How to benefit in the new lending spectre

AUGUST 2010

Good times then came and went and came back again and after 10 years of growth, growth and more growth – finance became easier to get hold of and ultimately many financiers made the same mistakes again.

Will they make the same mistakes again in the future?

Whether they do or not there will be more internal and external regulatory pressure on all financiers to make sure that they don’t. It will remain more difficult to obtain finance for developments for the foreseeable future and there will be more hoops to jump through than ever before.

So what can you do now to make sure your business is best placed to attract development capital when it does start to become available again and how can you secure it on the best terms for you?

Lenders are going to need more certainty in the future – which means that developers are going to have to demonstrate more control. Financiers are shifting the emphasis of their due diligence process.

Previously, they’ve concentrated mostly on the cost, quality, end value and certainty of a development they might lend against.

Now financiers are placing just as much due diligence emphasis on the companies they’re lending to. That means property developers and investors are going to have to focus much more on how they operate as a business and how they manage and deliver projects.

Their ability to do this will have a huge impact on whether they’ll be able to attract funding and what the cost of that funding will be. Organisations that can demonstrate they have very robust internal risk management and development controls, a clear view on how they’re going to deliver value from their investments and are firmly in control of their supply chain, are going to have a huge competitive advantage when liquidity eases up.

Financial due diligence on a development project will only be done once a decision is made to proceed, but due diligence on your business is something you should be doing now. Businesses that put their houses in order before debt comes back on the market will be able to move fastest and secure the best deals.

Demonstrating that you have learned from the downturn and can therefore show as a result that you have controlled operational and delivery costs at greater rates than the downturn in the market will also stand in good stead with financiers.

Stricter controls will help achieve savings, as will reviewing the way you’re engaging with the supply chain. Developers should look at everything from procurement strategy, contracts, incentives for suppliers and how to manage waste and improve efficiency.

Developers will need to be very clear about what markets and asset types to invest in and will need to apply expert product knowledge to drive those extra percentage points from margins. That means not only having internal expertise but making sure that consultants and advisers also share expert product knowledge.

Anyone active in the current market will need to have a far more rigorous approach to the delivery of their projects. Standard forms of contract and traditional management techniques may fail to provide the necessary degree of protection. An independent audit as part of a pre-contract strategy may increase the likelihood of securing funding on projects, as well as potentially improving the commercial terms for that funding.

In the past year, we have increasingly found that corporate governance and cost control are becoming as important as the project itself in the due diligence process. Financiers will want to know that there is the right level of control and the right calibre of advisers and that cost and risk are being managed creating more focus on certainty of outcome.

When the market does come back, it will move very quickly. So making the investment now in strengthening your overall position will ensure that you’re best placed to benefit from a rising market in the future.