John Connolly is Director of the development and due diligence team at international property and construction consultancy McBains Cooper. John provides advice on acquisition, investment, development, expansion, and disposal programmes on behalf of both private and public sector clients.
James Thomlinson: John you act on behalf of both the private and public sectors. To what extent are your time and resources split evenly between these two client bases? Have the government cuts had an impact on your strategy and workload?
John Connolly: Historically we have had a 65/35 split between the Private and Public sector however since the recession this has swung to a 45/55 split toward more Public sector projects. We are constantly monitoring this balance and over the last 12 months have had a big push back to the Private sector.
Currently we are working on more Private sector projects which are mainly underpinned by the investment market (Institutional Funds) however this is not reflected in the fee revenue as most of the time spent is assisting Clients to make schemes 'stack up'. We have however seen a movement of development projects coming back on line which had historically been 'shelved'.
Due to the nature of our business we have position ourselves as a 'niche' provider of professional services to the market using our interdisciplinary approach which has allowed us to be flexible and as a consequence have been able to minimise our exposure to the spending cuts by replacing the schemes that are at risk or been pulled. We have however been affected by the spending cuts specifically relating to our Housing Association Clients and Custodial projects
JT: Voltaire is experienced in handling transactions involving stalled sites. These situations broadly result from either a cost overrun or a breach of banking covenant whereby the debt secured against the site has risen above a given percentage of site/completed value. From your point of view how have the lenders you work with generally dealt with such challenges? To what extent have they been pro-active?
JC: The past few years have been a major 'test of mettle' for many of the developers we are dealing with across all sectors. The developers who have managed to survive are the ones with a track record but more importantly a good relationship with their banks/lenders. In my experience I have seen certain developers who have historically been chasing the money without really understanding the art of development. As a consequence it's been these developers who rather than attempt to reengineer a scheme or 'think outside the box' have just walked away leaving the bank to deal with the problems as on most occasions they have lent 100% or more of debt.
There has been a variety of measures which have been implemented by the developers who have a longer term view on the market. These mainly revolve around agreeing a sensible repayment strategy with the bank and working hard to re evaluate a scheme which is essentially 'under water'. Examples are revising Planning Consents, renegotiating Section 106 agreements, simpler designs to drive down construction costs and changing the strategy with regards to the end users.
JT: Let's talk cold hard numbers for a minute. For a typical residential development scheme what is a diligent £/sq.ft build cost and a diligent contingency percentage to apply to a development appraisal? And for a typical commercial development scheme? How have these changed over the last year?
JC: Interesting question, and too be honest it's very hard to give a straight answer. Essentially, in the 'boom' you could pretty much give a relatively accurate cost per/sqft, depending on quality of finish etc as you knew the cost which a contractor wouldn't go below due to demand outstripping supply. In the current market it is very difficult to provide a cost per sq ft as it depends on the individual projects. If it's a good location, is a ready-to-go scheme and more importantly has funding, then we are seeing contractors provide very competitive prices which in some instances are difficult to comprehend. I would therefore recommend carrying out an elemental cost plan using current tendered pricing which will be more accurate than just relying upon a cost per sq ft which historically was the case.
JT: McBains Cooper has expanded abroad with new operations in Greece, USA, and Latin America. What was the rationale behind the international expansion and how has McBains found working with overseas lenders versus UK lenders?
JC: To be honest, I haven't been involved in this side of the business so cannot answer in detail. I will say that the response in the UK market and our exposure globally due to the international expansion has been incredible. It was the board's decision to move into Latin America to increase diversity of the business and the opportunity which was presented in order to do this was a very good proposition.
In addition, we wanted to de-risk the reliance of the business on the UK market and offer the same service internationally that we provide in the UK.
JT: RBS and Lloyds are in the process of reducing their balance sheet and therefore inviting clients to refinance real estate loans elsewhere. Across the Irish Sea NAMA are continuing to keep their cards close to their chest. What do you think we can expect from their policy decisions going forward?
JC: I think it is very difficult to generalise because each organisation is different. In the case of RBS they are backed by a guarantee scheme (i.e. the UK Asset Protection Scheme), whilst NAMA has been buying the debt, albeit at a discount to reflect the value of the underlying assets. Lloyds Banking Group represents the merger of Lloyds TSB with HBoS, and it has its own issues relating to integration and understanding the nature of their existing loan book. As a result of these differences, each organisation will have its own policies going forward.
However, I will generalise to this extent, that I feel sure in each case there will be continuing emphasis on working with their existing customers. The banks themselves are not asset managers, and their customers will be able to bring much needed property expertise to a given situation, as well as existing knowledge of the issues relating to a particular property. However, it is important that existing customers maintain credibility with their lenders.
I would like to congratulate all three of these organisations for not flooding the market with distressed assets. I believe that there is an up and coming problem relating to secondary property, but that is another story.
JT: 2010 being well advanced and with a few weeks to go, clients and lenders are focusing on closing some of the transactions they are currently working on before Christmas. For 2011, everyone has high hopes that the market will become more stable. What is your point of view and what are your plans for 2011?
JC: Much of the same I am afraid, especially the start of 2011. That said, as previously discussed we have seen a movement over the last month in projects coming back on line which is a cause for an optimistic view moving into next year. We have also been producing a lot of cost plans along with due diligence advice which signals clients are starting to come back into the market and keen to do development in 2011. In addition, I feel that the market will understand the consequence of the public spending cuts during the early part of next year and this will allow decisions to be made especially in the Housing Associations.
I also think that the banks will be forced to work the assets which are 'under water' and hopefully will be more open to start lending money again, in a sensible way and with very stringent controls which will allow more development. In summary I think the beginning of 2011 will still be difficult but would hope that towards the end of the year will see the property market becoming more active specifically the residential and care home sectors.