Investec Structured Property Finance has re-entered the investment loan market for the first time since the financial crisis, with an £18m loan to Ballymore.
The bank plans to diversify its business to include about £150m to £200m of investment finance this year, on top of £500m to £600m of development finance.
Ballymore secured Investec’s first property investment loan in more than a decade, to improve two light industrial sites in Silvertown, E16, while it applies for residential-led planning consent for those sites.
The loan is Ballymore’s first since it repaid €3.2bn of debt and exited Ireland’s National Asset Management Agency in December 2016.
Mark Bladon, co-head of origination at Investec, said the loan reflects the kinds of deals the company will continue to target.
As with its development finance, Investec will look for clients with secondary assets. It will take on deals that, Bladon said, high street banks might shy away from because they involve value-add asset management and, as a result, seem riskier.
Those loans will be between £5m and £50m, and Investec expects to lend up to £100m per client.
He said: “I don’t see us competing with the German banks on 25-year FRI leases to City offices. When people talk about a flight to safety, it comes back to City offices with a long lease, which Santander or whoever would happily do all day long.
“We’re talking more client-led investment transactions than just trying to put £250m into the commercial real estate investment market in central London.”
Investec said one of the goals in expanding its offering was to work with clients throughout a building’s lifecycle, which would open up opportunities for a bigger range of loans.
Despite expectations of doing about £150m to £200m of investment finance loans this year, Bladon said there are not specific long term targets. “We don’t set ourselves a target of, say, £500m or £600m because then people tend to do deals for the sake of it. We’ll keep going as long as we see good clients and good opportunities.”
Why did Investec stop lending to investment?
Investment finance was a part of Investec’s business until “the world ended” with the global financial crisis, Bladon said. Over the following three years, the bank cut down on lending, focusing almost entirely on existing clients.
When the markets started recovering in 2010 and 2011, Investec once again grew its client base but only targeted property development. Unlike banks that took a risk-off approach by distancing themselves from development lending, Investec focused on it as a way of getting higher returns while managing low quality and non-performing loans from the fallout of the downturn.
Why diversify now?
With the loan management process winding down, Investec now has more capacity to lend again. Last year, it lent £500m to property – the most it had done in a single year – while this year, between development and investment finance, that could grow to between £600m and £800m.
Bladon said: “As an organisation, you don’t want to put all your eggs in one higher risk basket. When you can only lend a certain amount, perhaps that makes sense for a short period of time, but as a longer term business, it makes sense for us to diversify to a lower risk investment product.”
Although ongoing uncertainty surrounding Brexit will influence the amount of risk the bank is willing to expose itself to, Bladon denied the diversification was a response to the referendum and said Investec would have pursued it regardless.
He added: “Now is not the time to be doing marginal deals. It’s probably not the time to over leverage. It’s not the time to be backing clients without strong track records. But for deals that do the opposite, why wouldn’t you keep going?”
Comment: Developers lure back lenders,
Eduardo Gorab, UK property economist, Capital Economics
In big picture terms, traditional lenders’ books are dominated by loans secured against existing commercial property. In fact, statistics provided by the Bank of England show that just under 90% their commercial property-related loans have been made to existing investments.
That share is currently considerably higher than it was in 2014, when it stood at 80%. Put differently, the share of loans secured against riskier development has fallen from 20% to 10%.
Shifts in traditional lenders’ exposure to development lending seem to be driven by broader market themes, such as investment and construction activity.
For example, the sharp fall in the share of loans secured against development coincided with the surge in investment volumes seen in 2014 and 2015, to £69bn and £76bn respectively, according to figures from Property Archive.
More recently, as the investment market cooled significantly 2016, and development activity has given some signs of life, traditional lenders have expanded their loan books to developments over recent months.
Indeed, in the six months to February, figures from the Bank of England reveal £24m of development loans to schemes in the pipeline.
And although this may seem like a small figure, it contrasts starkly with a £409m decline in net lending to existing assets.
To send feedback, e-mail karl.tomusk@egi.co.uk or tweet @ktomusk or @estatesgazette
