Copyright: David Lawson/Financial Imes 1997Home page
All very understandable after the tide of bad loans generated in the last boom. But little evidence has emerged so far of a lemming-like rush into development finance. 'There are certainly too many banks chasing too little business and new ones opening their doors every month,' says Simon Taylor, a partner with Drivers Jonas. 'But they are all looking for the same thing: secure investments at conservative loan values.'
Institutions are also playing ultra-safe. Funding remained stable at just over pounds 1bn last year, about a third of the 12.5m sq ft of development under way, according to JLW Finance. But the proportion devoted to speculative schemes fell from pounds 500m to below pounds 300m.
Fears that institutions could lead a charge back into the market springs from the fact that they were responsible for the last mini-surge a couple of years ago. But conditions were different then, says William Hill, manager of Schroder Exempt Property Unit Trust. 'The pricing of development risk was attractive by comparison to yields for investment properties, which were being chased by a wall of money.' Funding was being done off an 8.5% yield with conservative rents. Eden House, a 40,000 sq ft block in Victoria, was funded off rents of pounds 25 a sq ft. It was rumoured to have gone for around pounds 30 late last year.
'We were looking for growth we could not get from over-rented stock,' says John Whalley, head of property at AMP Asset Management. That paid off with a scheme like 50 Pall Mall, which made hefty returns when sold for pounds 19.5m.
Today, rents and land values have moved up, making such margins impossible. Some backing is being provided but almost exclusively on pre-lets. 'Funds are in the market to upgrade their portfolios, not take risks' says Rupert Clarke, managing director of JLW Finance.
Such reticence contrasts with reports as long ago as last summer that speculative finance was making a comeback. The well-respected annual survey by DTZ Debenham Thorpe, Money into Property, showed banks easing their purse strings and institutions - particularly insurance companies - growing more willing to back speculative development. The contrast lies in the tenses. Little has happened so far but intentions are promising for the future.
The impression that a dam has broken arises from the hype surrounding a few key projects, according to Simon Taylor. But he points out that each has special factors which cannot be generally applied.
This was certainly the case when Argent sent shockwaves around the market by funding a pounds 350m speculative development programme covering Thames Valley Park, a City office block and the Birmingham Brindleyplace regeneration. This complex deal, which took consultants Richard Ellis 18 months to broker, was based on prime sites with historic land prices, hefty equity stakes from the developer, BriTel Pension Fund and Citibank, plus mezzanine finance through United Bank of Kuwait to top up the pounds 80m senior debt issued by Helaba, Hypobank and DePfa.
'It shows that money is there for the right product in the right area, but developers must be able to put up equity,' says Malcolm Wilson of Richard Ellis. A similar package was put together when Tops Estates raised pounds 85m to renovate and refinance its Leeds shopping centre. Unfortunately for most developers they do not have that equity to spare, and big ones with enough fat in their balance sheets usually call on general corporate borrowing - one reason why overall bank lending is rising.
Another headline deal was Petershill, the MEPC office complex next to St Paul's forward funded at around 6.5% by Hermes Pensions Management. 'This showed that where the figures and location are right, a fund will put up money to create a long-term investment,' says John Moore of DTZ, which acted for Hermes. Again, however, there were caveats. Even in such a prime location, MEPC had to provide guarantees.
Helical Bar, a company worth only pounds 65m has managed to create a 2m sq ft development programme by proving it can let speculative schemes before completion to partners like Friend's Provident. Its commitment comes from 'erosion' deals, where profits diminish while space remains empty. But development director Gerald Kaye says it is still hard going to find the right schemes which can provide the extra 1.5 per cent yield cover funds demand.
This caution will erode during 1997 as property returns outperform gilts and equities, more current schemes are pre-let and weight of money begins to build. Stephen Eighteen, DTZ Finance managing director, is impatient that more is not already happening. 'Banks are probably being over-careful at this point in the cycle. Risks are relatively low at the ratios they are lending of 50 to 60 per cent of cost.'
Pen Kent obviously prefers a more cautious line as his swansong before retiring this spring. History shows he is right to be worried but the warnings may be a trifle premature. Another few months may pass before judging whether the the funding dam is producing a much-needed flow or threatening to burst.