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
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Contracts Executive - City of London

£35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Guru Careers: Financial Director / FD / Senior Finance Manager

Up to 70k DOE: Guru Careers: We are seeking an experienced Financial Director ...

Day In a Page

Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen