[**Banks tighten lending and demand money upfront
LENDING MARKET Banks are tightening the screw on property developers by demanding interest payments on land that would normally have been paid after a project had been completed, writes Gretchen Friemann
According to industry sources the cash call has already led to fire sales on residential land developments where it is believed values have suffered their sharpest fall.
However two weeks ago it emerged that a commercial site in Portlaoise, which had been earmarked for a shopping centre, became the first significant forced sale on the market since the global credit crunch and property sector slowdown.
Maryborough Construction Holdings Limited, the owners of the land, failed to find a suitable anchor for the planned shopping centre and had over-relied on loan capital for the project. The firm had already drawn down €23.5 million of an €84.5 million loan advanced by Anglo Irish Bank to purchase and develop the site, which is now up for sale for €25 million.
According to Ronan Webster of agent CBRE, the interest demands from banks are “hurting those who didn’t make any provision to service their debts” but claims these cases represent a very small segment of the market.
If the “current stalemate” continues, with buyers and sellers at an impasse over values, Webster predicts the interest rate calls will have a “wider impact”, but argues it is an unlikely scenario as market conditions would have to remain the same for at least the “next one to two years”.
Up until the credit crunch, developers could rely on their banks to roll-up interest charges until a project had been completed. Then the borrowing charges would be paid in one lump sum and the developer would move onto the next site.
Yet as one investment specialist points out: “People were buying up land two years ago at a ferocious rate assuming the growth story would continue. And with the benefit of hindsight, that looks like madness.”
According to one source, those developers who are still locked in planning or have no clear exit from a transaction are at “most risk” from the interest rate calls.
And it seems there is no end in sight to the tighter funding environment.
One investment specialist, who wished to remain anonymous, says a number of his clients have resorted to writing off profit margins as they factor in falling values, which have slumped by up to 30 per cent in some areas.
But he stresses that “very few” have actually lost money on a venture.
On the flip side, the same source claims those wishing to secure funding must “have large cash reserves. The banks no longer seem to care about asset wealth. That’s gone out the window. The new rule is if you have money, the banks will lend you money.”
While the extent of the liquidity freeze in the sector is well known, the head of commercial property lending in one of the large banks says most institutions are now “either closed or semi-closed to new business”.
He points out the “collapse in securitisation has shut off a key funding source” and claims those banks with access to the “credit lines of a larger parent group” are faring better than most in the risk-averse conditions.
He describes how the securitisation market - viewed as a growing source of income for Irish banks until the credit crunch hit - has dried up at an alarming rate. "I used to deal with three or four people in the securitisation department of a foreign-based bank and today I’ve just learnt those people have all been dismissed or reassigned.
“In these types of conditions, when a liquidity source is suddenly shut off, you have to stop producing the loans until you’ve cleared out the backlog.”
However Felix O’Regan of the Irish Bankers Federation denies banks are pulling down the shutters on new clients.
“A large number of refusals in one line of business might be a result of an institution’s decision to concentrate on a different sector. We’re certainly not hearing anything as dramatic as banks closing down new business. That would be a complete exaggeration.”
But according to Donal Kellegher, a director in Savills HOK’s development land division, smaller players have been frozen out of the market by new funding restrictions.
“We used to see quite a number of small syndicates, made up of a group of friends, that would club together and buy land. That market has gone. Really, unless you’re an established player, it’s extremely hard to get financing from the banks.”