Bank software woes could disrupt property lending
Property software developer denies cash-in
Copyright: David Lawson - first published Property Week October 2006
Bank software woes could disrupt property lending
An obscure change in financial regulations is set to cause huge disruption in property lending as banks struggle with complex risk assessment software. Some lenders could drop out of the market while others slash interest rates. ‘There will be wide disparities in the cost of funds for several years,’ says Chris Marrison, chief executive of software developer Risk Integrated.
New controls on lending risk drawn up by the Basel Committee on Banking Supervision, commonly known as Basle II, come into force next January. Many big banks have not implemented the software to assess property loans because they are too busy sorting out areas such as credit cards and equities which form a much bigger part of their business, says Marrison.
This will give an edge to niche property banks which have been working on the software for years. They will be able to raise capital more cheaply and pass on savings to borrowers. He estimates Hypobank could save Euro100m a year on its Euro40bn portfolio.
But investors will not get an easy ride with schemes that might normally struggle to raise funds. The software will expose risks and increase the gulf between these and safer projects. Nor can they run to banks dabbling in property, as the cost and time involved developing and running the software will drive these lenders out of the market. ‘It will not be efficient for banks to hold small real estate portfolios,’ says Marrison.
REITs will also feel the impact, partly through cost of borrowing but also because they, too, will have to master such software. Share values will depend on quality of income, and they will be expected to be able to demonstrate the impact of a tenant defaulting on a lease. Some leading property lenders are confident they will cope. Northern Rock stated in its interim accounts it will be ready to adopt the new risk controls but added that most of the market is not expected to adopt Basle II until January 2008.
What is Basle II?
Major lenders must keep enough capital to cover bad loans – normally around 8% - forgoing potentially huge returns on that money. Under Basle II rules this figure could be lower if lenders provide more detailed risk assessment. The favoured method involves complex software modelling.
Why are lenders facing problems?
Property risk is difficult to model because each loan is different and involves many varying factors. Lenders are concentrating on easier assets such as corporate loans and credit cards, which also make up a bigger slice of their business.
What will be the effect?
Banks that have worked on the software will not only save huge amounts on the capital they raise but be able to provide cheaper loans, especially on low risk property.
Property software developer reassures agents
The UK’s largest provider of residential agency software has denied cashing in on the clamour to acquire internet listings sites by newspapers seeking to offset declining property advertising. When Vebra was taken over by Guardian newspaper group subsidiary Trader Media, attention focussed on the firm’s top-rating web portal thinkproperty.com, which pools property listings for hundreds of smaller agents around the UK.
But around 22% of UK agents rely on Vebra software to run more than 3,000 branches and managing director Stephen McCluskey has assured them that the move was driven by the need to find a compatible partner to help finance development rather than aiming for the highest bidder. ‘We were approached by numerous media companies and financial institutions who were primarily interested in the property portal side of the business and turned them away,’ he says.
Trader Media was different because it has a similar role as a leading developer of software for car dealers. Part of the deal also ensured the core management team including McCluskey and technical director Iain Hamilton remain to ensure stability. But Thinkproperty is anticipated to receive a boost from links with the Guardian’s web site and autotrader.com. A third of those searching for cars are estimated to be also seeking a home. McCluskey will also get new marketing resources to develop the online service for agency software users as ‘the intelligent alternative’ for property sales.
The portal is second only to Rightmove, but has seen its share of the listings market slip from more than 12% to less than 7% this year, according to web analyst Hitwise. No price was released for the takeover of Vebra, which employs more than 100 people and earned £1.6m in the year to April. But the Daily Mail Group paid £48m for Primelocation, the number three property portal, Propertyfinder, the pioneer listings service was bought for £15m by News International in 2004.
Vebra’s residential agency and management software includes Solex, EstateCraft, Premise and WebLink.
TOP RESIDENTIAL PROPERTY SITES
[By Market Share] %
Rightmove 20.9
Vebra 6.59
Primelocation 4.93
Findaproperty 2.34
Propertyfinder 1.89