Ronson: Lenders' bad debt is the stumbling block for developers
Sunday 03 April 2011
Gerald Ronson's annual lunch at The Dorchester has become a grand affair. This year, 350 of the commercial property industry's leading businessmen and most influential commentators were looking forward to its courses of salmon and beef.
Before they could tuck in, Ronson, 71, spoke in his matter-of-fact, glass half full manner. The man behind Heron Tower, the soon-to-be-completed luxury City skyscraper adorned with a vast aquarium containing 67 species of fish, spelt out the problems facing the sector.
"The banking sector has not been able to provide the oil necessary to get the development wheels working again," he warned on Tuesday. "Banks still have a lot of unfinished business of their own and the big question is what happens to the parcels of toxic waste they have tucked away. The banks, especially the Irish ones, will be sitting on some big losses."
The property industry is facing a cataclysmic problem. If it can't borrow, developers can't build or trade property. Even though the sector praised last month's Budget – with its reintroduction of enterprise zones et al – this will all come to nought if property companies cannot get the money they need to do their job.
As Ronson succinctly put it, the problem was caused by the free and easy lending of the last boom. There is no new lending because many banks – some of the Irish banks, Bank of Scotland and Royal Bank of Scotland among them – lent on inapproprivate deals and schemes that are now worthless, and the debt is still on their balance sheets.
More than £52bn of property debt will need to be refinanced this year, with another £121bn next year. And this at a time when banks are being pressured by authorities into putting more capital on their balance sheets, meaning even less money is available for property loans.
Real-estate adviser Savills published its annual list of the top lenders last week, highlighting the way the market has shrunk. In particular it noted the dwindling number of traditional lenders, such as the German banks – except Deutsche Hypo, one of the few still active.
Ronson told his audience that, with the banks closed, they must seek alternatives to debt. "The opportunity here is for more imagination to be used to find solutions to help them unwind their positions."
The largest listed property companies, British Land and Land Securities, teamed up with wealthy partners to fund their City skyscrapers – the Cheese Grater and the Walkie Talkie – in the past 12 months. While listed developer Capital & Counties is searching for a partner with housebuilding or construction expertise, which also has the cash to help build its 77-acre Earl's Court scheme in west London.
British Land's chief executive, Chris Grigg, said: "The opportunity to borrow from banks against development has fallen and I don't see this changing. Development will now have to be financed by equity – finding wealthy partners."
A potential replacement for banks could be insurance firms, with French giant AXA and Britain's Aviva among those looking to lend on the right deals.
Michael Marx, the chief executive of listed property firm Development Securities, says: "Insurance companies are beginning to expand – we use Aviva and there is also Canada Life, but the list will grow. We may see new lenders come from growing overseas markets such as China and India also."
But William Newsom, Savills' UK head of valuation, warns: "The new names in the market are encouraging, but they are not making up for the reduced activities of existing players."
Some hope that mezzanine debt could cover the shortfall. This hybrid form of finance – between bonds and equity – is expensive compared with traditional bank debt, but gives property companies access to cash for dealmaking. Using mezzanine capital, though, means developers can save some equity for more dealmaking.
But Desmond Taljaard, the co-principal of the London office of investor and lender Starwood Capital Europe, says: "We have observed a more notable return of competition in the mezzanine lending market compared to the senior lending market. Investors are using mezzanine capital again, as it is cheaper than equity and is becoming more available."
Real-estate investors are looking closely at raising mezzanine funds. For example, London-based Brookland Partners is rumoured to be looking at starting mezzanine and senior-debt vehicles. Aerium, a European fund, is planning a raft of products, including a junior debt fund and a bridging-loan venture.
Matthew Cutts, the head of lenders and investors at adviser EC Harris, said: "It will be four to five years before we see the traditional lending market coming back."
Ultimately, though, the banks have the biggest balance sheets and developers will need those loans to come back. But it is thought that regulators could crack down on banks' property lending, as this was one of the major factors behind the crash.
Mr Cutts says: "The pressure on the banks is to lend to small businesses, not to property again. There is a backlash that property has not helped the economy."
Banks are under pressure to strengthen their capital base across Europe
In his Dorchester speech, Mr Ronson – who has lived through three recessions – warned of several more years of tough times. He predicted: "We are now, I believe, a third of the way through the recovery in the cycle, with 2014-15 looking like the most likely time for the sun to start shining again."
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