cREdiT
cRunch
where they already have a strong
relationship with the borrower.
Ed Stansfield, an analyst at Capital
Economics says, “The banks seem to be
funding nothing unless they really have to.
Development finance is to all intents and
purposes unavailable at the moment.” The
share of the banks’ loan books that is lent
to property is at a record high and he
believes most banks would like to see that
exposure reduced, so there is likely to be
little new lending in the short term.
Who is lending and hoW?
Tony Edgley, MD of corporate finance at
Jones Lang Lasalle says, “There are
probably between 12 and 15 lending
institutions in the UK who – for the right
deal – are in the market and have about
£50m per transaction.” But they are being
selective; both assets and borrowers have
to come up to scratch. And anything more
than £75m has to be syndicated. This
borrowing is, “a very specialised sliver of
the market,” Edgley warns.
Just as mortgage margins have widened,
the commercial property business has the extent of the value destruction that has
become highly profitable for the banks. happened.” The property sector across
Rates for low risk, high quality assets – the Europe is only 2.5 per cent funded by
only ones the banks will consider – are publicly quoted equity, so though it’s good
standing at two per cent above five year to see shareholders displaying their
swap rates, Edgley says. With swaps confidence in the sector, this won’t solve
currently at 3.2 per cent, that means the capital constraints currently facing
borrowers are paying 5.2 per cent for 60 developers. And though it’s possible for
per cent loan to value, plus a one per cent existing quoted companies to raise money,
minimum arrangement fee and possibly an he can’t see new companies coming to the
exit fee as well. With base rates at half a per stock market unless they have a very
cent, that makes property lending a great convincing story and managers with a
business – as Edgley says, “If I can get six track record and reputation. Besides,
per cent on only 60 per cent of the value, Edgley says, “You need the power of debt.
on a risk adjusted basis that’s a very good
return on my capital.” The entire market
If the debt is not there, then the equity is
moribund.” So it seems that capital is a
Equity rights issues by major players
such as Segro, Land Securities and capitalisation of
constraint on the market across the sector.
Whatever the proposed development or
Hammerson show that equity investors
now have an appetite for risk. Ed Stansfield the FTSE property
purchase, funds are difficult to source and
banks are cherry-picking the clients they
says, “That may reflect a sense that the
quoted stocks had been rather oversold, sector is only half
want. It’s interesting that despite the high
margins now available to lenders, no banks
with extreme discounts to net assets,” says
Ed Stansfield. It’s enabled many of the that of Tesco.
yet seem to be taking advantage of the
chance to make a land grab for market
larger investment companies and
developers to repair their balance sheets. ‘That is the extent
share – though Santander has been
dipping its toes into commercial property.
But Tony Edgley thinks larger investors
are increasingly preferring debt. With six of the value
However, it does seem that we’ve
reached the bottom of the trough – at least
per cent available on a loan, while equity
yields are around the seven to nine per cent destruction that
as far as the availability of finance is
concerned. What remains to be seen is just
on a significantly higher risk, there’s no
equity risk premium priced in any more. has happened.’
how fast markets will recover – and on
that, the jury is still out.
In any case, he points out that the entire
market capitalisation of the FTSE property Tony edgley,
What do you think? Add your comments at:
sector is only half that of Tesco. “That is
www.propertydrum.com/articles/financing
Md of corporaTe finance aT Jones lang lasalle
14 june 2009 PROPERTYdrum
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