Equity is king in the UK, as lending criteria have tightened since the vote to leave the EU and debt finance is harder to obtain, especially for development projects, the MIPIM UK real estate fair has heard.
'The dynamics in the lending market now are negative across the board, for investment and for development. Overseas and European lenders are less active than they were,’ John Feeney, global head of real estate for Lloyds Banking Group, told the ‘Lending practices in post-Brexit UK’ conference at MIPIM UK on Wednesday afternoon. 'There is less activity and I do not think it is going to be any easier in the near future.'
After Brexit everyone paused for thought and 'some overseas institutions took a step back,' said Simon Mower, associate director at debt advisory in the corporate finance division at KPMG. 'The UK institutions are still active, but there's been a reduction in loan to value.'
There was an end of cycle feeling in the market even before the referendum, panellists agreed, and the vote has just strengthened that caution. 'For commercial, pre-let agreements are critical, but this has been the case for a long time,' said Mower. 'Speculative development is incredibly hard unless you have a brilliant track record.'
Feeney said that at Lloyds for any development the first thing they look at is the track record of the sponsor and his depth of experience, long before the merits of the project itself are even taken into consideration.
Development finance was never easy but is now considerably harder, they agreed. 'The development finance component of the market was always the thinnest and now the dynamics are very weak indeed,' said Feeney. 'There is zero appetite for speculative development, but it is still possible to get financing for development. It is just much harder and there is a lot more scrutiny now.'
Alternative lenders
There is a positive aspect to this tight market, said Bill Hughes, head of real assets at Legal & General Investment Management: 'When debt is plentiful then inevitably mistakes are made and the wrong buildings get built. Now lenders are being thoughtful and cautious and that is a good thing.'
Another positive aspect is that non-bank lenders have more opportunities, Mower said: 'With banks retrenching after Brexit, other lenders can take on more less risky projects than before. Deploying capital in the regions, away from London, is a huge opportunity for debt providers.' In a highly fragmented market, many are realizing that, provided you can disaggregate the capital stack, you get a better deal with different providers, he said: ‘It is more complicated but worth the extra effort.'
'Diversifying our sources of finance has been absolutely key for us, and it has given us flexibility and choice,' said Lucinda Bell, CFO of British Land. 'In our current project on a massive scale, 46 acres of mixed-use development at Canada Water, equity funding is a key component, ideally in a joint venture, but it may be appropriate to have some debt, and a forward-selling element too.'
