This morning at Real Estate Capital’s London Forum at Butcher’s Hall in the City of London, Rupert Clarke, managing partner at Lipton Rogers Developments and former chief executive of Hermes, revealed his golden rules for bankers to avoid the next bust.
Clarke was however pessimistic that any warnings would be heeded. “I think most banks will break free of these rules and continue to grow the size of their book at the top of the market when prices are at their peak and margins are at their lowest nor will they sort out incentives and the alignment of interests within their teams. There is more work to do,” he said.
He urged lenders to consider when they were going to stop lending and recognise the market as overheated. “Before you start you have to have a good idea of when you’re going to stop. It’s like cycling down a hill without any brakes – it’s vital.”
His golden rules were:
– Know your borrower and promoter. Are they the type of people you want to do business with? Do you trust them? Do they have the right attitude and capital if things go wrong?
– Keep a focus on the obvious lending rules of LTVs, independent valuations and margins. If the market moves away from us, will we still operate or do we choose not to lend anymore?
– Stress test how the loan will perform under changes in micro circumstances as well as broader economic change.
– Monitor your loans. You want there to be more money put in when the covenant is beginning to break, not afterwards. Be pre-emptive.
– Development finance is risky. If you are lending against land or vacant property you have to be very comfortable that if it doesn’t go to plan that there will be someone there to pay the interest.
– Regional property is tricky. It’s a locals’ market and you need a borrower who knows his assets. When it goes wrong you’re a long way away.
– Mezzanine lending requires a completely different set of skill to senior lending. Just because you know about one doesn’t mean you know about the other.
– It is really silly to lend in a different currency. It happens every cycle that someone lends in Swiss Francs because their interest rate is low and it is just crazy.
– Lending team rewards can’t just be front-ended. Most rewards are calculated on a share of arrangement fees and are short-term bonuses. The real win is when you get the money back.
– Know when to stop. There will be another bust but the market will get more competitive and teams, books and profit projections will go up and people don’t know when to stop. If you don’t stop a couple of years before the bust you will probably lose the majority of what you earned before it.