Property Players Sweat Over Lending Squeeze

Source : The Business Times, February 29, 2008

Banks batten down hatches amid global turmoil and as big deals suck liquidity

The squeeze is on. Banks have tightened financing for property investment deals, which include big transactions like sales of office blocks and development sites. This, in turn, may keep some buyers from participating in the market, industry players have told BT.

It's also taking longer to wrap up property sales deals these days as securing funding becomes more of an issue - and this could be a drag on investment sales.

Bankers cite two main causes for the tightening. The turmoil in the global financial market has led to increased awareness of risks all round, and several mega transactions in the past 12 months here have left less liquidity available for others.

Says Tan Teck Long, DBS Bank managing director, corporate and investment banking: 'There are a couple of large deals such as the integrated resorts (IRs) which have soaked up a fair bit of liquidity.'

Yesterday, Las Vegas Sands Corp announced the completion of its $5.25 billion loan syndication for the Marina Bay Sands IR, the largest deal of its kind here.

Brad Nelson, global head of commercial real estate, Standard Chartered Bank, agrees that the big deals had been sucking liquidity out of the market. 'Banks only have a certain amount of capital base,' he points out.

Banks' exposure to property-related loans is capped by law at 35 per cent of their total loans, to keep risks from the industry in check. This does not include mortgages for owner-occupied properties.

Meanwhile, banks have become more cautious and are giving smaller loans relative to a property's valuation than, say, 12 months ago. This serves to provide them with a greater buffer in the event of a fall in property values given the weaker sentiment in the Singapore property market today.

Jones Lang LaSalle regional director and head of investments Lui Seng Fatt says that about a year ago, banks may have given loans of up to 75 per cent of valuation for income-producing assets like office blocks. Today, the figure may be closer to 60-65 per cent.

Things are even harder for relatively unseasoned, smaller players buying residential development sites. They face greater scrutiny these days before banks give them loans, BT understands.

'Financing for real estate projects has definitely tightened, especially since last quarter. This is essentially because of tighter liquidity brought about by limited appetite in the capital markets, due to current market developments,' says Paul Kwee, Citigroup Singapore corporate bank director and head of real estate.

Lending amounts are more conservative now and covenants tighter, he says.

And despite the decline in Singapore dollar interest rates, the margins that are added to the floating interest rate reference are wider today, observes Mr Kwee. Margins are wider by 50-100 basis points now compared to last year, say bankers. Property sources say that while big established developers can still secure financing for purchases of development sites with relative ease, things are less rosy for smaller players.

Maybank head of business banking Lee Hong Khim acknowledges that his bank hesitates to finance new players whose core business is not in property development.

Mr Lee adds that Maybank is 'more selective in the projects we finance; the location of the project is an important consideration as well'.

Giving his take, Citi's Mr Kwee says: 'Smaller players may find it harder because they have fewer financing options available to them as compared to the big boys who may also be able to tap the convertible bond or Sing-dollar bond market, for instance.'

But Mr Nelson of Stanchart says that 'when liquidity is tight, lenders will normally take the position of supporting their existing relationships . . . regardless of whether they are SME (small and medium enterprise) or wholesale customers'.

Another outcome of banks becoming more cautious in evaluating loan applications is that it's taking longer to complete property investment sales deals, says JLL's Mr Lui.

The investment head of another major property consultancy group feels that the tighter financing environment could change the profile of institutional property buyers. 'We may see greater participation from core funds, which assume lower risk, lower returns, and lower debt, and less participation from opportunity funds, which assume higher risks, higher returns and higher debt.'

Market watchers point to an extreme recent example, when UK-based New Star International Property Fund made a pure-cash (zero debt) acquisition of One Phillip Street, an office block in the Raffles Place area, for $99.02 million.

Funds that need to assume higher leverage to achieve their investment returns may find it difficult to buy property assets in Singapore - and their numbers may dwindle.