Karen Lennox speaks to the Royal Bank of Scotland’s Simon Hersom about his approach to lending.
Since the early 1990s, most UK clearing banks have put property on the back burner. It is German mortgage banks that have dominated the lending scene, increasing competition and squeezing margins, particularly in the past two or three years.
But one UK clearer has made its mark. The Royal Bank of Scotland has built up a commercial property loan book on a grand scale, earning a reputation as an aggressive lender.
The man behind the bank’s strategy is Simon Hersom, head of the property and finance group. Joining from Rothschilds in October 1994, he has since shaken up the bank’s lending team and its loan book.
RBoS decided to make property a priority after its board saw the profits that could be made, particularly from backing the Scottish Development Agency, says Hersom. “Unlike other banks, neither of the top guys minded property,” he says.
He is reluctant to say how big the bank’s property loan book is. But brokers who have done business with RBoS say that the bank privately claims to have lent some £4bn to the property sector.
“Our property exposure has grown faster than our peer group,” admits Hersom. “But we would expect to be out of line because we are a smaller bank and we went for a specialist niche.”
Since the early 1990s, many clearing banks have shifted power away from the branches back to head office. But Hersom has gone in the opposite direction and strengthened the RBoS branch network. “We have more people spread around now,” he says.
There are more than 500 staff involved in property lending throughout the country, building up contacts with local borrowers. “We are actually putting people out into the areas where it’s happening,” Hersom says. Regional business centres in Manchester, Edinburgh, Glasgow and now Leeds have expanded, turning in big deals.
Hersom is aware of the dangers, however. “Distance lending caused a lot of problems for everybody last time,” he says. So why has he done it? The answer is national coverage.
In one case, he recalls a London property company that wanted to fund property in Aberdeen. It was introduced by a broker to RBoS’s Manchester office. It helped, says Hersom, that the bank was close to the Scottish market and had people in Aberdeen just a phone call away. The loan ended up being written out of the London office.
A strong regional network is also the only edge the bank has over the German lenders, which do not usually have offices outside the capital.
To avoid a repeat of boom-time mistakes, Hersom has brought in a number of safeguards that are intended to filter out bad lending from the branches. “You can’t afford to train individuals in every branch as property specialists,” he admits.
A key part of his safety net is the grandly-titled Service Agreements for Commercial Property Appraisals – Hersom’s alternative to the Red Book. The bank gives this document – a detailed letter of appointment – to all of its valuers.
These new-look instructions ensure that the bank’s staff get what they need from an external valuation in a form they can understand, Hersom claims.
Overheating fears
The Bank of England is taking a keen interest in the bank’s work, particularly now that it fears that the property lending market is overheating.
Despite such concerns, however, RBoS remains a keen lender: “We will be comfortable for the next two years, and my guts say it could be longer. Prices, valuations and rents are rising, making investments look good. You can now sell secondary properties at good prices,” explains Hersom.
Industrial property is the bank’s favourite. “It is an area where other people aren’t too interested. It’s less exciting overall, but prices don’t tend to collapse either. And it doesn’t appeal to the German lenders. It’s not very pretty and you need local knowledge.”
Hersom has not shied away from development funding – adopting what others suggest is a high-risk strategy. In the past year, RBoS has advanced £100m to just one borrower for a retail shed development in Scotland. Hersom argues that development funding turns over quite fast, so the risk period is relatively short.
Funding Chelsfield’s speculative redevelopment of 1-5 New Bond Street in London is another example. Lending a relatively small amount to a well-known developer for a scheme in prime West End territory was not a difficult decision, comments Hersom.
But, for these types of risks, Hersom insists that decisions are made at head office by the specialist property team. “A provincial branch may get one development loan application in a year. You can’t expect staff to be up to speed on all the specialist procedures that have to do with panels of surveyors and valuers and so on.”
It would be relatively easy, says Hersom, for a branch to be “sold” a prelet funding deal only to find that no contracts with tenants have actually been signed.
His next goal is to go for deals in which the bank will put up some of the equity as well as debt. “I want something with an angle. We are building up relationship banking and we would like to share in the risks and rewards. We don’t mind taking a certain level of risk as long as it is equity and we get rewarded for it.”
West Register, which has been trading property on its own account for the past few years, is an example. “It was a work-out vehicle,” explains Hersom, “born out of the bank having a few problem loans from the late 1980s. We bought properties for virtually nothing and worked them. Now we are both buying on our own account and selling.”
One of West Register’s headline deals has been the turning of the Charles Church housebuilding company. RBoS had ended up as the largest member of a complicated banking syndicate. Most of the other banks wanted out when the housing market crashed, but could not agree a refinancing deal. West Register made an offer for the whole company and listed the loan stock. Having cleaned up the balance sheet, West Register then sold the company to another housebuilder, Beazer.
Keeping this kind of deal off the bank’s balance sheet allows RBoS flexibility to deal with some of its own property loan exposure as well as the ability to position itself to make an equity play. It reflects Hersom’s long term ambitions and his merchant banking approach to the business.
“We are a local lender with the desire to be there for the long run. We will do better if there is a crash next time because we won’t stop and engage reverse gear, but carry on and do better than those that have to stop dead.” He admires rival HypoBank, which kept lending throughout the early 1990s business slump.
“I would like to be in HypoBank’s position next time – steady as she goes, and keeping a weather eye on what’s going on. I don’t want to have to pull out. But every time we see a speed camera we do slow down a bit.”
