Real estate financing in a post-COVID-19 context

All financial institutions and private lenders offering real estate financing are currently busy dealing with payment deferrals and other arrangements for outstanding loans. Most lenders have taken a stand on this and in the case of real estate projects and borrowers that were doing well before the crisis, these lenders have generally offered solutions that aim lend a hand to these borrowers and their projects.

The question on everyone’s lips is: how will lenders now assess new financing applications? Will it really change? Where is it likely to change? Uncertainty as to the short, medium and long term effects of this crisis on real estate and more particularly on new real estate projects, raises its share of questions.

What seems certain is that property developers will not face a liquidity crisis stemming from lenders, as was the case during the last crisis in 2008. The situation will be quite different, thanks in part to the fact that banks will not be directly impacted by the crisis and thanks to the intervention of government agencies that buy loans to offer additional liquidity to banks in return. The risk will not be one of liquidity but rather of varying degrees of tightening of credit conditions. But will the effect be the same?

It is clear to us that lenders will become much more selective and may want to forgo riskier or less conventional projects, at least in the short-term. Developers with riskier or less well-structured projects will likely have to turn to alternative lenders or otherwise abandon their projects.

For promoters with solid reputations and proven track records, it is possible that the situation changes very little, if not that the lenders will now want to separate the risk more, by syndicating their loans more often. For quite some time, we’ve seen the opposite happen, so the banks didn’t really want to syndicate their loans, unless it was a mega project. Now there is a risk that loans to the tune of $50 million will be syndicated more often than before, which will result in additional costs for the borrower.

What about the financing of income properties?  

It is conceivable that lenders will analyze the appraisal reports submitted to them more carefully to support credit application. Will the loan-to-value ratio be less important than the debt coverage ratio? It may well be the case, especially in the short term, until the situation has stabilized. Also, it is a safe bet that residential income properties will be less impacted than commercial income properties, especially hotels and shopping centers.

It is clear that we will experience a period of uncertainty and adjustment in the coming months, but since interest rates remain very attractive this may motivate property developers to continue carrying out new projects. Lenders all seem to agree on one premise, that the real estate market was and will continue to be good and that lenders will continue to support their valued customers.

By Nicolas Beaulieu