Problem Property Webinar: Advice for Lenders, Developers and Investors – Key Points
Our latest webinar on 4 October 2022 (Problem Property: Advice for Lenders, Developers and Investors) sparked a very interesting and timely discussion. The panel was comprised of Tom Brown (Voltaire Financial), Arvindar Singh (FRP Advisory), Philip Reynolds (FRP Advisory) and Fergus Jack (CBD Urban) and chaired by real estate finance partner, Alexander Pelopidas (Newmanor Law), with co-founder, James Dakin (Newmanor Law) running the roving mic.
Below we outline our 12 key points from the webinar.
- We’re not in a recession….yet – Phil and Arvindar thought this was hard to call, and it feels like we are in the calm before the storm. However, all the persisting headwinds make a downturn likely. We have the tight labour market/wage inflation and, whilst the interest rate rises will eat into that, if rates hit 5.5% by July 2023 as predicted, then there will be a hit on consumers. In terms of dealing with the energy issues, the government intervention is only partially mitigating this. The sense is the economy is approaching a tipping-point.
- The main thing the Government needs to do is build confidence – it is clear that the Government needs to do more in terms of things like shortages of people and skills and improving the planning system. However, in the wake of the mini-budget, the Government needs to instil confidence back in the UK economy domestically and internationally.
- The residential rental market is the least written down property sector – Fergus explained that office occupation is at an all-time low, retail is suffering and even industrial yields are changing. There appears to be a flight to quality reflected by the fact that the yields for all property sub-groups have moved except for west-end offices and west-end retail (typically owned by foreign investors). However, Fergus noted that, at least in the short-term, the residential rental market is the least written down. This is because, as purchasing power is reduced, the demand for rental increases. This trend is appearing in the south-east and likely to spread.
- Residential sales on the other hand may see stagflation – Fergus also explained that exit values for residential development are more difficult to predict and he’s been told that values may drift (depending on location) between 5 – 15%. His expectation is that stagflation is more likely. The issue is that the increasing interest rates will hit buyers and those re-mortgaging (of the latter there are roughly 300,000 every quarter people in this position).
- Timely engagement is key for lenders and borrowers – a key message from the panel was for both lenders and borrowers to engage with each other as early as possible to resolve issues. In particular, Tom commented that some developers have a habit of putting their head in the sand when in fact they should proactively approach their lenders, who usually want to work with their borrower. Phil agreed; borrowers tend to assume the lender’s answer is ‘no’ without asking. All too often extra funds could have been made available if the ask was made sooner rather than later.
- Credibility of the borrower (and their advisors) is key to surviving and thriving – one of the key considerations as to whether a lender will allow a struggling loan or development to continue is the credibility of the borrower and their ability to deliver. This extends to the credibility of the team of advisors that a borrower has surrounded themselves with. Arvindar pointed out that the advisors also act as a fresh pair of eyes to help come up with a viable plan when the borrower may not see a way through. Tom agreed with this sentiment – ultimately, lenders want to build relationships with borrowers who take on issues and are upfront with the lender and when the lender gets repaid, they will work together again.
- We won’t see the same level of enforcement action in relation to development sites as we did in 2008 – the panel was asked what level of repossessions we might see in the coming period. Arvindar commented it won’t be as dramatic as it was in 2008 when there was a lot of repossession action; although this was more likely to occur in smaller developments. More collaboration between lenders and developers is expected. Phil commented that he had seen recently an increase in decent sites being dragged down by under-performing ones. Ultimately, however, administration and receivership are a last resort because of damage to the value of the asset. The overall feeling is that projects will be kept alive with the hit being taken privately because the sources of funding are so varied and deep.
- Something’s got to give in a developer’s budget… and it should be land values – prompted by an audience member’s question, it was noted that developers continue to face increase costs of materials, shortage of labour, energy squeezes etc and the only thing that perhaps can flex in the budget is land values. Fergus agreed but stated that this requires a seller who wants to sell and in the current climate many will sit tight. However, opportunities may arise with the repurposing of other sites (e.g. a hotel site with revised planning permission).
- Whether a Lender appoints a receiver or sells the debt is a question of certainty and work-out capability – another audience question that arose was how does a lender decide whether it sells its debt or appoints a receiver. Phil explained that selling the debt gives the lender a definite loss as opposed to the potential uncertainty of trying to work out the loan for a better outcome. Phil’s expectation is that lenders may be more willing to sell the debt to other lenders, which may mean that borrower finds themselves in front of a more aggressive lender than they started with! Arvindar commented that, in last 24 months, the receiverships that she’s seen are more with the secondary lenders rather than the mainstream lenders because they have more exposure and higher pricing. Tom thought that lenders that have entered the market in the last few years may not have skill sets to do the work outs, which will inevitably lead to indecision on their next course of action. Fergus commented that part of the challenge for any lender is working out where the exits are going to be because if they mark to market these loans quarterly, or even weekly, the 60% LTVs that looked ok previously, now may not look so good.
- The difference between LPA Receivers and Administrators – Fergus outlined how receivers are the simplest enforcement method and work best with single assets. If the property is more complex, he said it would be better to go with an administrator. However, having a real estate professional like Fergus either dealing directly with the asset as receiver, or working alongside an administrator, is key as they have the skills to deal with the property. Arvindar further explained that where the asset involves an operating business (e.g. a care home) a receiver’s powers may be more limited than those of an administrator (subject to what the security documents say). Where the security has a qualifying floating charge then the lender can appoint an administrator, whose duty is to all of the creditors, but they can realise all of the assets (not just the property). This may be attractive to a lender where they don’t think they will be repaid from the property asset alone and they can benefit from some recovery from the prescribed part under the floating charge. However, Arvindar agreed where the main asset is property then it is more efficient to go down the receivership route.
- When buying a distressed property, credibility and certainty of execution are key – we asked Phil how does a buyer get his attention when he’s selling a distressed property. He explained it’s not simply price. He does not have to take the lowest offer but can take the offer he believes will ensure the deal is concluded. So credibility of the buyer is the key as is a track record and an element of that is having the right advisors around them; Phil wants to see lawyers involved that know how to deal with administrators/receivers as to what we can and cannot accept, agents that know how to structure an offer and clarity as to the source of funding and timelines. All of this gives confidence that the buyer can contract quickly and with certainty and will move you up the interest ranking.
- Not all doom and gloom – The prevailing message from the panel is that, firstly, problems can be dealt with if tackled early and with the right advisors by your side. Secondly, those with funds and able to mobilise quickly will be perfectly placed to take advantage of what is coming down the track.