Luxury London housing schemes still attract finance, but elsewhere it is tough, writes Jane Roberts
Residential development and investment finance may seem incredibly hard to find, but like other parts of the real estate finance markets, it depends who’s asking and how much borrowers are prepared to pay.
Almost more than any other sector, brokers say that this is a very patchy market. “It is completely segmented,” says Stuart Buchanan, head of Acuitus Finance, which advises buyers of commercial and residential assets ranging from £1m to £50m, including at Acuitus’s auctions.
“There are banks operating up to £5m, others in the £5m-£20m space, then certain lenders coming in much higher than £20m.”
A host of international private banks and large banks’ wealth management divisions will also lend on residential – “but only if you first deposit, say, £10m with them; then they charge you handsomely for the privilege of borrowing £5m” as one residential fund sponsor puts it, only half-joking.
Once you get into the mezzanine space – which is sooner than it used to be in terms of the lower loan-to-cost ratios available for development – finance generally comes from equity funds, at eye-watering costs.
It might take longer to arrange now that fewer banks are active, but in recent months the sector’s biggest and best investors have managed to refinance and find new funding, some from non-traditional bank sources.
Two years ago, London & Stamford, run by Patrick Vaughan and Raymond Mould, targeted London housing as a growth sector. The REIT has raised two facilities with US insurer MetLife to finance part of its £89m residential portfolio, £25m secured on flats at the old Arsenal FC ground in Highbury, north London and £22m for Bridges Wharf in Battersea and Clapham Road.
The market leaders in student housing have been active: UNITE Group refinanced £316m with four lenders (see p24), while Liberty Living refinanced £300m, a chunk of it via a US private placement.
Insurers, new to property lending, seem to like the sector and UNITE, Quintain/Wellcome Trust’s iQ Student Accommodation Fund and Round Hill Capital, the private equity firm buying Blackstone’s Nido student housing business, are talking to insurance groups about new senior facilities.
Lenders target prime London housing
The other attractive sector to lenders is prime central London residential. Last year, RBS, Deutsche Bank and United Overseas Bank of Singapore completed a £230m, three-year senior loan for Richard Caring to develop 20-21 Grosvenor Square as luxury flats, alongside a mezzanine package from a LaSalle fund and SAFANAD.
In Chelsea, Barclays Real Estate is providing site acquisition and development debt finance for Native Land’s and Grosven-or’s latest development (see below).
Even for the best capitalised clients and primest locations, the level of loan-to-value or cost available are lower now and substantial up-front equity is needed, making development tougher and potentially more expensive. Fiona Freeman, head of London real estate at Barclays Real Estate, says “Equity must go in upfront now rather than being drip fed.”
Private equity firm Carlyle Group is developing central London student housing and has bought two prime London residential sites via its third European fund.
Robert Hodges, European head of real estate, says: “Before 2008 you didn’t need any equity to do these things – the banks financed you. You could get high levels of debt, put mezzanine in and probably finance your equity too. Now even with equity they are financing on modest loan-to-cost levels.”
Carlyle owns Henry Moore Court in Chelsea and last month spent £36.5m to buy the 40,000 sq ft, grade II-listed 88 St James’s Street, SW1, which it plans to convert into luxury flats.
For smaller borrowers and, with a few exceptions, those outside central London, life is very different. Here banks are more likely to try to shake off customers rather than lend them more. Brokers say this includes some UK clearing banks as well as the Irish banks like Anglo Irish, which were big UK residential lenders before the crash but are now pulling out.
“Outside London and the home counties it is as if a line’s drawn through Birmingham – it’s really hard getting residential development finance in other cities,” Buchanan says. Most of the funds that see traditional lenders’ withdrawal as an opportunity also focus on high-end residential in London.
Specialist debt investment manager Aeriance Investments, whose sponsors include Aerium Properties, launched its first residential fund, OREL, in November 2011. It has £100m of initial equity to provide two to three-year bridging finance for property companies and high net-worth buyers.
The fund, which considers senior and mezzanine loans up to 65% LTV levels and has a 10-12% net return target, has commit-ted about £50m to two deals in Belgravia, one in Kensington and one in Knightsbridge.
Senior investment officer, Daniel Bendavid says: “We get a liquidity premium; we are paid not because we take high risk, but because we are here.”
Residential lending is a Close Brothers speciality
Financial services group Close Brothers has a banking arm that lends to several specialist sectors, including property, which accounted for £563m of the total £3.45bn book at the 2011 July year-end. The bank is well funded and it is keen to continue expanding the property book, having been a consistent through-the-cycle lender in the past 40 years.
Oliver Powlesland, a senior manager at Close Brothers Property Finance, says about 70% of the book is residential development lending and typical loan sizes range from £0.5m to £10m, although the size is increasing and it will lend up to £20m.
“We do not usually fund multiple-unit schemes, with the maximum usually up to 15-20, so the majority turn over in 12-18 months,” says Powlesland. “We like lending it out and getting it back.”
At 7% cost, plus fees, the bank is not the cheapest lender, but Powlesland says it is quick to turn deals round and customer-focused. The bank will lend in the south- east and “other areas where there is proven demand” – it has clients in Bristol, Oxford and Manchester, for example, as well as an Edinburgh office focusing on transactions in Edinburgh, Glasgow and Aberdeen.
The bank also lends on an end-value rather than loan-to-cost basis, and with 50-55% the typical LTV level as long as the customer has sufficient equity in the deal and upfront, that makes Close Brothers attractive: the 60% of site acquisition and development cost commonly offered by competitors probably equates to 40%-45% of value.
Chelsea project shows Barclays still goes big on housing
Barclays Real Estate has been a long-time supporter of the residential market. “We lend across the spectrum from housebuilders, which are more akin to corporates, to private developers,” says Brendan Jarvis, head of real estate. “We have regional housebuilders who have banked with us for many years and continue to trade well in their catchment.”
There is a perception in the market that less of the bank’s £16.23bn UK loan book has been going to residential, but Fiona Freeman, head of London real estate, says this is not the case.
“We did go a year or so when there wasn’t much going on. For example, we bid on some student housing deals but our price wasn’t what people wanted. But halfway through 2010 developers had got used to re-balanced loan-to-cost levels and wanted to borrow again. Our residential book actually grew last year.”
The £90m loan for site acquisition and development the bank has just made to Grosvenor and Native Land to develop Alpha Place, 25 private and 13 on-site affordable flats totalling 100,000 sq ft on Chelsea Manor Street, London SW3, is much larger than an average residential facility.
The deal was led by Barclays’ Graham Chilver. The loan to cost ratio is thought to be around 60%.
“Alpha Place is a large deal – there are few residential deals that you do above £40m and they tend to be £20m-£45m,” says Freeman. “Sometimes if they are bigger we might look to club with someone else.”