is
encouraging, especially for the residential sector which has been
especially hard hit in recent years.
Mode of lending
Most of the lenders surveyed confirmed that they prefer to
operate on a bilateral basis, largely for reasons of greater
control. In syndicated transactions, it is usual to obtain the
consent of the majority lenders to any variations or amendments
which can, potentially, lead to disagreement amongst the syndicate
and delays in making important decisions. With bilateral loans,
there is only one lender, hence the decision making process is
wholly within the control of that particular lender. In a difficult
market, one can understand why bilateral lending is likely to have
greater appeal.
What is in store for 2012 and beyond?
The lack of funding (or, to be more accurate, restricted
availability of funding) is attributable to a number of different
considerations, not least the current debt crisis and general
global economic climate. It therefore seems unlikely that we can
expect to see any immediate signs of recovery in our sector in
early 2012.
It is also important to note the new capital adequacy
requirements under Basel III which, when implemented in early 2013,
will introduce a new global regulatory standard on bank capital
adequacy and liquidity. These regulatory changes and increased
funding costs will further impact on the availability of finance
and will result in an additional increase in the cost of lending
across the banking industry. These requirements will be introduced
on a global basis (with modifications). They are likely to prove
costly (and therefore unpopular) for borrowers, but these measures
have been introduced on a global scale to address the deficiencies
in current financial regulation and prevent the repeat of another
financial crisis, thereby protecting the global banking sector and
its investors for the future.
Our real estate finance team are at the forefront of market
developments and are well placed to assist you with any of your
funding needs. To find out more, please contact Nina Armstrong or
Paul Ray.
The content of this bulletin is provided for the purposes of
general interest and information. It contains only brief summaries
of aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
not provide a substitute for it.