The new financial order

As banks continue to apply far more stringent lending criteria, Clare Hartnell outlines some ways that property companies may look to raise finance

The property industry has a very different landscape to the good old days seen ten years ago. Securing finance is harder than it has ever been and with the harsher criteria applied in making lending decisions, some property businesses are suffering severely as a result. It's not just 'new' finance that is difficult to come by; businesses that have breached their loan to value covenants in their loan agreements are also being hit.Property companies must now explore all sources of finance to find the most efficient method of funding available to them.

Businesses are spending time building relationships with a number of banks, to help give them more flexibility when considering funding. Not only are they building stronger relationships with UK banks, there are also a number of overseas banks that are lending in the sector.

Gone are the days where credit was given easily - it's now important to shop around for credit and to make sure the charges and fees are competitive, as the market has seen a marked increase in both interest rates being charged on loans but also in arrangement fees.

The nature of the property industry means that securing large sums is a must, so property companies and owners must think outside the box when deciding how to finance the next project. It may be more efficient to consider raising finance through methods other than banks, such as joint ventures or attracting international investors.

A joint venture requires combining the resources of two organisations. When exploring this avenue, choosing the correct business to partner with is essential. Both parties must be open to a degree of flexibility to create the most effective arrangement, be it a limited liability company or a partnership, or just a formal agreement between the parties.

The parties must decide how best to structure any joint venture, both from a commercial and a tax perspective. For example, limited liability companies are separate legal entities allowing the parties to limit their liability to their equity contributions. Partners in contrast may have unlimited liability for the debts and liabilities of the partnership.

Another form of finance worth considering is the 'overseas investor'. The UK is an attractive country in which to invest at the moment due to the exchange rate which has contributed to a rush of overseas investors snapping up British property assets over recent months.

The opportunity to secure investment is strong. To mitigate risk, foreign organisations looking to enter the UK property market may prefer to invest in an already established organisation as opposed to entering the sector themselves.

Accepting a cash injection from a foreign investor, as opposed to offering a stake in the business for future returns, will enable the property firm to retain control of its company as well as give them the cash to take on projects to expand and build on their brand.

However, businesses must do their homework on any potential investor so they are sure of their reputation and motivation for investing. In addition, the property business looking for an investor must be aware that extensive due diligence on their operations is likely to be carried out by the investor and that they are likely to require preferential returns. This can introduce unwelcome external pressure on the business, so must be a carefully considered option.

The past few years have taught the property sector some harsh lessons about the forms of finance available. One of those lessons is that personal guarantees should be avoided - there are a number of unfortunate players in the sector who can testify to this.

As the economy begins to get back on its feet, it is likely that the big banks will begin to lend more freely again, with the businesses that have survived the recent recession coming out stronger as a result. In the meantime, those operating in the property sector must now be creative when looking for finance.

Clare Hartnell is head of Property at Grant Thornton UK LLP