The days when property investors complained bitterly about the lack of credit, even for compelling projects, seem a surprisingly distant memory, given how recent they were.
Even while parts of the property economy – such as development in the regions – still struggle to attract finance, we seem to have entered an era of aggressive competition among finance providers of many different stripes for the custom of property owners.
Competition among lenders must feel good for many borrowers, but better credit availability and pricing for borrowers often means falling underwriting standards for lenders. The better the deal for the borrower, the riskier it probably is for the lender; any cautious lenders out there will find it hard to win much business in this newly competitive environment. Are we already experiencing the beginning of the next unsustainable boom, leading inexorably to another bust? Do lenders know what they’re doing?
Without a doubt, many do. The experience of the last, catastrophic, crash is very fresh, and the market is full of people who will have learned from it even if they made mistakes during the last boom. But the rapid increase in deal flow (and lending team size) over recent months, coupled with the fact that junior lenders will have had few deals on which to cut their teeth in the past few years, suggests there must be many with limited experience. The return of development finance, particularly in specialist areas like high-end residential, poses challenges for a lending industry that has financed precious little development since before the crash.
Of course, the property lending market is no longer as dominated by the banks as it used to be. They have only gradually and selectively returned to the market after recoiling from it in the aftermath of the crash. The banks’ retreat, the continuing inability of commercial mortgage-backed securities to offer a trusted indirect route to property debt returns – and a maelstrom of regulatory change since the crash – have combined to create room for new entrants. Insurers, private equity and hedge funds have been among those entering the fray, either to lend directly or to acquire exposures originated by others.
Some of these new entrants will be staffed with experienced property lenders, others may be coming with modest local property knowledge, tempted by yield or an opportunity for quick profits. But even the resurgent banks have historically relied on “on the job” training to turn generalist banking recruits into property lenders. Successive cycles have shown that approach to be flawed – and this time lots of people seem to have noticed.
A number of the major UK banks have been developing structured in-house property lending training programmes. The Real Estate Finance Group’s Vision for Real Estate Finance in the UK includes a recommendation that those involved in property lending should have to acquire and maintain an appropriate accredited property lending qualification. As part of a growing focus on education, my own organisation is for the first time providing a morning of property finance sessions aimed at junior property lenders on 2 April to kick off our forthcoming spring conference.
We seem to be swimming with the tide. As part of its efforts to repair its reputation and rebuild trust after the crisis, the broader UK banking industry has asked Sir Richard Lambert to come up with proposals for a new organisation to help raise standards among UK banks and building societies. He is due to publish the conclusions of his Banking Standards Review at the end of March. One of the proposals is for the establishment of well-defined professional standards of competence, operated by other professional bodies but accredited or validated by the proposed new organisation, which could also provide external assessment of in-house training programmes. While the Banking Standards Review doesn’t mention property lending specifically, that is surely an area in which it would make sense to set recognised baseline levels of competence.
Some investors might question whether all this really matters. After the long credit famine, can’t we just enjoy the fact that finance is finally flowing again? Well, I think we ignore poor property lending at our peril. If we want the next crash to be less traumatic, we need to accept that the next boom should be more sober than the last one.
Peter Cosmetatos, chief executive, Commercial Real Estate Finance Council Europe
