Banks cool on all but blue-chip developments

 

The banks are distinctly cool about lending money for anything other than blue-chip office developments at the moment and things could get even cooler in 2001.

The chill has crept in over the past 12 months, mainly on concerns that the economy is now at the top of the cycle and a downturn is just around the corner. The banks are all examining their loan portfolios to determine their exposure to any future bad news and some are rumoured to have already closed off their books to any further office development projects.

Another factor looming large over the sector is the 11 million sq ft of office developments which have been earmarked mainly for the suburban areas of Dublin. Bankers and indeed many developers believe if these projects all come to fruition, the entire market could collapse leaving millions of sq ft of excess office capacity.

Mr Gerry Burke, head of property at Bank of Ireland Corporate Banking, says while there is still strong demand to fund city centre office units, the emphasis is on "picking the winners" of those being planned for suburban locations. "We are not out of the market completely. We are open for business and will evaluate projects on a case-by-case basis." Some banks are now insisting that they will get involved only in projects that have a watertight take-out mechanism.

"Where developers are looking for tenants at the end or looking to sell it, we would be very nervous," explains one. Basically the banks now want to consider only projects where the developer has either pre-sold or pre-let the units with a good covenant.

The banks have all lent substantial funds to the commercial property sector in the past five to seven years and analysts are fairly comfortable about the asset quality on the books across the Irish banking sector.

They are now claiming that it is reasonable for the banks and their customers to be more circumspect and cautious going forward. "If you were to assume that everything will be built there will be a glut of property and we don't want to create stresses in the market," one source told The Irish Times.

The biggest demand for this type of finance has been in the Dublin area, with growth in Cork, Limerick and Galway in the past few years. And in the future it seems feasible that the banking sector will be more inclined to extend finance to new projects as they come on stream in urban centres which are being earmarked as growth centres.

Developments which are geared for general use will also be easier to sell to the banks as they offer greater flexibility in terms of letting. The high specification proposals are more likely to run into difficulties.

In many cases these were being marketed towards the burgeoning information technology sector. But a raft of profit warnings from many of the leading lights in this sector have injected a high degree of nervousness into the US market and has hit the net worth of these companies. Against this background, expansion plans are being put on hold or pared down for now and the appetite for even the most ambitious office units will also be dampened.

The banks are keen to stress that while they all have lending targets, they would prefer to make good decisions on where they are channelling funds rather than boost lending volumes. To sum up one lender: "If the business is good then we will do it, but if it looks risky we won't."