RBS banker accuses debt funds of being ‘loan-to-own’ investors

Real estate debt borrowers should be wary of turning to alternative lenders because they were more likely to go after the underlying property, the LMA Real Estate Finance Conference heard today. RBS director of real estate finance Jason Presence told an audience at Allen & Overy’s offices in London that some non-bank lenders were effectively acting as ‘lend to own’ buyers.

Real estate borrowers should be wary of turning to alternative lenders because non-bank finance providers are more likely to go after the underlying property, the Loan Market Association Real Estate Finance conference heard today.

RBS director of real estate finance Jason Presence provoked a lively debate when he told an audience at Allen & Overy’s offices in London that some non-bank lenders were effectively acting as ‘loan-to-own’ investors.

“The clear message behind a debt fund  is that they would be very comfortable accelerating enforcing against a property in the event of a default, as they have little reputational risk compared to the traditional banking market,” said Presence, who was taking part in a panel on development financing.

“Their funding would be recovered in part from a forced sale. They would have gone into the deal with a view to the potential upside of owning the asset and the opportunity they could create.”

The behaviours and motives behind this financing sector was evident in the last financial crisis,  Presence claimed.

“Ghost lenders or vulture funds would buy small secondary pieces of debt from banks and then exacerbate inter-creditor negotiations and restructuring of the facility to the extent that traditional banks would choose to exit due to far higher holding costs. The banks would exit via the secondary loan markets allowing [the funds] to take control.”

John Cole of Cain Hoy Enterprises, which has acted as both a principal and an alternative debt lender, responded, saying that the sector had evolved since the last crisis.

“To make a generalist comment about alternative lenders and the way that they can be a negative force on the market perhaps is a little strong,” said Cole.

“We assess the risk the way any prudent, responsible lender would. It’s about successfully achieving the end result for everyone who benefits from those developments.  It’s not about wanting to own the property, that’s not what we do and I don’t think we’re unique.”

The lack of finance for speculative development was also highlighted with William Newsom from Savills bemoaning the lack of activity.

“So far as the UK banks are concerned, fundamentally, they won’t provide it because they are subject to the ‘slotting’ regime by the Prudential Regulation Authority and speculative commercial development finance just does not sit happily in that framework,” said Newsom.

“From a lenders’ point of view, it’s a huge missed opportunity. If lenders have ambitions to make good returns, that can be achieved through providing speculative development finance at this very favourable stage in the cycle.”

Most panellists at the conference believed the current property cycle would not begin turning before 2018 with many predicting the top would not be reached until after 2020.

However, a UK exit from the EU in a referendum due to be held by 2017 could change the landscape dramatically.

“If it looks like the probability of an EU referendum being lost is high, I think the cycle may turn on that,” said John Feeney, managing director and global head of corporate real estate at Lloyds.

“If we get to a point where it looks like a low probability event then I think the cycle is likely to carry on for quite some time. I think we’re a good maybe five, seven years away.”

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