Stripped bare: The banks’ beauty parade, enticing clients with promises of better deals, is over. Where does that leave development? By Nadia Elghamry
It has been like a beauty pageant. For the past few years, banks have shimmied down the catwalk displaying their wares, enticing clients with bigger, better assets and promises of shrinking margins. But now it is the swimsuit round. Funders are almost stripped bare, and they are afraid to come out of the dressing room.
Banks seized up last year as the full force of the funding crisis hit. Overnight, cash for development disappeared. It has left the North West lending scene barren.
The party line is that banks are still in the market “for the right deal” or for clients with whom they “have a relationship”. But few are willing to step forward to back up that position.
HBOS declined to comment on its lending, as it struggles to consolidate its position following losses of £10bn. Abbey – which took over Alliance & Leicester’s commercial lending functions in Manchester last year – also proved too shy to put forward a commentator.
Others have simply disappeared. Iceland’s third-largest bank, Kaupthing, which, until last year, had a Manchester office at 1 Marsden Street, is now nationalised; Allied Irish Bank announced crashing profits this month as bad property debt provisions bit; and Royal Bank of Scotland has publicly stated that it is shrinking its commercial lending portfolio.
It is as if the banks have put their lipstick on – but behind the gloss, the teeth are broken.
No appetite
The signs on the doors may say “open”, but the vaults are shut, says Dave Wilson, partner at BTG McInnes Corporate Finance team in Manchester.
“In the last quarter of 2008, banks had no appetite for transactions,” he says. “They made noises that they were still open for business, but then they’d decide not to pursue opportunities. They would get a sniff that a competitor was doing something and they’d make an offer, but not at a competitive level, purely so they could say they were still doing business.”
Since February, the banks have begun to specify the basis on which they will lend, says Wilson.
Arrangement fees have trebled, as have banks’ lending margins – now generally around 3% above base rate, compared with 1% last year. But with base rates at historic lows, he says out that lending rates are actually lower than at the peak of the market. Hedging products are still available, although they are understandably more expensive.
Wilson says that The Co-operative Bank, some of the Yorkshire banks, HSBC and the NAB-owned banks are still in the market, but that HBOS and Barclays “don’t seem to be doing anything”.
Those involved in deals are reticent to talk about loan-to-values, but Victoria Hoyle, assistant director of corporate finance debt advisory at Deloitte in Manchester, says that, whereas banks would have looked at 75% LTV or pushed to maybe 80% for a good client, “now we are looking at a number beginning with a six”.
Hoyle worked with Peel Holdings to raise the £360m of funding for MediaCity in November 2007, but says she has not done much property work recently, bar a few investment funding deals. She advises any developer looking to raise cash to start early. She says: “Any equity has got to be in cash, and banks are all focused on tenant quality and on the interest cover ratio covenant [used to calculate a company’s capacity to cover interest obligations of a loan].”
It is clear that banks have become public enemy number one. But they too are suffering, as Phil Basten, head of property finance at the Co-op Bank in the North West, explains: “Which bank has an appetite to substantially increase its property book? There is an issue with liquidity and Basel II [the international standards for banking], and all those things make property funding a difficult thing to operate.”
He believes that some re-educating needs to be done. “The raw cost of money has changed, and the banks have not been very good at explaining this to customers,” he says. “If the cost of potatoes goes up, then the cost of chips goes up.”
The Co-op Bank is 100% funded by deposits, has historically uber-conservative lending criteria and is one of the few with funds left to distribute.
“We were very dull and now, all of a sudden, we are perceived as being incredibly sexy,” says Basten. “We stuck to the senior debt model, we are not as aggressive on pricing as our competitors, and we like to get underneath deals. A few years ago people would smile when you said that and wonder why. Now they all do it.”
Club deals are providing some relief for those trying to raise large sums, but these are notoriously difficult to put together and increasingly pricy for clients.
Wilson says: “We did two last year and we shared lawyers. Nowadays, you get to the point where you have separate interests, and you’d want separate lawyers.”
Funding scars
For developers, debt funding is something they simply do not want to talk about, but the scars are there for all to see. Bruntwood, for example, completed a large securitisation in February 2007, raising £440m in a placing that it said was over-subscribed and achieved “extremely tight pricing”.
Although it set its values at the peak of the market, there is no indication that Bruntwood is about to breach its banking covenants. How it would feel about a similar cash-raising arrangement today is anyone’s guess, since the company will not comment. But as one market commentator puts it: “If I was Bruntwood, I’d be slightly concerned about it.”
Even those with a relationship and funding facility with a bank are feeling the pinch. Cibitas Investments, the Manchester-based developer behind the 95-acre regeneration of Holt Town Waterfront, is perhaps more secure than others as a special-purpose regeneration vehicle owned by ING Real Estate, Stanhope, Waystone and private investors.
“We have shareholder funds, but our model is based on minimum shareholder equity and maximum bank finance,” says Sally Cockshaw, development executive. “We have a facility with HBOS for site assembly, and normally we’d have some headroom, but that isn’t there any more, so we are not physically doing any acquisitions,” she adds.
When this might change is a question voiced over and over again. John Hughes, development director at Ask Developments, points to discussions the firm had to fund its £42m St Petersfield scheme in Ashton-under-Lyne.
“Negotiations with banking partners have proved difficult,” he says. “We’ve got detailed planning permission, we’d agreed a maximum price with contractors, we were within three months of a start on site, and we’ve had to put it on hold. It is nothing to do with the concept, but purely the ability to leverage the cost of construction.”
Property Alliance Group’s Axis office building is “the only live project in the city centre”, says Hughes, and he is intrigued as to how it managed to secure speculative funding (see below).
Market whispers suggest that the bank was keen to get close to one of the parties. A year ago, many would have agreed with this tactic, but as former beauty queen banks emerge, battered and bruised, with streaky mascara and lipstick smudged, now it is far from the norm.
Joint venture secures Axis funding
Many commentators want to know how Property Alliance Group’s 18-storey Axis office building on Albion Street in the centre of Manchester has survived the carnage.
Dominic Pozzoni, director at Property Alliance, says its joint venture scheme with Development Securities has funding in place with Alliance & Leicester. He adds that all piling for the construction is now complete.
Pozzoni will not state figures nor discuss details of the funding deal, but adds: “Our track record is excellent. We are known in the market for grabbing occupiers and to work with them.”
Yet even Property Alliance, with its cash in the bank and a bullish attitude, has yet to spend that cash. Pozzoni is reticent to push ahead, and called contractors off the site six months ago. And the developer has yet to sign an occupier.
Pozzoni agrees that an occupier’s decision to take space in a flash new headquarters building may be seen as tasteless in the current climate. “That’s why we’ve taken our people off site,” he says. “But we are looking to be back on site in the summer this year, with a completion date of 2010 or beginning of 2011.”
For many other developers, pushing the start button feels a long way off. Many will be looking at a two-year time-frame before funding eases, meaning that, for many schemes, a start on site will continue to slip further away.
