By Joanne Wright, Partner. Contact Thomson Snell and Passmore 01892
Continuing difficulties in the banking sector have led to more creative ways of borrowing.
The most significant factor affecting lending in the commercial real estate sector is the impact of regulatory changes. The Basel Regulations impose capital adequacy rules leading to some financial institutions either not lending at all or lending only against the very highest quality assets. The availability of development finance has been particularly affected.
The increase in lending from non-banking resources is a positive response to tackling the net funding gap in the UK market. Revised debt structures are attracting a range of new non-traditional players to the market. These new entrants have a different approach to bank lenders: debt funds, asset managers and insurers are providing senior, junior and mezzanine debt financing.
The mezzanine lender in particular can help by providing top up funding normally subordinated to senior debt provided by a major bank.
There has also been an increase in wealthy individuals lending money for development or acquisition transactions. Individual lenders are more open to entering into bespoke arrangements which generally offer them a greater return as well as entry and exit fees. For borrowers increased flexibility is attractive.
Insurance companies too are starting to bridge the funding gap and 2013 will see the expansion of debt funds. We also anticipate further innovative income type projects to be created from underlying real estate. For example, a hotel chain recently created and sold a commercial ground rent to help fund the buy back of six hotels.
Despite views on the state of the economy and the real estate market tending to be mixed, the overall consensus appears to recognise a slow recovery. This is still a fragile market which is 3% smaller today than it was in 2008.
Over the next few years, as optimism and the appetite to do deals increases, the expansion of alternative debt will be key.