William Newsom was elected a Fellow of the RICS in 1990. He is a Director of Savills Commercial Ltd and UK Head of Valuation. His division specialises in bank advisory valuations, both for new lending and for workout purposes. Over the last 18 months, his division has provided independent valuation advice to over 100 different lending organisations.
Dorothée Queyroux: In order to secure funding for commercial development schemes, developers are typically required to secure a firm pre-let or pre-sale. The difficulty of this process has resulted in the market focusing more on residential than commercial development. Has this been reflected in the nature of the instructions you have received from lenders?
William Newson: Yes, as valuers for banks, we are receiving virtually no new instructions to value commercial development schemes. For all practical purposes, none of the banks are providing commercial development finance. Furthermore, owing to weak occupational markets (with the notable exception of central London offices and retail) we are seeing little if any pre-letting or pre-sale activity.
However, we at Savills do continue to receive instructions to value residential development schemes. These come in all different sizes and stages, but the main activity is with schemes under £10M. It remains very difficult to raise development finance, whether residential or commercial, above £10M. Lenders are very selective, both in terms of the schemes they will lend against and in terms of borrowers. Essentially lending is confined to developers with a recognised track record developing out the best quality projects. Development finance at the present time is also expensive. Lenders have come to appreciate that development is a high risk activity.
DQ: Over the last year we have noticed many assets being acquired with pure equity rather than incorporating any debt. Have you noticed your lender clients (and their respective borrowers) losing out to cash buyers?
WN: Yes, this is a big feature of the market. This is particularly relevant for German Banks, who mainly are seeking to lend secured against prime commercial investments. It is just the same properties that many of the equity backed investors are seeking. This has led to a large number of lenders not being able to realise their ambitions to lend. It has also led to a very competitive market such that when the rare prime opportunities arise, those competing have been driving loan to values up and margins down. Lot size is particularly important in this context. The greatest competition is for lot sizes of between £20M and £50M. Very few lenders today will lend above £100M on their own.
DQ: Particularly given cases of mainstream European lenders' criteria tightening have you become increasingly involved in Islamic funding?
WN: Yes, we were and are at the forefront of the development of Sharia compliant funding in the real estate sector in the UK and in mainland Europe. The availability of equity from Islamic investors has meant that a number of the conventional banks are now willing to consider these types of transactions. The use of a variety of products from lease Ijara to conventional or commodity Murabaha has increased. As long as the transaction successfully marries conventional returns and security to Sharia compliant procedures all parties' requirements can be met.
DQ: Since the demise of CMBS the property market has seen far fewer fresh ‘big ticket’ transactions being underwritten. For requirements of more than £50-60m it is generally necessary for a consortium of several banks to come together. To what extent do you envisage the return of the CMBS market?
WN: CMBS definitely will return, as the market needs it owing to the scarcity of liquidity. The two main questions are when and in what form? I am expecting us to see a cautious re-emergence of CMBS during 2011. New CMBS will be simpler and more transparent than in the past. It will tend to relate to large single assets and/or single borrowers and/or single tenants. It will tend to be focused on more vanilla type properties. CMBS will be in single tranche owing to the problems encountered by B note holders. Loan to values will be low, perhaps initially less than 50%, and perhaps modelled on the German Pfandbrief. However, the latter carries the guarantee of the original bank which will not be the case for CMBS. There will be a closer examination of financial ratings in the future. Finally there will be a much greater disclosure of information regarding the properties, the promoter, and the legal and technical reports.
DQ: 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?
WN: 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.
DQ: And finally, the same question we ask everyone we interview, how do you see the remainder of 2010 developing, and into 2011?
WN: At the time of writing, we are in the middle of November and really there is only the party season left this year apart from having to finish off a number of year end jobs. I am looking forward to plenty of good parties and trying to avoid clients crying into their beer. I wish everybody in the industry to approach 2011 with confidence. There is far too much gloom and despondency out there. There having been a high level of write downs, I consider that 2011 is a land of opportunity for those with equity/liquidity, property expertise and the ability to focus on the fundamentals. In the property banking industry, there is concern about the impact of Basle III, and I think we should be ready for a changed set of circumstances and the emergence of new lenders. The market has a resilience to metamorphose itself and I feel sure it will bounce back in the fullness of time.