Ronson: Lenders' bad debt is the stumbling block for developers

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."

Start your day with The Independent, sign up for daily news emails
News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film
Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
News
news
PROMOTED VIDEO
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
news
News
i100
Sport
Alexis Sanchez missed a penalty before scoring the opening goal with a header at the back post
footballLive! Sanchez makes up for penalty miss to put Arsenal ahead
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
News
i100
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
Sport
Rooney celebrates with striker-partner Radamel Falcao after the pair combine to put United ahead
footballManchester United vs Newcastle match report
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all