The current change in the lending environment is a retreat to historic levels rather than a fundamental collapse, according to Jason Briggs, a corporate finance director at BDO Stoy Hayward.
It is a case of repricing risk rather than falling off a cliff but it means the current environment leaves equity as the key driver for business over the next few years.
Briggs, speaking at the World Economy & Budget Hotels Congress held earlier this month at the Hilton London Tower Bridge, was nonetheless surprised by claims that 50% of lenders were still active. Many were saying they were open for business when in reality it was not the case, he said.
The biggest change was the reduction of loan-to-values and increased margins on the debt. At the height of the boom, leverage was up to 85% and in some circumstance above that. Senior lenders were providing quasi mezzanine finance but it was not priced at the same level as traditional mezzanine was, said Briggs.
Part of the cause of these lending practices was the bonus culture in some banks and Briggs believed this had a significant effect on the market.
He said commercial property had dropped 15% in value since the peak a year ago and this meant that a borrower at 80% LTV had just 5% in the game now. Fortunately, however, banks were not enforcing LTV covenants an attitude that Briggs said was "correct and commendable".
The current problems in the market can be traced back to late 2005. At this point, the yield gap between commercial property initial yields and five-year swap rates had closed to zero, once the costs of borrowing were included.
"If the cost of debt is more than the return, then there is clearly a problem," said Briggs. The good news was that the crossover back to initial yields exceeding swap rates occurred at the start of 2008. "In terms of fundamentals, it is a recovery," said Briggs.
The threat, however, was that swap rates were going up, reaching 6% by early June, and this meant the arbitrage between yields and the cost of borrowing had again disappeared.
Budget hotels, along with care homes, were probably the most resilient segment of commercial property, said Briggs. But he warned that resilience to the effects of a downturn was not the same as immunity.
Where budget hotel developers stand to benefit in the current economic climate was in the increased availability of sites. The absence of residential developers was a particular bonus.
The benefit of more realistic site values was counteracted by the increasing cost inflation in construction. But even here budget hotels had advantages over more traditional upscale hotels in that they can use and convert unusual spaces and were better able to use innovative construction techniques.
One challenge ahead, though, was with the increased desire among owners and developers for leases rather than management contracts. At the very least, leases would be more aggressively funded in the years ahead.
Larger corporates would have the advantage over small chains or individuals when it came to funding. And this would provide a significant barrier to entry, said Briggs.
Large corporates also had an advantage in that they could exploit cross border pricing inequality and there was already evidence that some were doing so, he added.