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Place AGM 2013: David Rainford

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

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Place AGM 2013: David Rainford

  1. 1. North West Property Finance Market A Grass Roots View After The Music Has StoppedAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  2. 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 writtenAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  3. 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 costAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  4. 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 reworkedAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  5. 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 cashAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  6. 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 feesAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  7. 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 hedgeAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  8. 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 fundingAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  9. 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)Audit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  10. 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 recourseAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  11. 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 COFAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  12. 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 buildersAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  13. 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% outAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  14. 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 arrangementsAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  15. 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 focusAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  16. 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 returnAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  17. 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%Audit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  18. 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 treatmentAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  19. 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, PresentationAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management
  20. 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.ukAudit & Compliance • Tax Solutions • Corporate Finance • Outsourcing • Business Recovery • Wealth Management

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