Construction Finance: How Has the Sector Changed?

The availability of all kinds of finance has been restricted since the onset of the global financial crisis, both in the UK and elsewhere around the world...

The availability of all kinds of finance has been restricted since the onset of the global financial crisis, both in the UK and elsewhere around the world. This is certainly no different in the construction sector, but as this industry is relied upon to help move the UK's economy forward, it's vital that developers can seek other forms of financing.

Construction News recently reported on comments made by Dipak Haria, Barclays vice-president of infrastructure and structured project finance, at the Forecasting Construction Conference, where the expert noted there is "less than half the liquidity looking at the market" than there was before the financial crisis hit. He suggested that targeting institutional investors is one of the best ways to generate more funding for the construction sector.

Mr Haria explained that Barclays is considering whether it can find an institutional investor to back a development in the long term, thereby enabling the bank to provide the necessary funding for the construction phase of the scheme. This is just one example of how the financing landscape in this sector has changed, with many banks wary of lending to developers in the current economic climate.

Earlier this month, EC Harris released a report about property development funding in Europe, which found that banks are most willing to provide a loan for office projects, followed by retail and residential initiatives. Head of lenders and investors at the firm Matthew Cutts commented: "Pre-let assets, particularly offices, are the most desirable for bankers, offering a stable return, over riskier, speculative developments." He went on to say that the construction finance market "will never be the same as pre-2008".

In addition to looking at what projects banks are most likely to lend to, the EC Harris research assessed how developers can improve their chances of receiving funding. Measures such as gaining pre-lets, providing additional sources of finance alongside traditional loans and creating a strong relationship with the bank in question all improve the chances of a funding deal being approved. Mr Cutts concluded: "Bankers appreciate a sense of realism and transparency from developers, with additional equity from an investor very important."

Looking ahead, it is the UK banking industry that is most upbeat about the prospects for lending in the construction sector, with 66 per cent of respondents stating they expect the level of funding for developments to increase in the next five years. By contrast, just 48 per cent of bankers based elsewhere in Europe are confident that the market will pick up.

The sentiment expressed by British financial institutions is echoed by Stan Hornagold, director of Marstan Group and vice-chairman of the board of the Construction Industry Council, who recently stated: "Developers are quietly and carefully preparing for the next wave of investment, having improved their land and taken over projects in distress at a low price." He is confident that the sector will improve, but acknowledged that it may take some time, asserting: "I would expect the development market to pick up when the economy as a whole shows some sustained progress, even if the rate of growth is very modest."

However, not everyone in the industry is as positive about the sector's short-term prospects, with economics director of the Construction Products Association Noble Francis calling on the government to boost its spending on building and infrastructure projects. He warned: "Although growth is expected in 2014, the next 12-18 months are likely to cause considerable pain to an industry that is already reeling from a prolonged decline."

Mr Francis is not the only industry figure to ask the government to up its spending, with the UK Contractors Group (UKCG) sending an open letter to chancellor George Osborne earlier this month, urging him to provide more information about the construction projects Westminster intends to fund, as well as to speed up the rate at which these schemes are started. UKCG chairman James Wates told Construction News that work needs to be done to get more institutional investors into the industry, as the funding promised by the government "will require support from institutions, yet many are deterred by the returns and risk profile associated with infrastructure delivery".

- Thursday 25 October 2012

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