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Credit crunch hits property development says EC Harris

15 October 2007

The knock-on effect of the US sub-prime market could possibly lead to reduced numbers of speculative developments and drive up prices of major schemes.

Turmoil in the credit markets, set off by the sub-prime mortgage crisis in the US, could have an impact on property developments in the UK. According to Martin Silvester, Midlands’s leader of the Lenders and Investor sector at EC Harris in Birmingham, the credit crunch will inevitably bring different challenges to the way major projects and schemes are being planned, funded and developed.

As he explained: “The knock-on effect of the US sub-prime market could possibly lead to reduced numbers of speculative developments unless they are supported by a very persuasive business plan and there will be a greater focus towards pre-let schemes. Property lending may well tighten and banks will expect a far more detailed approach throughout the whole due diligence process.There is also evidence that the banks are starting to get nervous about lending arrangements on large scale projects under development as they are becoming increasingly nervous around their rate of return.”

Martin Silvester went on to warn that the situation in the US is a serious reality check for developers and property investors. “Its impact has started to create uncertainty and nervousness across the property industry as we experience a ripple effect in the UK. Both investors and developers now need to focus more tightly on the value and scale of risk in every scheme. Looking to the future we may eventually experience a tightening in the industry in relation to the scrutinising and weighting of risk. It is likely to drive the prices up of major schemes, as the banks look to minimise their risks and take a closer look at the integrity of costs.”

Martin continues, “An accurate assessment of risk and a mitigation strategy will inevitably benefit the lender by reducing risk and the developer through scheme viability. In particular lenders should be more rigorous when appraising the time, cost and quality for the projects.”

As the economic uncertainty increases the ability for a developer to assemble a team with a wealth of experience and deep understanding of the industry will add credibility to a scheme and its funding requirements. EC Harris is now playing an increasing role in introducing financial solutions and maximising opportunities for property investors and developers alike. Having the expertise and ability to re-engineer a scheme and its costs are equally important as Martin Silvester explained: “If the banks are going to back a scheme, they increasingly won’t back it at marginal levels. Property investors often need to adopt a more entrepreneurial approach to funding and by working with lenders and investors across our Europe we are finding that this may even extend to looking at innovative international funding routes.

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