Investec's R6bn bet.

Posted On Friday, 01 August 2003 02:00 Published by eProp Commercial Property News
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But UK property prices could fall 30% without doing too much damage, claims bank.

Bernard KantorInvestec's UK private-banking arm is a major lender to London's falling residential property market. It makes up £525m (R6,3bn) of its £941m (R11,4bn) total lending. About £370m (R4,4bn) is to residential property.

UK weekly financial magazine The Economist predicts the UK residential market will fall by 25% over the next four years. The International Monetary Fund is also warning of a downturn. Prices in many parts of London have already fallen by 10%.

But Investec has "stress tested" its property loan book, says group MD Bernard Kantor. If property values drop 30%, he calculates that as little as £6m will not be backed by property value.

" We limited lending to 60% -90% of development cost," says Private Bank MD Steve Heilbron. "The rest is made up of developers' equity and (high risk) mezzanine finance ."

By the time the property is built, Investec's loan is between 50% and 70% of the value. As it is the senior debt, the 30%-50% of equity and mezzanine finance will be lost first .

Investec has been in the London residential market for 10 years. "We have strong relationships with proven developers," says Heilbron.

He says the market could remain under pressure for another five years. Yet the bank still has an appetite for lending. "There are markets within the residential market that will hold up. The £1,5m (R18m) to £2,5m (R30m) market will be particularly hard hit, but there is still strong demand in the affordable market between £300 000 (R3,6m) and £500 000 (R6m)," says Heilbron.

Investec continues to lend but it is not chasing deals, he says. "We spend a lot more time ensuring any project we fund is a hard buy."

The bank employs its own quantity surveyors and other property professionals to remain close to the market and its clients.

The residential market is the most liquid property sector and development funding usually runs for 18 months, unlike 20-year home loans to end-buyers. Nonperforming loans are currently only £10m, of which £7,5m is to one borrower.

Deal flow has dropped as many developers sit on their hands and competition among banks becomes intense. "The large banks are awash with cash," says Heilbron. "They are pricing their loans too finely, well below our acceptable risk levels."

SA-born Ira Rapp, a major London residential developer, feels Investec has a sound debtors book because it has refused to cut its margin. "I would like to do business with Investec, but I get better deals from the high-street banks," he grumbles.

 

Last modified on Saturday, 10 May 2014 17:01

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