The credit crunch generating risk and opportunities on a local level, argues Lillian Peterson Turner & Townsend cost manager
As we greet the New Year, it is looking more than likely that one of the dominant stories of 2007 is going to continue into 2008.
Although the credit crunch continues to generate headlines in the business pages with Middle East and Far East investors taking positions in the weakened US and UK banks, in my day-to-day job as a cost manager, I'm seeing the risk and opportunities the credit crunch is generating on a local level.
I am currently monitoring a residential development on behalf of major bank and it is posing challenges for both funders and developers. The funder (a bank) is concerned with ensuring that its return at project completion is guaranteed at the rate it based its funding criteria on. Alternatively, the developer's concern is that the development delivers potential buyers willing to pay the sales price in line with its development appraisal.
I am watching this situation with interest because I am aware of a slowing down in UK property price rises. As lending criteria is tightened and the Bank of England begins to enter an interest rate cutting cycle, will future confidence levels reach the crisis levels anticipated by media commentators?
I am noticing a potential chain of events here. A reduction in consumer spending can have an impact on the return that the developer expects and the timing and volume of returns on the bank's loan investment.
Whereas the consumer mortgage industry gets more publicity in the broader media, property developers also have to worry about how they can continue to secure funding for future developments. Of course, there are a number of options such as exploring alternative funding opportunities on the wholesale commercial market, entering into joint ventures to reduce risk or land banking until margins improve.
In the current climate, who in the commercial sector should worry more than the others? On one hand, we have some speculators who can be exclusively reliant on residential consumer spending to secure sales. On the other hand, are the better geared funds and real estate investment trusts also exposed on their more marginal developments?
My guess is that funders and lenders will continue to look favourably on the more diversified developers, who have pre-lets and can also repay the loan facility through their portfolio of investments and secured assets.
Therefore, the real pinch is perhaps going to be felt by the lesser capitalised developers as well as speculative developers who are more reliant on the narrow high volume residential markets to guarantee return on their investments.
None the less, I feel risk and uncertainty will continue to influence banks who are also feeling the impact of their own credit investment strategies and reduction of finance through interbank borrowings.