Corporate Finance Associates Blog

Asset rich and cash poor, how many times have we heard that phraseology?  But what about ‘We can afford to pay it (the interest) and repay it on time but don’t have any money to put in’?  The concept of self certification mortgages has finally been put to rest and are no more, but we are still being asked to help businesses that espouse the latter scenario in that they will make good money from what they are doing, so repayments are easily covered, and will make a significant profit a short way down the line, but the lenders don’t like this approach.

The old saying about a banker is that he is someone who lends you an umbrella when the sun is shining but wants it back when the rain starts falling, very apt, but it should be remembered that is what they are, bankers, not property investors, not widget makers, not housing developers, so to expect them to take an entrepreneurs view rather than a risk takers view is wishful thinking.

Bankers want to see their borrowers share some of the risk, which is why even if a property can be bought cheaply, under what is deemed to be its market value, it is unrealistic to think that ALL of the money can be borrowed so some lenders have reverted to their ideal which is to lend a percentage of the market value or the purchase price whichever is the lower so that in every case the borrower is risking something, even if it is not cash but a charge on some other assets they own.

A good development deal is another case in point, the end profits may be good, but if the developer is taking no risk at all at any stage, even if they actually recoup it later, lenders won’t either.

Borrowing is a partnership, so put something of value on the line and you will get the support, try to do it without and the project will never happen.

The market has changed but realistic borrowers will still get the support their project deserves, they may just have to put the banker’s hat on for once.

If you have a proposition that merits investigation, do visit our contact page and get in touch, we will be honest enough to let you know what can be achieved.

Many times the pervading view is that bargains can be had when buying at auction however, property auctions are not for the faint hearted and the risk can be that you go overboard in the heat of the moment.

Some bargains can be had at auction but usually only for those with the skills to capitalise, namely builders and developers who can add value to the stock and overcome the challenges that are often the reason why the property went into the auction in the first place.

I have seen 1st time buyers looking for a property that they can “do up” to live in but the fundamental point is that a lot are not mortgageable by standard means and often involve bridging for a short time until they are. A point to be aware of here is that some lenders, if strictly following the Council of Mortgage Lenders guidelines, may not be prepared to finance you out of the bridge for 6 months, so you need to know that the deal will stack up with 6 mths worth of bridging costs potentially being included.

A lot of stock ends up in the auction because there may be title issues, condition issues or in the case of a lender repossession they have to be seen to be getting the best price on the day, which the open auction is designed to achieve.

You also need to factor in that the 10% has to be paid on the day in cash (or draft) and you will lose it if you cannot complete because the fall of the hammer is deemed the actual exchange of contracts. Some auctions are also 14 day completion so watch out for those.

So what I would say is don’t discount it out of hand if you do not class yourself as experienced in these things, but do your own due diligence. Get the auction catalogues, select some suitable properties, view them critically, and decide what you think they are worth with all the tools that are available on the internet, go to the auction BUT DON’T BID! Just see what they go for and what sorts of people are buying them.

I would suggest you need to visit at least 5 or 6 auctions as an observer first to get a feel for things. If it is then right, surround yourself with the people who can help you, a capable broker like ourselves, a solicitor used to completing in auction timeframes (extremely important) who can also scrutinise the legal pack first, possibly a tame surveyor who might look at the property for you for a “drink” and maybe a builder who can give you the “warts and all” costs to turn the property into something that will have value.

The bane of my life is the amateurs who have watched only a few episodes of “Homes under the Hammer” or Sarah Beeny’s “Property Ladder” and think they can do anything.  Good luck to them if they enter into this sort of transaction, as long as they go into it with their eyes wide open, but many don’t, and remember the auctioneer’s guide prices are just to get people through the door and put “bums on seats”, they often bear no resemblance to what these properties may go for, but they alone obviously get some potential purchaser’s juices going.

We are often asked to help with funding auction purchases for commercial or investment purposes and we frequently need to resort to some form of bridging or short term funding to achieve that.  Do give us a call if you have seen something in an auction catalogue that catches your eye, but do it early on and we can do our best to guide you through the process should you intend to be successful bidding at auction.  Contact us here for further details.

The following was posted on Commercial Introducer.com

Fitch Ratings says that it expects European banks’ commercial real estate (CRE) exposures to remain a material credit issue through 2010, and refinancing will be a particular concern in 2011 and 2012 when a high volume of property loans fall.

This may lead to further negative rating action on European banks relating to their commercial real estate exposure, though action is likely to be limited in scope.

Gordon Scott, Managing Director in Fitch’s Financial Institutions team, says:“Many banks have not yet reported substantial losses on their CRE portfolios, despite significant declines in asset values in certain markets and segments. This is partly due to timing and serviceability, as long as loans are being serviced banks are unlikely to report the loan as non-performing.

“However, with a large proportion of loans in negative equity, Fitch expects pressure on borrower cash-flows and increasing loan covenant breaches to result in further losses.”

Corporate defaults typically peak after economic contraction ends, suggesting that loan losses (which themselves will lag default) may not peak until into 2010. Lenders may be protected to varying degrees by their underwriting standards, particularly those whose exposure is in good locations, with good quality tenants, and longer leases.

Loans written prior to 2006-7 at lower loan-to-values (LTVs) will be better placed to withstand additional pressure. A prolonged period of economic weakness and/or further asset value declines could result in a significant rise in defaults.

Scott says:

“Banks are adopting a more conservative approach in terms of new underwriting and pricing of commercial property loans. Many banks are also under significant pressure from regulators, shareholders, politicians and other market participants to de-risk their balance sheets, which has potential to reduce the overall supply of credit to the sector.

“All of these factors will severely limit borrowers’ refinancing options for the wave of European property loans with high LTVs that mature in the four years from 2010.”

Irish banks’ commercial property exposure remains very high relative to tier 1 capital, and they are particularly exposed to development finance. In the UK, exposure has risen sharply since the early 1990s and is high relative to tier 1 capital at the two state-backed banking groups (Royal Bank of Scotland Group and Lloyds Banking Group, both rated ‘AA-’/Outlook stable) though recent capital-raising initiatives will reduce this.

Spanish banks’ CRE lending has quadrupled since 2002. Most medium and large sized cajas (regional savings banks) and medium sized universal banks have high exposure to the property sector (around 30% of total lending) making them vulnerable to further adjustments.

In Germany, CRE exposures also represent a high proportion of tier 1 capital at many Landesbanks and specialist property lenders. Exposure to the most stressed markets – the US, the UK and Spain – may pose a serious challenge for individual banks’ asset quality. More than 40% of German banks’ CRE exposure is international, according to Fitch.

Rating action is possible for banks that Fitch considers to be most exposed to downside risk from continued adverse market developments, particularly if in the agency’s opinion loan impairment reserves appear inadequate and/or capital appears to lack sufficient buffer to deal with potential problems.

It should be noted, however, that many of the European banks most exposed to CRE already have low or weak Individual ratings; while their stronger Issuer Default Ratings are driven by support. This is likely to limit the number of potential negative rating actions.

The report, “Banks’ Exposure to European Commercial Real Estate,” is available at www.fitchratings.com. Fitch is undertaking a more detailed bank-by-bank analysis and will provide further commentary as more data is available.