LENDING A HAND

The pick-up in transactions is indeed positive, but it will depend, as Sita and Blackall observed, on the availability of finance and debt.

Considering the bleak outlook concerning bank lending globally, AHIC has dedicated a session to ‘how to finance your project’, with representation from both Jones Lang LaSalle MENA director — Capital Markets Gaurav Shivpuri and H Partners Investment Fund chairman Fouad Chraibi.

According to Chraibi there are three main factors which are influencing the market:
• Less fad for luxury real estate and therefore less income to finance hotel projects;
• Limited local financing and fund-raising;
• Toughness of debt-raising: higher debt costs and restrictive covenants.

Shivpuri said that there are “no indications, as of now, that banks will begin lending to real estate in a big way”.

He explained that: “Real estate financing in Dubai and the wider region has declined over the past 18 months as banks have tried to reduce their exposure to the sector. The bankers are even more averse to lending to the hospitality sector as they have a higher vacancy risk when compared to other real estate asset classes,” said Shivpuri.

Banks would consider lending to more developed assets, however, added Shivpuri.

“Due to limited availability of senior debt, some non-banking institutions are stepping in to offer bridge financing for short term periods to development projects. While their preference is for residential assets (which can be sold on a strata basis by the borrower/developer who can then pay the institution back), they are also looking at some hotel assets where a large part of the construction is already over.”

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Generally, avoiding exposure to risk was the key priority for banks.

“Almost all lending that will occur will still be limited to a select few based on existing banking relationships, the strength of the borrower and the strength of projects. Today, the bankers are much more prudent and are scrutinising every little detail in a project prior to financing it. If there are concerns with respect to the long term sustainability and financial performance of the asset, the bankers will not be keen to move ahead,” said Shivpuri.

Chraibi said he thinks banks will continue lending, but only if certain conditions are met, and he pointed out that debt covenants might change “according to the quality of the investor”.

“Banking-houses will continue financing hotel projects in 2010, providing the creditworthiness of the investor and the quality of the project and its warranties. A good portion of the investment in equity is required, e.g. 40% minimum,” said Chraibi.

He suggested that new sources of debt and equity finance could come from financial companies, which open “the possibility to contract mezzanine debt involving strong warranties for higher debt costs” and government grants-in-aid to stimulate investment in the tourism area.