Here today, here tomorrow

In a couple of years’ time, just a stone’s throw from London’s Barbican Centre, the Heron, a slender 36-storey tower providing luxury living space in the Square Mile and a home for the Guildhall School of Music & Drama, will rise and mark a significant change to real estate market. Believed to be the first speculative residential development of any significance since 2007, it is being financed by a club of three banks. Santander Corporate Banking, the joint lead bank, which entered the UK real estate market at its very height in 2007, just before the credit crunch. Having supported the market through good times and bad, Susan Geddes, head of real estate finance at Santander, says the bank is still extremely keen to stay a very active participant in the market.

“The UK commercial real estate market has undergone a radical change since Santander came on the scene three years ago” says Susan, “headlines about subprime debts and the lack of liquidity have gone hand in hand with news of emergency funding, government bailouts and quantitative easing.”  These events leading up to the credit crunch and the measures undertaken to shore up the banking industry and kick-start lending are now legend. How did this impact the UK commercial real estate market? “Quite simply, property values fell, loan covenants were breached and defaults increased” replies Susan.

De Montfort University published an illuminating annual survey on UK commercial property lending, back at the end of 2008. The total amount of commercial property loans was around £237-240bn. Although this had risen to £240-254bn by the end of 2009, this was largely due to drawdowns on committed facilities and the restructuring of existing loans. The actual amount of new lending within this headline figure was substantially down – by 41 percent in 2008 and by 70 percent in 2009 – and in 2009, only £15bn of new loans were originated, compared with £49bn in 2008. The number of lenders has changed too, with many becoming inactive due to a shortage of funds or lack of risk appetite. Of the 59 institutions surveyed by De Montfort University, 21 had no loan originations at all in 2009 and just four banks accounted for 45 percent of total new loans. The number of lenders in the market continues to be a moving feast, with some banks dipping in and out within the space of six months. Santander, however, has had a constant presence throughout these testing times and has every intention of staying active.

Certain banks are willing and able to lend – Santander among them. Susan recognises that Santander is one of the fortunate ones. “Santander has a strong balance sheet due to its record of prudence and security, and so we have carried on with business as usual, building relationships, lending to customers and offering the right products.

Since entering the market three years ago, Santander has continued to grow its business firstly during the peak and then during the ensuing recession. Susan attributes this to the bank’s back-to-basics approach, “We put long-term client relationships and transaction quality above everything else. Other banks might view risk as a disincentive to doing a deal, but Santander sees it as an opportunity to understand its client’s business and develop a bespoke funding solution for each individual transaction. We look to support healthy, viable businesses and develop strong relationships, as demonstrated with Heron.” And ultimately this supports all the players in the broad market, which is at the heart of Susan and Santander’s philosophy.

Looking ahead, the commercial market is still in a state of flux and it is too early to predict how it will develop, but one major issue looms large – refinancing. Of the outstanding debt in the market at the end of 2009 (£240-254bn), a massive 23 percent (£53bn) is due to mature in 2010. Looking further forward, 71 percent of all outstanding debt is due for repayment in the five-year period to 2014, which compares with a five-year figure in 2006 of 61 percent. Not all the lenders of this debt are still active or have cash to lend. With only £15bn advanced in new loans last year, this amount of maturing loans poses a real challenge. Santander is ready and willing to step up to the mark and meet this demanding challenge.

Another factor facing the market is pricing which continues to be a key element of any financing. When lenders withdraw and the landscape becomes less competitive and riskier, pricing moves upwards and a large component of a margin is the cost of risk. “No client ever wants to pay more than they have to, but I believe there is a price that makes a deal work from both the lender’s and the borrower’s perspective.” says Susan. Her clients are sophisticated investors who understand this and have realistic expectations about the loan-to-values and pricing required.

Aside from pricing, many factors differentiate one lender from another, but what Susan believes gives Santander a real edge over its peers is its focus on acquiring long-term relationships where the bank fully understands their clients business. “Santander has been able to support its clients throughout the credit crunch because of our strong balance sheet and prudent approach. We still have the capacity to support businesses, but they need to be the right type of business. This is where our relationship banking approach and really knowing our customers well comes into play.”

Santander delivers solutions – not just a one-off debt facility, but a full banking offering including deposit, asset finance, risk management and international banking. Whatever the basis, building a sustainable relationship with the client will be at the core.

Clients appreciate Santander’s back-to-basics approach to relationship banking too. Santander has provided a senior debt facility to NewRiver Capital Limited for a joint venture targeted at UK retail property assets. Mark Davies, its Finance Director, explains “we only work with partners who demonstrate an excellent understanding of the property sector and display a commitment to helping us achieve our strategy,” citing Santander as an example.

“The market has come through a difficult patch and Santander is still supporting our clients” explains Susan. And although 2011 and 2012 are going to be challenging years, it’s a challenge we’re looking forward to.”

After all, she adds: “We’ve been in all the way, and we haven’t stopped lending.” And it’s this kind of commitment that will enable amazing buildings  to grace our city landscapes in years to come.