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Bank of England
Anglo Irish Bank
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Private Equity Investment
Private Equity Funding
The construction and building sectors could be in for a tough year as higher VAT and government spending cuts take their toll on businesses and point to another year of reduced activity. Profit margins are expected to be further eroded by the increased cost of materials and the competition for work will mean that builders are unlikely to be able to pass on savings to customers.
Indeed, one of the many casualties of the economic crisis has been the brake on bank lending. In most countries, banks and high street lenders are now very reluctant to release funds to borrowers.
This month the Bank of England released its quarterly "Trends in Lending" statistics. The report revealed that the stock of lending to UK businesses contracted by around GBP 5 billion in the three months to November 2010.
Property investors and developers are among those being denied credit lines by banks and an increasing number of those that have managed to secure funding have breached loan-to-value rules attached to their loans.
The news that developers have essentially defaulted on their payments has led to a number of high-profile banks taking drastic steps to write off the debts of customers with the biggest credit hangovers.
For example, it was revealed earlier this month that Anglo Irish Bank and Bank of Scotland have begun offering customers "golden goodbyes" in the hope they will be able to re-finance their debts with other lenders.
Both institutions are offering to write off as much as 25 per cent of loans of their most indebted customers as well as waiving exit penalties.
Volumes will not start to recover until banks mend their balance sheets and begin lending again. And it is not just developers who are feeling the pinch as a result of the decline in bank lending.
New figures show that the total UK mortgage lending fell to its lowest level for nine years in 2010. The value of mortgages advanced stood at GBP 136.3 billion, which was down five per cent from GBP 143.3 billion in 2009 and the third year in a row that the figure has fallen.
Lending was just over a third of levels seen in 2007, revealing the extent to which the UK property bubble has burst.
Added to this, further pains are expected to be felt by developers if, at some point in the future, the Bank of England decides to reverse its quantitative easing (QE) programme, which has pumped money into the economy.
Reversing QE could take some time and have a negative effect on bank lending. New European rules, which require banks to hold more capital to offset the effect of bad debts, could be another constraining factor for lending throughout 2011.
As a result of this decrease in bank lending, businesses working within the construction and building industries will increasingly be forced to seek alternative, privately-sourced avenues of funding.
Indeed, a growing number of private equity and foreign property funds are now looking to plug the gap in funding for new projects. Developers are increasingly looking to partner with foreign investors for joint ventures or as buyers of equity stakes - options that developers rarely found attractive during the property boom years.
There are many benefits of using private equity funds as a means of financing a project or property development including access to long-term capital and an investment fixed within a framework of a negotiated contract.
Perhaps the greatest advantage is that private equity allows the risks and profits to be shared between the fund and the borrower, something that is not an option with a loan from a bank or credit institution.
As markets around the world continue to enter various stages of recovery and banks look to take control over their assets, the demand for privately-sourced funding for new developments is expected to rise. Individuals involved in any such partnerships are likely to reap the rewards.
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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.