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Money matters
ONE of the greatest challenges facing developers and operators in the current market is the reluctance of banks to lend. Clearly the reckless lending policies in the boom years created many of the economic problems we now face and therefore it was prudent for the banks to tighten their lending criteria. Greater emphasis is now given by the banks’ credit committees to historic trading records and the quality of the management team seeking to borrow funds. This approach is soundly based and will help to avoid a repeat of the earlier problems. However this has created particular issues for property developers and for purchasers of businesses which have underperformed the market and which therefore are priced to reflect ‘hope value’. Inevitably these lending policies have
affected the market and have resulted in a reduction in the value of many development sites and businesses which are trading poorly when compared to their peers. Some developers and business owners decide to fund the early development stages by using their own equity. For those who have insufficient funds available, or who do not wish to take on such a commitment, there is a need to explore other avenues. One route to consider is the sale and
leaseback, whereby an investor provides development funding in return for a commitment on behalf of an operator to take a long term lease of the premises when they have been completed. Depending on the quality of the location and the prospective tenant this can be an attractive option for both parties, and can generate a
good return for the investor at a time of historically low interest rates. Alternatives include the use of private
equity. Some private equity funds have been set up specifically to concentrate on development propositions. There is extensive interest in the leisure sector where the management team looking for backing has a strong track record. A number of established private equity houses with substantial funds at their disposal are always on the look out for appropriate investment opportunities. For smaller ventures or start ups it may be necessary to attract funding from high net worth private individuals. An added benefit of private equity
investors is that they often bring with them considerable business experience which can add value to the partnership over and above the financial commitment. Although in the past private equity investors have often taken a short term view with the intention of selling their shares within five years, there is an appetite amongst some investors now to adopt a longer horizon. Finally, it is sensible to find out about the
lending criteria of smaller less well known banks, some of whom are seeking to fill the gaps left by their higher profile competitors. As smaller organisations they can sometimes be more flexible than the high street banks, although they too will undertake in depth due diligence on any prospective borrower. Borrowing is certainly not easy in the
current market but a review of the alternatives can open up unexpected ways in which to raise capital.
bflmagazine.co.uk 13
The reluctance of banks to lend has resulted in a reduction in the value of
many development sites, but there are alternatives to raising capital.
John Anderson, chairman,Humberts Leisure
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