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Matching the lender to the loan

by on for Estates Gazette

Strange new world: that was the title of a piece I wrote in 2011, commenting upon unusual and unexpected new entrants into the lending market. The traditional lenders, banks, were, for the most part, on the floor and rich entities were taking their place. The stock market was sluggish and many thought that the route back t nirvana was central London residential. And so it proved for some.

So what has changed? Well, everything and nothing. Some banks are still lending, to a point, but borrowers are having to jump through even higher hops, just to stand still. In the most remarkable case of shutting the door after the horse has bolted, legal due diligence has reached previously undreamt-of levels of pedantry and box ticking.

Divesting non-prime loans

And most lenders are divesting themselves of their non-prime, non cookie-cutter loans, even where those loans are being properly serviced. If a loan contract doesn’t fit the current model, the borrower is forced to inject more equity, refinance or at worst, sell.

Basel III and ‘slotting’ are still causing uncertainty and senior debt, which may be available if you happen to be in the right place – prime central London resi/triple-A convenants/central London offices – is still expensive. And you can only borrow, on average 60% LTV. And, despite the much-vaunted Funding from Lending Scheme, the Bank of England has just announced the net lending fell by £2.4bn in the final quarter of the year, compared with the previous three months.

And because many borrowers had not managed to amass the vast amount of cash that they would need to plug the gap, they are forced to look for mezzanine.

The current average return required by mezzanine lenders is around 15%. Because senior debt is hard to come by, other than for a limited number of asset classes and in limited locations, prices have rocketed in those locations and cash buyers have a real advantage.

Because the right stock is difficult to source at the right price, we are in the world of silly first offers, which often fall by the wayside, leaving the underbid-ders to step in and take over. And let’s not even talk about the myth of the off-market transaction – however it is defined.

Not so hard for the big beast

Times are not quite as hard for the big beasts of property – their funding comes from different sources, such as public equity, pension funds, insurance premiums, sovereign wealth funds and investment banks. These are part of a whole other world of funding that is not available to or event understood by your average punter.

But it’s not easy, even for the institutions, and if you look at how those companies are being traded, those with the lowest discount to net asset value appear to be the strongest central London players. As with everyone else, it’s location, location, location.

But there is cash around, even for your smaller operator, and there are all sorts of potential investors and indeed lenders wanting a slice of the safe haven that London still appears to be, notwithstanding the best efforts of the coalition government to play to the crowd and to kill the golden goose that is London residential property.

No let-up in demand

Specialist lenders such as Close Brothers, Commercial Acceptances and Dragonfly, to name a few, see no let-up in demand in the South East residential development market. Investor after private investor walks through the door, looking for introductions to seasoned operators, especially those with exposure to central London property.

The market is fragmented and investors need a guide. And as the property world jets off to MIPIM, it will be the people who offer sources of finance who will have the busiest diaries.

Nicky Richmond

Managing Partner and Head of Finance

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