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.

The following article is reproduced from The Telegraph Online

Investors pile into commercial property as Isas sales hit record levels, say the IMA

Commercial property was the most popular sector in October as investors renewed their appetite for Isas, according to the Investment Management Association.

By Paul Farrow
Published: 2:29PM GMT 01 Dec 2009

Investors have renewed their appetite for commercial property having endured dreadful returns for the best part of three years.

According to the Investment Management Association, the property sector was the highest selling sector in October, accounting for £367.6 million of net retail sales – the highest since May 2007. Property funds have seen positive net retail sales for seven consecutive months. It is in stark contrast to last November and December when property was the lowest selling sector.

The IMA added that gross Isa sales (£965m) were the highest ever for any October – and the highest monthly figure outside the Isa season since June 2000.

The demand for property has coincided with an upturn in performance. British commercial property posted the third consecutive monthly capital growth in October, at 1.9pc, according to the IPD UK Monthly Index. Since the market’s upturn, which began modestly in August, UK commercial property has produced a compounded 3.2pc capital growth. This has reduced the fall since the trough in July 2009 to -42.4pc, as measured by the IPD UK Monthly Index.

Tens of thousands of investors were persuaded to buy into commercial property at inflated values in 2006 and 2007, only for prices to come crashing down. Many funds fell in value by more than 40pc.

Funds that invest in actual bricks and mortar are not exactly the most liquid of investments, as the credit crisis showed. The crisis brought property deals to a halt, causing liquidity to dry up. Falling fund values triggered a rush for the exits as investors tried to withdraw their cash. Many funds imposed “exit fees”, suspended trading or introduced a notice period to stem outflows.

But investors appear to have put the turmoil behind them and money has been pouring in. So much so that last month it emerged that Hermes Real Estate and Threadneedle Property Investment were staggering cash inflow into their open-ended institutional property funds so that fund mangers were not under pressure to invest.

Billions of pounds, many of which is coming from overseas, is targeting UK commercial property after a sharp fall in asset values since summer 2007. However, investors have been left frustrated by a lack of quality assets on the market as cash-call bolstered property companies avoid selling into a distressed market and banks take their time to unwind distressed portfolios.

This had caused Threadneedle to halt new allocations to the Threadneedle Property Unit Trust, which grew from £310m at the start of the year to more than £400m at the end of the September. The fund had reached its maximum liquidity limit of 20pc, and therefore new cash will not be taken until the fund has made acquisitions.

“All the money that went out of the fund has come back,” said Don Jordison, managing director at Threadneedle Property.

©www.telegraph.co.uk

We are asked on a regular basis to arrange funding for those building developers out there that are still keen to get on with residential and commercial builds, but the reality comes as a shock to many of them, that despite the “supposed” masses of money the banks are lending they see none of it, and indeed are unlikely to, at least at anything near the terms that used to exist.

In the pre-Credit Crunch days there were two essential ways to finance a development project, go with a bank who would usually lend up to 65% of the land value and up to 65% of the build costs drawn down in stages as the development progressed, or secondly go with a specialist lender who would lend up to 60% of the Gross Developed Value (GDV),  often resulting in less input from the borrower and very often 100% of the build cost covered.

In the former case, it was great if you had the funds, most developers didn’t as their money was still tied up in the last development that was now being sold, in the latter case, these forward thinking lenders made development funding a much easier proposition.

Well we have the Credit Crunch, and a lot of the GDV lenders either closed their books (some of them having Icelandic parentage) or took a step back to see what the market would bring, and the high street banks just refused to sanction new deals at all, but would not announce to the marketplace that they no longer had an appetite for this sector.  Out of all this however there remains some specialists who still know what they are doing and can still help with the smaller projects.

We are now 2 years on and after the spate of large developers shedding completed stock, by bulk sales or heavy discounts, and closing up other “in progress” sites after making them wind and water tight, we have seen a gradual return, as in certain parts of the country work is starting once again.

The lending climate has changed however, the GDV lenders are few and far between but will look at smaller residential deals (very few lenders at all are looking at commercial builds unless they are either pre-sold or pre-let to a reputable end user) up to say £3m.  They limit their total advance to about 50% of the GDV and expect the developer to exhaust his own funds first before drawing on theirs.  Interest rates are higher often 9% p.a. and if the interest is to be rolled into the deal rather than separately serviced, the 50% limit has to allow for payment of these  as well.

The banks are still there in a minor way but are not keen to lend in excess of 50% of the land costs, and a similar amount of the build costs and there will always be the need to jump through an extensive array of “hoops” first, so don’t expect them to be major players for quite a time to come.

We are seeing green shoots, and the demand will always be there for housing stock to satisfy the British desire to own their personal bit of real estate, but unless the deal represents a very attractive return, there will be challenges for quite a while to come.

If you have a development project you would like our input on do let us know and we can point you in the right direction.