Property's cash dash shuns banks

With traditional lenders reluctant to come up with funding, British developers are now having to look elsewhere for the money – and in this they are proving both innovative and successful, says Russell Lynch
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The Independent Online

In the wildest days of the credit boom, any property developer with the merest twinkle of a scheme in his eye could rely on big bucks from the banks. The likes of Peter Cummings, corporate supremo at HBOS – one of the worst offenders – were handing out wheelbarrows of cheap cash. Between 2005 and 2007, banks lent an enormous £84bn to the property sector. Slicing and dicing these loans through securitisation merely extended the party. It was too good to last, and it didn't.

Pressure may be mounting on the Coalition to get Britain's reluctant recovery moving again with a major housebuilding programme, but finding new sources of funding is also critical for developers facing a unique funding challenge to revive commercial building schemes.

Now that they're nursing a painful property hangover, banks don't want to know.

Many have had to extend the terms of tens of billions in loans doled out before the punchbowl was snatched away in late 2007 – so-called "forbearance" – to avoid having to make provisions on the debt and blasting a hole in their own balance sheets. It hardly augurs well for new lending.

De Montfort University's latest study underlines the scale of the problem. Sliding property values mean up to £100bn of the £213bn in debt held against commercial property will struggle to be refinanced on current market terms when it matures, as it has a loan-to-value of more than 70 per cent. De Montfort estimates an overhang of £51bn in pre-recession property debt falls due this year, and £153bn in total by the end of 2016.

Adding to the banks' difficulties – and those of the property sector looking to borrow from them – are looming regulatory changes. The sector is still in discussion with the Financial Services Authority over reforms which will force banks to hold more capital against their commercial property loans, making new lending even less likely.

In the face of such difficult fundamentals it's no wonder that property firms are nervous. Only the biggest players like British Land and Land Securites – currently building the Cheesegrater and Walkie-Talkie in the City of London – have the balance sheet firepower to develop speculatively, and even then they will only risk it with joint-venture partners.

It's also plain why so many finance directors are keen to shift funding sources away from the banks.

Liberum Capital's Alison Watson said: "The number of active lenders has shrunk, margins are increasing and loan-to-values are falling. Refinancing is tough unless you are a major REIT (real estate investment trust) with a strong track record. Development finance remains very thin on the ground. For a REIT having a diversified source of funding reduces risk."

British Land and Great Portland Estates have both tapped up the US via the private-placement market, selling debt to a select pool of US insurers. Even much smaller players have done the same thing, like the self-storage company Safestore, which raised £73m in the US alongside a refinancing of its existing bank facilities in May.

Its chief executive Peter Gowers said: "You have to be able to access as wide a range of funds as possible to help drive growth. We added to our UK banking relationships by going to the US for further, long-term funding, at rates as good as or better than those on offer in Europe. Cross-border funding was once really only for large multi-nationals, but now it is an important option for more UK-focused businesses to consider."

Derwent London went a step further last month by doing a deal direct with Cornerstone – the real estate subsidiary of the US insurer Mass Mutual Financial – which is looking to expand into Europe after lending $5.7bn (£3.5bn) on real estate in the US last year. Derwent, which is cutting its reliance on banks from 80 per cent of its debt to 50 per cent, borrowed £83m for 12 years at an attractive rate of 3.99 per cent and secured on two of its properties in London's West End.

Dealing direct with one insurer also saved the property company the hassle of doing an investor roadshow, while arranging the loan in sterling also saved on currency conversion fees.

Derwent's finance director Damian Wisniewski said: "The UK banking system and European banks are not as willing to lend to property companies as they were. However, US, Canadian and some European insurers like the UK market. It is becoming a very important source of funds for our sector. It's one of the things that will help the industry. They will not lend to everybody – there is a difference in the pricing and availability of debt for those who can and those who can't."

CLS Holdings, a property company with assets in four countries which counts the Government as its biggest UK tenant, is going even further outside the box. Having tapped up the Swedish bond market for funds last year, it plans to test the appetite of private investors for unsecured debt on the London Stock Exchange's order book for retail bonds (ORB), potentially raising £50m later this year. The LSE launched the ORB market two years ago to cater for demand among retail investors for corporate bonds, allowing them to buy in for as little as £1,000 compared to the £50,000 or £100,000 blocks previously demanded.

Its chief executive Richard Tice said: "Where one type of traditional lender recedes others emerge to take its place, be it insurers or the US private-placement market. Markets evolve, it's a natural part of the process. I wouldn't be surprised to see more property firms going into UK retail bonds by the end of the year."

The innovative move embodies the defiant message emerging from the UK property sector: who needs banks?