Lending support in rocky times
IT IS now 11 years on from the global financial crisis, with the UK real estate markets having seen significant changes in the level and relativity of capital values. We are now in a market where a shed is more desirable than a shop. Borrowers and banks have learnt some hard lessons, but have we put those lessons into practice? Banks and regulators have implemented polices to protect against a market crash. Banking culture, as much as liquidity ratios, has been improved and gearing significantly reduced.
A senior debt loan is unlikely to exceed 50 to 60 per cent loan-to-value, as opposed to 2007, when 85 per cent wasn’t unusual.
So, with some warning lights flashing red in property, how are we at Investec Structured Property Finance approaching lending? Here is my ten-point checklist for lending in uncertain times:
The client/lender relationship is crucial. There was heavy and justified criticism of banks who took a short-term view, pulling the plug on borrowers at the first sign of trouble. It is much better to roll with the punches and work in concert on the business plan to recover debt and equity.
We look for clients with a proven track record, sufficient capital to meet their obligations — and integrity. Borrowers should look for exactly the same attributes in their relationship bank.
Be cautious lending on non-incomeproducing assets such as strategic land with a planning upside, which often take far longer to unlock than original business plans envisage. The borrower in this instance needs to be well capitalised and prepared for the long haul.
By contrast, well diversified income which is repeatable if shortterm, delivers a revenue stream that can weather a downturn.
At Investec, we are increasingly looking to alternative markets where diverse repeatable income can be relied upon. These include student housing and build-to-rent, as well as more traditional multi-let offices and industrial.
Don’t allow heavy negotiating to drive loan-to-value ratios higher than prudent, squeezing margins below sensible risk weighted returns. It is better to have the courage to step back from providing a loan than book building.
There really is no substitute for a good location — you can do many things to ease a problem loan, but you can’t move the asset.
Lending is simply investing at a lower risk/return than the client’s equity. However, there is always a risk and that risk should be priced correctly.
Don’t believe in “new paradigms” or people saying, “it’s different this time”. The fundamentals of property lending in the UK rarely change.
If the market crashes and levels of defaults rise, it is vital to establish a “legacy team”. This moves the relationship away from the origination team, so objectivity can be maintained. Populate the legacy team with a combination of skills, working on the mantra of “know what you know, know what you don’t know and know who to ask”.
Check that the bank’s security against an asset is what you think it is — and remedy any identified defects.
Put in place a capital repayment strategy, working as closely as possible with the borrower to recast the business plan to reflect current circumstances. This is best achieved by breaking the plan into attainable milestones.
During the GFC we were greatly influenced by a lecture from mountaineer Joe Simpson on his book Touching the Void, telling how he lifted himself out of a crevasse after falling in the Peruvian Andes and managed to crawl five miles with a broken leg by setting himself small but achievable goals.
Without clients, banks don’t have a business — treat your client fairly, not because the regulators tell you that you must, but because it is the right thing to do.
As one of my former senior South African colleagues liked to say: “Always do the right thing, even if you think no one else is looking. The true test of relationship banking is when the chips are down.
A good relationship is a two-way thing and prospective borrowers, when obtaining funding quotes, would be well served by considering the culture of the bank from which they borrow, as much as the percentage on the interest rate.