Mr. Jonathan Rhodes, Director & Head of Valuation of Capital Markets at G L Hearn – Property Consultants -- gave an outstanding presentation to the LAI London Chapter, entitled: "Lending to commercial property -- 'Please, Mr. Banker, can I have some more?!'"
If I had been Jonathan, I might have said ‘no!’, and sat down to enjoy the rest of our lunch on 18th June. That was, after all, the essence of his message. However, he was also a bit like Elijah (well, despite my age, I don’t actually know what Elijah looked like) and, in an excellent and richly fact-filled talk he chose also to offer some prospects ‘no bigger than a man’s hand’.
The recent history of bank lending is a cautionary tale of over-optimism, lax control and cavalier attitudes to securitised risk. Whilst, in your scribe’s view, this will all have been forgotten by 2019, Jonathan traced out the present emaciated and over-stretched state of the banks; as he noted, Lloyds Banking Group (vice Halifax Bank of Scotland) and Royal Bank of Scotland are, in effect, the largest landlords in the UK. With two thirds of present debt expiring within 4 years, and with the 35-40% fall in values decimating LTV ratios the banks have been forced to take a cautious and phased approach to retrieving their exposure; this has frustrated the hoard of circling vulture funds. The banks’ position has been slightly relieved by low base rates, which has made re-financing a little more reachable. They are also helped by a strengthening investment market for the ‘best’ properties – the Germans being particularly active, but a wider range of Funds are starting to see good property as a ‘least bad’ haven. This has encouraged debt-equity swaps with a 3 to 5 year work-out.
Nevertheless, banks generally are seeking to de-leverage and recapitalise. They are also running scared about the riskiness of their clients and further slippage in values. As a result – ‘no!’ There are only about 10 possible sources of lending, and these are all highly selective and risk-averse: only those with the right property and who can show themselves to be the right borrower with a good track record need apply. If you get over this hurdle, you will get no more than 65% LTV and have to pay 200-250 basis points margin. Any property that can be seen as secondary, carrying undue risk or involving residential is poisoned from the word ‘go’.
Now for the cloud – a good thing because it promises rain! Wholesale money markets are starting to unblock, which will relieve the liquidity of banks’ stock. i.e. money. As the property market improves, the fundamentals of borrowing/lending will look more interesting. Perversely, this may be particularly so in the secondary market once fear of small business insolvencies recedes. Maybe soft rain will start to fall in 2010 at the top end and 2011 at the secondary. However, terms will remain tight, with hedging fees against inflation staying high because of governmental indebtedness; for a long time, banks will look for better terms for less risk. This mildly optimistic outlook carries one underlying assumption: that politically driven calls for ‘better’ regulation cause no material damage to the banking structure.
You will recall that the worshippers of Baal came to a sticky – perhaps investors in property - and banks, need to learn from their example and convert.
Michael Mallinson,