Place AGM 2013: David Rainford

A u d i t & C o m p l i a n c e • T a x S o l u t i o n s • C o r p o r a t e F i n a n c e • O u t s o u r c i n g • B u s i n e s s R e c o v e r y • W e a l t h M a n a g e m e n t

A Grass Roots View After The Music Has Stopped

North West Property Finance Market


Today’s Agenda

• Context/background - funding challenges

• New funding climate

• Parameters

• Key considerations and case studies

• Refinance and debt forgiveness

• Conclusion – deals can be written


Great Party But Not Sustainable

• Bank competition - trying to build local market share

• Funders competing on both LTV’s and pricing

• Locations were ‘off prime’/good or disguised under the banner of a regeneration area

• Sites with planning angles and locations crying out for apartment schemes waiting to be pre-sold

• In such a buoyant market many transactions were still ‘off market’ which justified value being

higher than cost


The Mother Of All Hangovers With No Easy Cure

• Prime assets/locations became skewed towards London

and the M25 corridor

• Yield shift with a greater divergence between prime,

secondary and tertiary

• LTV pressures with resultant ’underwater borrowings’

• Residential schemes down valued on rental yield

assumptions and pre-sale purchasers unable to complete

• Banks and clients had short term commitments on longer

term projects

• Income attached to assets could not service debt levels

• Exit strategies had to be reworked


Rehab – Getting Used To The New Funding Climate

Fundamental change. More non traditional lenders. Increased equity and higher pricing

• Banking casualties/exits - Anglo, Singer & Friedlander, Northern Rock, Macquarie, Fortis

• Exit strategies – Bank of Ireland, Allied Irish, Yorkshire/NAB

• Traditional lenders still effected by loan book issues :

• Exit non-core lending areas/refinance deals which no longer fall within present criteria

• Aversion to put out further funds to achieve exit

• Borrowers in limbo without any joined up strategy or plan

• Banking new entrants – Handelsbanken, Aldermore, Shawbrook

• Insurance companies – Aviva, M&G , Legal & General

• Mezzanine funders - Pluto Capital, Pramerica, Maslow Capital, Omini Capital

• Bridging funders – arguably principal funders for speculative residential schemes

• Private HNW investors/entrepreneurs

• PropCo’s with surplus cash


Lending Parameters and Pricing

* Including fees

Pre-Credit Crunch Post Credit Crunch

LTV/LTC Pricing LTV/LTC Pricing

Commercial Investment

70-80% 1-3% Senior Debt 60-65% 2.75-8%

90% 3-7% Stretched Senior / Mezzanine 85% 15-25%*

Residential Investment

80% 1-3% Senior Debt 60-70% 2.75 – 6%

Mezzanine Limited

75% (cost) 2-4% Development 50-60% (cost) 4-10%

55-70% (GDV) 10-25%*


Open For Business - Devil Remains In The Detail

• Sector caps – hotels/leisure/student accommodation

• Preference to support existing clients/whole banking relationships

• Strong bias to London and the South East. Weaker funder appetite in North

• Lending amount constraints/minimums

• Sole lender or willingness to consider a mezzanine provider

Overriding considerations

• Strength of cash flow from charged security. Little ability to take a view on cover criteria

• Proven equity stake

• Experience of Borrower

• High propensity (clearing banks) to insist on

hedge


Commercial Investment – Key Considerations

• Preference for dry investments with long leases to strong covenants – yield drives comfortable LTV

• Amortising profiles – typically 15 years. Commitment periods typically 3-5 years

• Typically no interest only unless sub 50% LTV or for larger lot sizes which can demonstrate strong

cash flows with premium pricing

• Interest cover - typically 200-225%. Repayment cover – typically 130-160% (net)

• Multi let properties/portfolios – re-letting risk/historic occupancy/management team/vacant

possession values – up to 60% achievable for well spread income streams (65% with premium

pricing)

• Larger portfolios with value added plays potential to gear to 85% - effective profit share based

funding


Commercial Investment - Case Study

• Multi-let secondary portfolio

• Local tenants but wide income spread/short expiry profiles

• Presentation focus – demonstrate serviceability, historic occupancy, void sensitivity

• Client focus – improve cash flow/flexibility of repayment without hedge

• 60% LTV (debt £2m) – part amortising/part interest only

• 2.75% /LIBOR. 5 year commitment (no hedge)


Residential Investment - Key Considerations

• Secondary /tertiary locations/HMO properties drives best LTV’s – but funders selective with

aversion to DSS

• Valuations yield based unless case can be made for o/o demand. Bulk sale valuations for

apartments/location concentrated portfolios commonplace

• Amortisation profiles up to 25 years but repayment cover criteria tighter between 130-190%

• Greater emphasis on occupancy levels, running costs/capex provision

• Ability to drive higher LTV’s and interest only options through retail buy to let providers at

expense of relationship and with full personal recourse


Residential Investment – Case Studies

Case Study 1

• Receivership purchase – residential portfolio Manchester

• Presentation focus – valuation, benchmarking, rental improvement, hands on local operator

• Client focus – preserve limited cash resources for capex spend

• £1.875m facility at 85% LTC/70% LTV with addition of bolster security

• 20 year commitment/20 year capital & interest repayment

Case Study 2

• Receivership purchase – student/ HMO portfolio – Manchester

• Presentation focus – barrower experience/ financial standing/detailed information base

• £5m facilities. 70% LTC. Non recourse

• 20 year commitment/20 amortisation. 2.89% over five year COF


• Strong preference for smaller scale housing schemes (up to 10/15 units) for developers with

proven track record

• Potential to fund apartments in areas of proven strong rental demand - both development and

take out investment facilities

• Outside high street lenders (not proactive in market) facilities are LTV driven and as such does not

work for larger/phased schemes but can deliver higher LTC

• Ability to leverage off added value via planning etc where such can be clearly demonstrated

• Consideration will be given to refinance including part completed schemes

• Need to accept market is driven by bridging style lenders – therefore full recourse finance and

pricing typically 15-20% pa. Need to be confident in sales/demand

• Exceptions – London and selected prime locations such as Cheshire and balance sheet lends to

large house builders

Residential Development - Key Considerations


Residential Development – Case Studies

Case Study 1

• Established developer with proven track record but existing funder no longer active

• 8 individual high value houses in Cheshire

• Structured land consideration with pre sale to land owner

• £3.85m facility at 75% LTC/60% GDV. Interest rate 8.5% p.a.

Case Study 2

• Local developer/contractor with track record

• 22 unit scheme. Phase 1 – 12 units and site infrastructure

• Valued added via access negotiations

• 60% land value/cost (70% overall cost)/60% GDV

• 18 month term. 10% p.a. Fees 2% in/2% out


• Pre-let/Pre-sale only – typically 60% LTC

• Mainstream Banks - need to fulfil investment criteria based on contracted pre-let income/lease

profiles and covenant strength

• Exit strategies need to be well researched defined

• Challenges around PropCo / OpCo transactions and hotels absent of term pre-let via conventional

lease or strong branded operator

• LTC’s up to 75%+ for strongest proposals

• Forward funding based on discounted yield

• Contractor funded JV arrangements

Commercial Development - Key Considerations


Commercial Development – Case Study

• Retail development – secondary location / Lancashire – GDV C£1m

• Pre-let with secured income stream - 15 years

• Challenges – limited equity. Deal size/market. Not enough profit for JV split

• Solution – pre-sale purchaser/discount to market yield

• Presentation focus - promoter stake/experience, funding risks, potential tax benefits, ability to

secure long-term funding focus


• Sector continues to be seen as a safe haven for investors with considerable fund interest

• Historically a favoured sector for senior banks (even on a direct let basis) but many now over-

exposed / subject to funding caps, restricted to existing clients / stronger operators or transactions

subject to University lease / nomination agreements

• Challenges around PropCo/OpCo transactions and hotels absent of term pre-let via conventional

lease

• Equity requirement typically 35%+ (potential for equity release on investment conversion)

• Operator risk and location are paramount – best sites in red brick universities, London and growth

universities with higher supply /demand in-balance favoured. Arguably this would potentially

exclude locations such as Manchester, Liverpool and Leeds (unless pre-let)

• Issues for developers / funders – ability to contract with universities or pre-sell to operator prior to

completion (without deep discount and location specific)

• Yields have held up but may not enough to deliver target funder return

Student Accommodation - Key Considerations


Student Accommodation – Case Study (WIP)

• 400 bed speculative purpose built scheme in North West

• Challenges – direct let, limited equity, promoter sector experience BUT good location/pre-let

commercial space

• Presentation focus – proven contractor, operator on board, exit strategy, market demographics

• £15m facility (development and investment) at 80% LTC

• 5 year profit share based structure/IRR 13-15%


Refinance:

• Refinance forms a material part of new lending

• Funders with appetite can accept the reasons and, for well-presented cases, are writing deals

• Criteria fundamentally no different from new acquisitions/schemes but the added risks need to be

covered off to avoid the scepticism of credit

• Covenant breaches accepted but proven repayment record essential/clean credit history

• Valuation benchmarking

Debt forgiveness:

• Not the solution to every problem situation but it is happening

• Banks need to work through the process – provisioning and exit targets

• Often goes hand in hand with hedging break cost issues

• Added challenges:

o Proving the valuation case

o Demonstrating borrower equity stake

o Personal recourse/additional security

o Taxation treatment

A Word On Refinance And Debt Forgiveness


Principal frustrations from investors and developers:

• Don’t know who is open for business and who is not

• Frustrated by the sales pitch followed by the slow decline

• Having to invest considerable time/energy in wasted discussions

• Ability to lend often more important than price

Key hurdles to success:

• Know the market/know the lender/understand the transaction

• Deal competition

• Valuation benchmarking

• Anticipate the barriers to credit

• Presentation, Presentation, Presentation

Deals Are Being Written In The North West


Contact Details

Bolton Office: Manchester Office: Liverpool Office:

Regency House 49 Peter Street Yorkshire House45-51 Chorley New Road Manchester 18 Chapel StreetBolton, BL1 4QR M2 3NG Liverpool, L3 9AG

Tel: 01204 41 42 43 Tel: 0161 827 1200 Tel: 0151 255 2727Fax: 01204 41 42 44 Fax: 0161 827 1201 Fax: 0151 255 2710

www.cowgills.co.uk

David RainfordProperty Finance Director

[email protected] 490 682

Real Estate

Place AGM 2013: David Rainford