WITH many developments held back by lack of money, three experienced North East property experts take a look at the links between property and finance.
THE link between property and finance is fundamental. Both residential and commercial property needs an element of gearing for the markets to churn, so the lack of any finance causes the market to slow down or grind to a halt.
On a domestic level, the crisis brought about by sub-prime lending has meant the market for first-time buyers has become particularly difficult, with lenders wanting a very much higher percentage of capital value than pre-2007/2008. This makes it extremely difficult for buyers to get into the property market.
The effects of this are evident, other than in central London, which seems to have suffered less impact. While not at the levels of Ireland or Spain, many residential developments remain empty or have a poor level of occupancy or have caused business failure or LPA Receivership. Many of the LPA Receiverships we’ve dealt with in recent years have involved blocks of flats.
Examples of this include Bramwell Court in Gateshead, a block of 26 flats of where only 19 were occupied and only seven were sold, resulting in our appointment as LPA Receiver to the developer. Similarly, York Chambers in Thornaby on Teesside comprises two blocks totalling 27 flats. Only eight were sold and again we were appointed as LPA Receiver to sell the development.
However, there is some evidence to suggest that lenders are becoming more flexible.
The relationship between property and finance in the commercial market is just as crucial, if not more so. Whilst it would be fair to say high-profile fortunes have been made and lost over the years, an element of finance is essential in kickstarting the process. There are now fewer lenders than in the past, with only three or four of the mainstream lenders currently active. Of these, perhaps only one is a traditional British-based clearing bank.
Many banks say they are open for business, but the criteria they demand make borrowing impossible for most developers. As in the residential market, developers or investors need a very much higher percentage of their own money.
There is virtually no speculative finance without major pre-lets or guarantees in place. This has meant that speculative development in the provinces has virtually ground to a halt. Finance for investment acquisitions is very much geared to reflect the length of unexpired term of leases, the quality and strength of the covenants and the absence of break clauses. Amortisation now is typically from the date of purchase until the end of lease or break option.
Enterprise zones have added an interesting dimension to this equation, with enterprise zone developers being able to raise money from syndicates, wealthy individuals and other tax conscious organisations hoping to take advantage of 100% allowances within the zones.
However, many of these developments remain vacant for some time. As a consequence, there are some relative bargains to be had in enterprise zone, but again the problem of finance presents itself as a higher percentage of cash is needed to purchase, particularly if the scheme has a short unexpired lease term.
:: Bill Lynn of Storeys Edward Symmons
Developers seek new ways to fund key regeneration projects in region
THE global recession and failure of the funding markets has left property developers and local authorities looking for new ways to fund key regeneration, development and infrastructure projects.
Local authorities can borrow under the prudential borrowing framework to provide funding for infrastructure and development works. The private sector has also started to establish infrastructure banks and fund projects by debt or equity funding.
The private sector is looking to invest in waste and energy projects. Pension funds are looking for low risk capital projects with long-term repayment profiles (25 years) that are inflation-linked. The private sector is therefore interested in funding infrastructure, development and regeneration that offers the right risk profile and funding structure.
Funding sources that have been attracting more attention recently include the Joint European Support for Sustainable Investment in City Areas (JESSICA). This uses ERDF/European Investment Bank funding, matched public sector funding and potentially private sector funds to offer debt, and some equity, funding. This is offered to developers on state aid compliant terms for commercial, industrial, some retail developments, and could later include residential development.
The Regional Growth Fund and the Green Investment Bank have both been established to provide investment into private sector led development and energy efficient initiatives.
Tax Increment Finance (TIF) is the rise in business rates that takes place due to increased development or to a change in perception or infrastructure which causes more business to locate to a particular development area. Local authorities can apply to HM Treasury to retain this uplift in business rates for a period (usually 25 years) and use part of the present value of this sum to fund infrastructure or decrease blight in development areas.
Business Increase Bonus Schemes work on a similar basis to TIF but the increased income is only retained for six years. Due to the shorter repayment period, a financial limit has to be put on any capital works funded in this way.
Business Improvement Districts are agreements by local businesses to make a future contribution to the infrastructure cost of making small scale improvements to an area. This is similar to a rates contribution but is not payable to central government.
The Community Infrastructure Levy (CIL) mechanism works on the basis that capital works are repaid via a ‘tax’ on the whole of the area that will have increased infrastructure need as a result of development taking place. This tax is normally calculated by assessing the total infrastructure need in an area and allocating this cost over the forecast number of homes to be developed and commercial/ retail development. Repayment is made over a long period (usually 25 years).
The Charge over Land Mechanism (CLM) is a repayment system best suited to development areas where there are fewer than six landowners who want infrastructure on a development site but are unwilling to, or cannot, pay for the infrastructure up front. The infrastructure is funded by the local authority by way of a loan to the landowners’ consortium with a charge taken by the local authority over the land.
Loan Guarantees are given where a local authority provides a guarantee to the bank or pension fund/investor providing funding to an infrastructure project or development. These guarantees provide a better credit rating and lower cost of funds for long-term funding. Joint ventures can be used as a source of funding, and as a repayment of funds, and are common in the private sector between developers and funders. Due to funding challenges, these are becoming popular in the public sector. Public sector organisations considering a property-based joint venture need to have an attractive asset base available for investment. They will look for a private sector partner able to bring equity funding to match the land value, commercial development and operational expertise and knowledge of commercial debt markets.
:: Steve Cole, senior surveyor, national markets - investment, GVA
Funding boost for Quarter project
WITH finance remaining difficult to source for the process of commercial property development, the sector remains frustrated in its aim to bring forward development for regional occupiers and inward investment.
Funding institutions and investors remain cautious against a background of occupier uncertainty, falling rents and falling values.
Out of adversity, however, springs opportunity, and funds are widening their target area to include other asset classes over and above industrial, retail and offices, with residential investments, leisure and hotels being good examples.
But despite examples of significantly pre-let schemes, funds can still take an adverse view on the financial security of some of the tenants signed up to take space.
This causes uncertainty and holds up development.
For developers, this is extremely frustrating, which adds delay after delay when already considerable time and cost has been necessary to assemble land and take a scheme through the planning process just for the till to ring with the almighty thud caused by the news that there is no funding to move on to the construction phase.
Which is why Newcastle City Council is being applauded for its initiative in supporting Silverlink’s Stephenson Quarter mixed-used scheme by providing finance to the tune of £30m.
This has allowed a start on site after a seven-year period of land assembly and planning procedures, generating a key area of the city where many thousands of jobs can be created.
As the city’s only major project to have commenced, Silverlink’s £200m Stephenson Quarter development is strategically needed by Newcastle, not only as a shining beacon in the regional office market by stimulating 300,000sqft of Grade A office space, but also by delivering two hotels, a large multi-storey car park, public space, restaurants and high-quality residential apartments.
This mix of uses will help to bring back to life this central and strategic part of Newcastle, and it will also help to bring forward other plans associated with a wider area around the Central Station – just as Quayside regenerated a much larger area so will the Stephenson Quarter.
Development has a vital role for the city’s economic activity and vision for the future, as has been demonstrated by the changed landscape along Quayside, St James Boulevard, and Science Central, for example.
As development takes time to go from the planning process through to delivery, without financial support, office development in the city centre will be on the back-burner.
We have much to celebrate with the city’s proactive approach to new development and much needed jobs.
:: Tim Evans is partner in charge at Knight Frank in Newcastle