David Rainford, property finance director, Cowgill Holloway Property & Construction - how to raise debt finance for development and investment transactions

1. North West Property Finance
Market
A Grass Roots View After The Music Has Stopped
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2. 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
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3. 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
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4. 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
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5. 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
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6. Lending Parameters and Pricing
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%*
* Including fees
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7. 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
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8. 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
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9. 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)
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10. 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
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11. 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
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12. Residential Development - Key Considerations
• 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
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13. 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
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14. Commercial Development - Key Considerations
• 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
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15. 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
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16. Student Accommodation - Key Considerations
• 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
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17. 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%
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18. A Word On Refinance And Debt Forgiveness
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
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19. Deals Are Being Written In The North West
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
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20. Contact Details
David Rainford
Property Finance Director
david.rainford@cowgills.co.uk
07794 490 682
Bolton Office: Manchester Office: Liverpool Office:
Regency House 49 Peter Street Yorkshire House
45-51 Chorley New Road Manchester 18 Chapel Street
Bolton, BL1 4QR M2 3NG Liverpool, L3 9AG
Tel: 01204 41 42 43 Tel: 0161 827 1200 Tel: 0151 255 2727
Fax: 01204 41 42 44 Fax: 0161 827 1201 Fax: 0151 255 2710
www.cowgills.co.uk
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