Lenders look to debt’s new dawn

LISTEN “We’ve been through a heck of a year. I’m surprised we fared as well as we have.” That is Paul Oberschneider, chief executive of Hilltop Credit Partners, sounding a relative note of optimism after a tough spell in the finance market and for real estate more generally. Interest rate rises, falling asset values and an air of economic malaise made business as usual a memory. But perhaps a corner has been turned. “Last year was challenging,” says Oberschneider, who established the financier three and a half years ago. “We looked at quite a few deals but we really took a pause and didn’t underwrite, didn’t deploy a lot of capital. “Going into this year, I’m more optimistic. As a lender, I think we’re entering an era where we’re going to see a lot of opportunity on repricing of assets and balance sheets – businesses that will have to be resetting their loan books in the next 12 to 18 months. We see that as a huge opportunity.” Peers of Oberschneider joining a podcast discussion with EG echoed the sentiment. Yes, much of the past year was grim. Yes, as Will Scoular, head of private client lending at Investec Real Estate, puts it, “you could see the confidence ebb out of the market” as the war in Ukraine was followed by rampant inflation and rising interest rates. Yes, debt serviceability has become a far starker strain for developers and asset owners. But this is not the financial crisis of 2008, Scoular adds. “We haven’t seen the distresses, we haven’t seen the loans fall over, and we’ve seen proper relationship banking where you try and work with your borrower to find a solution,” Scoular adds. “I see this as almost a dawn, where we see interest rates probably peaking and then beginning to come off. With that, confidence will be coming back into the market. We see this year as a really interesting one for our clients and hopefully we can help them with that.” Best laid plans The aftermath of last year’s disastrous mini-Budget hurt, real estate financiers agree. But it was shorter and sharper than what the market was forced to work through after the global financial crisis. “If you look back to the Liz Truss Budget, you got a market correction in the space of six weeks,” says Gavin Eustace, founding partner at Oaktree Capital Management-backed Silbury Finance. “It was enormous, it flooded straight through the market. Think back to the GFC and that took a while to work its way through, whereas with this we’ve had a quick, sharp pain and now you’re seeing a logical way forward in terms of debt repricing.” But there is a risk that a perception of the UK as unstable when it comes to politics and policy lingers – and that investment will be hampered as a result. “We’re constantly on the road capital raising and I have to say that capital raising has been really difficult in this last year because of all the uncertainties,” says Oberschneider. “It hasn’t been easy. I think it’s going to get easier. We’re having lots of conversations and people do buy into the idea that there’s going to be a lot of repricing that needs to take place and capital is looking at it. But the government’s done [us] a disservice.” What do lenders want? “Certainty,” says Investec’s Scoular. Where do they want it? The planning system would be a start – with some lenders requiring planning permission for a scheme to be in place before a loan is agreed, the snail-like speed of the average application making its way to committee has become insufferable. “You can only build a business plan when you have some certainty around the environment you’re working in,” Scoular says. “One of the shames about planning is how the government have largely ducked that as an opportunity. “Planning isn’t popular for people who are local to the planning but it is very popular for the people who want the homes. That voice has been lost somewhat. “And we see it with our client base – the frustration and the uncertainty in obtaining a planning consent, even in a zoned location, is a difficult business case to make, particularly when you’ve had cost inflation on top of that. Put those things together and look at the actual risk return for committing to a development and it makes it quite marginal.” US-born Oberschneider agrees. “Unlike other countries, like the US, you have an issue with the planning system here,” he says. “Even in a low interest rate environment, in the UK we were unable to build enough stock to match demand. “People put in planning applications for new-build developments and they may not even hear back for 18 months. You don’t want to give me planning? Well, tell me today. I’m not going to wait 18 months. Nobody has that kind of time. And time costs money.” And even if plans are permitted, adds Eustace, the next challenge is building the scheme. “We don’t really have the workforce for that – we don’t have enough skilled labour,” he says. “Even with material prices levelling out, you’ve still got a mass shortage of labour. There are times on my sites where you’ve got good developers and schemes are behind because they can’t get labour, they can’t get brickies.” Why wait? EG’s guests expect the UK’s interest rate – at 4% – to have peaked or to at least to be close. “I think rates have probably peaked if you look at the swap rates,” says Oberschneider. “Central banks are in a bit of a conundrum. They’re their own worst enemy at this point. If you compare their own balance sheets to 2008, they’re the ones that bought all this debt. So they’re going to have difficulty pricing themselves out. “What they have to do is let inflation run its course. But I don’t think they can raise rates much further. I’m no economist, I’m not a central banker, but the markets are already saying pricing is coming down.”And if it does, the deals and development should come back. “Our group economist has gone on record saying we believe interest rates will peak at 4% and then towards the end of this year come off to probably 3.25%,” Scoular says. “When you start to see interest rates coming down, you’ll see confidence coming back, and people might look back to today and say, ‘why didn’t we buy stuff right now?’ This could be a great buying opportunity.” The panel Paul Oberschneider, chief executive, Hilltop Credit Partners Will Scoular, head of private client lending, Investec Real Estate Gavin Eustace, founding partner, Silbury Finance To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Photo @ London From The Rooftops/Bav Media/Shutterstock