Caledonian Trust (LSE:CNN) has many valuable sites ready for the building of houses and flats, but does not have ready cash to bring more than one or two to fruition in any one year. Even without speedy building, the value of the sites with planning is retained and may be worth much more than I have allowed for – an example of one such (potential) overly conservative estimation is given later in this newsletter.
Funding for developments
Prior to the financial crash in 2008 it was relatively easy to obtain loans from banks for property development, often on terms of only 3-4% above base rate and on a 60% of loan to value ratio.
Now, as I’ve discovered to my cost in Leicestershire, it is extraordinarily difficult to get banks to lend. Property developers are classified as high risk. In most cases the banks are not interested at all in lending to them. If they are, then the interest charged is very high.
A lot of this is to do with the Bank of England rules on reserve capital. If a bank is lending to a household buying their own house then the amount of capital the bank needs in reserve in very small, therefore they have plenty to lend under the “household mortgage” category.
But under the “property developer” loan category they are required to hold a great deal of capital in reserve. This reduces their return on capital employed, hence they are reluctant to lend.
In addition, the regulators simply say a bank has lent enough in that area and needs to re-balance by cutting that type of loan.
In Caledonian Trust’s case, obtaining finance has been so difficult that for many years the only lender has been Douglas Lowe, the chairman and 79.1% shareholder, who is currently owed £4.3m.
Those banks that will lend will often do so only as a percentage of the cost of a site. Imagine Caledonian paid £0.5m for a site in 2008; even if it has now obtained planning permission to build 25 houses and so it could be sold as a bare site at say £2.5m, if Caledonian wanted to borrow to build the houses itself it could only borrow say 60% of £0.5m. Not nearly enough to complete the build.
Here is what Douglas wrote concerning the £1.4m loan obtained for the Brunstane development in the 2018 annual report:
“The loan with complex covenants and
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