• Alternatives serve up funds

Lancashire County Cricket Club is the latest organisation to tap an alternative finance to fund hotel development. The club’s launch of a mini-bond issue aims to raise GBP3m to fund the development of a four star branded hotel at the club’s ground, and joins crowdfunding and raffles among a widening selection of alternatives being pursued to help transactions in a market where traditional lenders have still not returned to the market as before.

The cricket club is asking private lenders to subscribe for at least GBP1,000 of bonds, which have a five year term. They pay a 5% cash return, and a 2% credit against expenditure at the club – effectively limiting the bonus to club supporters. The mini-bonds are not tradable, effectively locking lenders in to the five year term. The GBP3m target for bond sales will be part of a GBP12m investment planned to upgrade the club’s facilities.

The club is celebrating its 150th anniversary this year, and last year recorded operating profits of GBP3.54m. Alongside a range of hospitality venues at the ground, the club currently operates the Old Trafford Lodge, a 68 bedroom hotel. Club chief executive Daniel Gidney said: “Our vision is to provide one of the best sports, entertainment and business experiences in world cricket. An attractive, contemporary hotel that will appeal to corporate visitors and private customers alike is central to this aim.”

Crowdfunding is also gaining traction as a suitable route for raising finance in the hotel sector.

In the US, New York based Prodigy Network recently raised more than USD25m in crowdfunded equity, towards its second hotel project. The company paid USD83m for a Manhattan block it will convert into a 191 unit extended stay hotel. The crowdfunded element, which combines with a loan from Deutsche Bank, and a USD20m commitment from an institutional investor, was gathered from around 100 investors, each investing a minimum USD50,000. “We anticipate that investors will earn annually compounded returns ranging from 17 to 23%, depending on the property’s ultimate sales value,” said Prodigy chief executive Rodrigo Nino.

In 2013, Prodigy assembled a similar jointly funded hotel project, also in Manhattan, which is now under construction for a 2015 opening. the AKA Wall Street project drew in USD31m of crowdfunded equity, alongside institutional funds and a USD72.5m senior loan from CIBC.

In the US, regulators are keen to impose tighter regulation on the sector, in the name of consumer protection. Earlier this year, the SEC proposed a range of measures, which could impinge on the ability to raise funds without cumbersome due diligence. Prodigy, in line with others in the market, requires investors to be accredited, thus avoiding the problem.

In the UK, crowdfunding has to date been on a more modest scale in the sector, but interest is rising. In September, the developer behind the Scottish Monzie Hotel project sought to raise GBP1m of equity by selling a 20% stake in the project using the Crowdcube crowdfunding platform. A minimum investment of GBP100 was set, with investors putting in more than GBP25,000 granted voting shares. The Monzie is planned as a 12 room hotel with exclusive use potential.

And in early 2015, Property Crowd aims to move into the hotel sector. The company, which buys developments and then sells shares in the companies owning the block, has already put together GBP3m of deals in the student accommodation market, and is buying more residential space. “We see hotels as a robust sector,” said Property Crowd’s James Robinson, who predicted the company will be looking to buy a new build hotel off plan from a builder/developer, which it will then sell on to share buying investors.

However, the potential of the finance source was established in early 2014 when a developer raised just over GBP4m to fund a residential conversion project in south London. Martin Skinner, head of developer Inspired Asset Management, used LendInvest to raise the funds, and was happy to offer a higher return of 12%pa. “What we needed was to move quickly, and traditional lenders are too slow,” he commented. LendInvest avoids equity involvement, providing what is essentially bridging finance – the loan has already been repaid.

Meanwhile, one enterprising hotel owner is planning to sell his hotel with a raffle. Gordon Hoyles has launched a prize draw as a way to dispose of his hotel swiftly, provided he can sell enough tickets at GBP1,000 each. The 18 room Hotel Continental, in Harwich, Essex is reckoned to be worth around GBP1m on the open market, but 78 year old Hoyles believes the prize draw will get him to his retirement in a month, far more quickly than hoping for an open market sale. 

 

HA Perspective [by Chris Bown]: The banks that provided development finance ahead of the crash are still hesitant about returning to the market. Across Europe, they have been hit with a battering, as regulators demand they improve their liquidity ratios – holding more in store to cover a rainy day – while also wanting them to lend more. Plus they’ve been busy unwinding a raft of exuberant debt and equity positions gathered over the eight years or so.

Governments can’t have it both ways, hence the embattled banks are very shy about lending to almost anyone – and certainly not anything as risky as property development.

Yet, while central banks hold interest rates at all-time lows, domestic investors get barely enough to cover inflationary losses. Hence the flight to equities, which commentators warn are sitting dangerously overvalued, on a risk-adjusted basis. And the success of some private equity clubs, drawing together funds from high net worth individuals to make aggressive cash purchases in bombed out sectors of real estate markets.

Into this comes crowdfunding as an alternative that can look attractive. The term covers a multitude of options, from pure lending to equity involvement, to an interesting mix such as the cricket club’s mini-bonds, where part of the return can be enjoyed in the clubhouse bar.

Some of the platforms use sharing economy style web portals, to match lenders and borrowers more efficiently.

Government regulators are always keen to clamp down on a free for all, especially if there is the potential for amateur investors to be taken for an expensive ride. In the US, there are concerns this will limit the potential of crowdfunding; while the UK has, for now, seen a light touch applied.

[Additional comment by Andrew Sangster]: It is certainly true that development debt finance has been slow to come back but it has been just as much a demand issue as one of supply. Sure, the traditional lending banks have fought shy of coming back into the market but when assets are being sold at below replacement cost why would you bother building?

In fact, in London and similar gateway cities, few assets have come to market at below replacement cost and prices are now well above this level. Development is alive and well in some markets, including London, as any glance at the pipeline figures shows.

So-called alternatives are an interesting option in the market but it is hard to see them taking much in the way of market share in the short-term. The traditional lending banks are now firmly back in the saddle and the threat to them comes more from institutions such as pension funds and insurance companies entering the market for prime asset lending and in the form of new overseas entrants with big balance sheets and serious slugs of capital to deploy.

Faced with this squeeze, if traditional lenders want to remain in business they are going to have to be more willing to look at development finance. And there are signs they are.

Given that the margin spreads for lenders are already incredibly tight, it is hard to see how the so-called alternatives are going to position themselves to attract borrowers who would otherwise go to banks. Either they come in even cheaper than the banks, which will challenge profitability, or they lend on ever riskier deals, which could ultimately cause collapse if they get it wrong too often.

All that said, alternatives are an interesting option for the right project, in particular when the fund raising can be a marketing exercise in itself. But mainstream lenders are going to be the preferred choice in the majority of instances.

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