Mike Edge, head of Property at Pinsent Masons, on MIPIM, finance & ‘Slotting’
Sunshine turned into rain and then snow but nothing dampened the optimism of the tireless networkers in MIPIM this year - even the banks! They have been thin on the ground in recent years but they are beginning to increase their visibility and the presence of those who did attend this year gives a clear statement: “We are back!” but the question is... are they really open for business?
If I’m honest, it would seem that they are and if there was one positive message to bring back home from Cannes this year then it was that greater activity from that sector in writing new lending is surely not too far away. However, there is little talk about "slotting". If you don’t know what that is... it is the exercise which the Financial Services Authority is requiring banks to have completed by the time they publish their half-year results and involves them retaining on their balance sheets a fixed amount of capital. The amount depends on the risk category or slot – Good, Satisfactory, Weak or Default - into which the bank has placed the facility.
The hope is that slotting may have benefits for the financial world in terms of not only bringing distressed debt for either sale or re-financing but also bringing to the trading markets a stock of “re-possessed” property for sale. This is the theory but what about the reality?...
Well, the debt providers are there and the buyers too in increasing numbers, so there is a better chance of an exit for those banks who wish to take it. However, will the banks be prepared to take the hit? Many may still prefer to retain on their balance sheets the requisite amount of capital to match the risk which the slotted facility requires, rather than take ‘write off’. Thankfully, relationships are still important and, not least, borrower relationships. In an increasingly competitive market, the banks may wish to preserve as many of these relationships as possible.
Whilst rental income is sufficient to cover loan interest and whilst loan to value ratios remain negative, the banks will need a carrot or a stick and slotting is unlikely to be the answer. For these reasons, I think there may be some improvement but I don't think we are going to see any significant increase in the opportunities which are being brought to the market-place. Rather than stimulating activity it may make lending more restricted and/or expensive except for those properties and schemes at the high end of the market.
Inevitably, the market will look for other forms of finance. For example, at Pinsent Masons, we have experienced an increasing appetite in the development arena for contractor "financing" – this is where the contractor is assuming development risk. There are several variations ranging from the scenario where the contractor defers receipt of the sums due to him under the building contract by taking a lump sum on completion of the works (with a retention until the end of the defects period) to where the contractor effectively acts as funder; although this can raise issues about what security the developer can offer. However imperfect these types of financing may be, this is a way in which stalled developments can get kick started.
So what about the tireless networkers? I suspect that next year at MIPIM they will be back talking to insurance companies, private equity funds and other sources of finance as well of course, to the banks.