As UK property trumpets the development opportunities in and around London created by Crossrail, a MIPIM UK debate agreed that this was not enough – government should be doing more to fulfill demand in the regions, and that starts with small-scale infrastructure projects.
John Feeney, managing director and global head of commercial real estate at Lloyds Banking Group, summed up the argument, saying: “A lot of government focus has been on grand projects. There is a role for smaller scale infrastructure that can support housing development across the country. We need an approach that works on a local level to a greater extent. That has been a little lacking.”
Cities such as Liverpool, Manchester and Cardiff have a demand for high-quality office buildings that is not being met partly because the infrastructure pipeline is not there. If it is not met, Feeney warned, that will have a real impact on the economy.
That demand is exactly why investors should be targeting the regions, said Bill Hughes, head of real assets at Legal & General.
He said: “We are trying to invest in places that are less congested with capital. London represents a tremendous investment opportunity, but that tends to be where international capital will go. If you are a UK investor, proportionally speaking, those regional cities are less congested and underdeveloped. There is potential for UK cities to do a lot more.”
Even though the opportunities exist, the problem for developers is that finance has become difficult to secure, particularly following the EU referendum. As banks de-risk their portfolios, development finance is the first type of lending to dry up, said Lucinda Bell, chief financial officer at British Land. Banks are nervous about lending to what they see as risky projects, and with uncertainty about the future, speculative developments are seen as too risky to invest in. What deals are looked at will be scrutinised in much more detail than they would have been previously.
Speaking from his experience at Lloyds, Feeney said: “We want relatively stable, consistent portfolios with proven demand. From a traditional lender position, much of that component of the market is just not suitable. It comes down to the sponsor and the sponsor’s track record. That is the first matter to discuss.”
However, Simon Mower, associate director in corporate finance at KPMG, made the point that despite uncertainties and traditional lenders de-risking, the lending market has become highly fragmented. Mezzanine lenders, he said, are still very bullish about their position in the market even as borrowers lower their gearing. As a result, non-bank lenders willing to lend in the regions can find opportunities, particularly with what Feeney called the “dearth of supply” in offices.
Although traditional lenders have been seen exiting high-risk markets, potentially leaving opportunities unfulfilled, that is not necessarily a bad thing, Hughes stressed. Considering the scrutiny that lenders will now put potential projects through, it becomes an opportunity to fix some of the problems that have in the past led to overtly risky deals. Not all opportunities should be taken, and developers could focus on fewer but more high-quality projects.
He said: “When debt is plentiful and debt will chase any product, you will create some of the wrong buildings. So I am pretty positive about the environment we are in.”
With opportunities cropping up across cities outside of London as the regions work to make a name for themselves and pursue devolution, it looks like we are not seeing the slow and steady death of development financing. We could be seeing the emergence of a market finding where it really is needed and where it can make a difference.
THE PANEL
- Chairing: David Hatcher Estates Gazette
- Simon Mower Associate director, KPMG Debt Advisory
- Lucinda Bell Chief financial officer, British Land
- Bill Hughes Head of real assets, Legal & General Investment Management
- John Feeney Managing director & global head of commercial real estate, Lloyds Bank
