Property Finance

David Isaac, Mark Daley

• Publisher: Bloomsbury Visual Arts
• Year: 2020
• Print ISBN: 9781352009378
• eBook ISBN: 9781350315761
• Edition: 3
• Topic: Technology & Engineering
• Subtopic: Construction & Architectural Engineering
• Index: Technology & Engineering

Property Finance is an accessible and comprehensive guide to the field of property finance, linking the practicalities of property and construction with an understanding of core financial structures and concepts. It introduces the key components of real estate investment and development cycles, and explores the interconnected roles of the financial services industry, property companies, joint ventures, banks, and real estate developers. For this edition, a new co-author, Mark Daley, has been brought on board. He brings a wealth of knowledge and teaching experience to this well-established textbook. An ideal book for students undertaking real estate or construction-related degrees, it is also useful for personal study or further information and help in this particular area of finance.

1

Introduction to Property Finance

1.1 Introduction

1.2 Debt and equity finance contrasted

1.3 Sources of finance

1.4 Commercial property finance

1.5 Overseas investment

1.6 Sources of corporate finance

1.7 The role of the stock market

1.8 Lending criteria – commercial property

1.9 Lending criteria – residential property

1.10 General lending criteria

1.11 General loan finance terminology

1.12 Property finance and the investment market

1.13 The financial structure of firms

1.14 The finance function

1.15 Lengths of loan and interest rates

1.16 Advantages and disadvantages of different types of interest rate

1.17 Markets and margins

1.18 Summary

Self-assessed questions

References and further reading

1.1 Introduction

This chapter introduces the language of property finance. It identifies the main lenders and the sectors of the market in which they operate. The different approaches by lenders to funding in both the residential and commercial sectors are explained. Lenders will provide finance for a wide range of borrowers who can be owner-occupiers, investors and developers. Private individuals and companies have access to debt finance primarily through banks and building societies. A loan secured on a property is known as a mortgage and can apply to commercial and residential transactions.

Residential and commercial customers need a deposit when they apply for a mortgage. This deposit is often called equity in the residential lending market and reflects the cash stake the borrower can provide. Lenders have strict criteria by which they assess the suitability of a borrower for the loan they have applied for. In its simplest context, lenders are concerned that the finance will be repaid and that the repayments are affordable.

Public companies can raise finance in several ways. These could include share issues and bonds as well as bank loans. These are discussed in greater detail in subsequent chapters. Equity in the context of corporate finance is capital or shares held by the company. But it can also mean cash invested by a partner in return for a stake in a project. A major corporation could take an equity stake in a new development. This may be cash or the acquisition of shares in the project. Where an equity partner takes a share in a project, the risk assumed and the potential returns depend upon the success of the project. The share in the profits will be agreed at the outset, linked to the level of investment in cash and shares made by the parties.

1.2 Debt and equity finance contrasted

In the context of commercial property lending, equity consists of money and resources provided by the developer, partners, investors and funds that participate in the risk and profit of the scheme. Similarly, debt finance basically consists of loans raised from banks and other sources against a project and non-project specific loans raised in the market. This is not always a useful distinction as corporate funding, the raising of finance against the assets of a company, can be based on equity as well as debt.

Equity in the residential property market is cash injected by borrowers and increasingly by their parents. Sanderson (2017) states that 34 per cent of first-time buyers currently have help from their parents. This is a reflection of the current lack of affordability in the market. In April 2017, Office for National Statistics (ONS) data showed that the average house price in the UK was £220,094, up from £154,452 during the financial crises of 2008/2009.

The performance of the UK residential property markets varies across regions. For much of the time, the London and south east regions will be out of line with the rest of the UK because the prices are far higher than in other regions. In March 2017, the average house price in London was £482,799 but only £117,111 in north east England (ONS 2017). By mid-2018, the market was slowing in some parts of the country and, according to the Halifax Building Society (2018), prices fell by 3.1 per cent in April 2018, which took them back to levels seen 12 months previously. In summary, values can vary across regions and prices may not move uniformly over the country as a whole.

1.3 Sources of finance

The residential lending market in the UK is dominated by the major high-street retail banks such as Lloyds, HSBC, Barclays and Santander. Building societies, which are also important in mortgage provision, are discussed later. The sector has evolved over the years, with consolidation after the 2008/2009 crash. Increasingly, banks are rationalising and local branches are being closed with more investment directed at internet banking. In 2017, it was predicted that over 400 bank branches would be closed, and in the previous three years, the number closed equates to approximately 1,500 (Which 2017).

In the past few years, a number of challenger banks have entered the sector. These include Metro Bank, Atom Bank, Monzo and Williams and Glyns. Metro Bank opened their first branch in 2010, but many of the new challenger banks will be conducting business through internet platforms, rather than being branch-focused. These banks are designed to provide greater competition to the established clearing banks. According to Price Waterhouse Coopers (2017), it is possible to identify four different types of challenger bank:

1. Mid-sized full-service banks such as TSB and the Co-operative Bank which retain large branch networks as well as online platforms. Metro Bank, which is a full-service bank, has a smaller branch network when compared with the established banks but offers similar services and long opening hours.

2. Specialist banks that cater for a particular segment of the community such as Aldermore and Shawbrook. Shawbrook caters primarily for small and medium business lending and savings. Aldermore was taken over by South African Bank First Rand in 2018 and is developing its focus on business banking.

3. Online-only banks include Monzo and Starling. These are aimed at domestic consumers and provide real-time notifications of spending and, in some cases, interest on current accounts.

4. Non-banking brand banks that have developed out of companies with other businesses such as Tesco and Virgin.

Building societies are also important in providing lending to both the residential and commercial property sectors. These include household names such as Nationwide, Yorkshire and Skipton. Building societies differ from banks in that they are mutual organisations owned by the members or account holders. The number of building societies has reduced since the 2008 crash. There are now 44 building societies in the (Building Societies Association 2018). The number of smaller building societies has reduced quite considerably, and some have been taken over by banks or other building societies. In terms of residential lending, high-street banks and building societies can offer products for both owner-occupiers and investors (for instance, buy-to-let mortgages). The terms offered to borrowers depend upon the prevailing economic conditions and the financial status of the borrower.

1.4 Commercial property finance

The commercial property market is financed in several different ways. Historically, financial institutions such as pension funds and insurance companies have participated in the market by providing equity in developments for inclusion in their portfolios.

Merchant banks have a key role in many complex transactions and, rather than lending money, their role is advisory and may include introducing parties to a transaction and advice on deal structures. Larger commercial investment and development transactions are often undertaken by regional offices or corporate business centres of the major clearing banks.

1.5 Overseas investment

In recent years, there has been significant inward investment in the UK. Much of this has been from overseas Sovereign Wealth Funds. Sovereign Wealth Funds are government-owned funds normally created out of the surplus of exports, such as commodities. Examples of funds backed by commodities exports such as oil include the Abu Dhabi Investment Authority, Qatar Investment Company and Norway’s Global Government Pension Fund.

Major overseas corporations, such as Mapletree from Singapore, have investments in various locati...

Table of contents

• Cover
• Half-Titlepage
• Titlepage
• Copyright
• Contents
• List of Figures, Tables, Boxes
• List of Abbreviations
• Preface to the First Edition
• Preface to the Second Edition
• Preface to the Third Edition
• Overview of Contents
• A Series of Key Texts
• Vocabulary of Finance
• Introduction
• 1 Introduction to Property Finance
• 2 Bank Regulation
• 3 Commercial and Residential Property Lending
• 4 Corporate Finance
• 5 Securitisation, Unitisation and Build to Rent
• 6 The Money Markets
• 7 Joint Ventures, Partnerships and Forward Funding
• 8 The Property Market since the Second World War
• 9 Conclusions
• Self-Assessed Questions and Answers
• References
• Index