Anyone who invests in and develops property will inevitably need to maintain excellent relationships with the banks that provide their funding.
Over the past 10 years there has been an inevitable explosion of “banker bashing” following the general meltdown in the banking industry after the 2007 financial crisis and the laying bare of the reckless speculation and excesses of the banks preceding it.
But nowadays I think of banks as psychologically damaged institutions – constantly prone to bouts of off-the-rails irrationality – that have to be treated with a certain amount of reserve, mollycoddling and caution.
But it wasn’t always like that. When I started off as a property investor in my 20s back in the 1990s, I enjoyed an excellent relationship with the Irish bank which funded my property developments in the UK. The submanager I dealt with was a wonderful, warm-hearted woman with a real understanding of the business.
At the time, what banks offered seemed like a simple equation. They would lend you up to 70 per cent of the total value of your property assets, including new purchases. When I started off, base rates in the UK stood at 6 per cent and the bank asked for a 3 per cent margin over that, meaning that I was looking for investments that would hopefully return 15 per cent of investment to produce a healthy profit.
Borrowing
When I looked to the future of property investment I vaguely imagined that these variables would generally hold true. 70 per cent loan-to-value (allowing for a 30 per cent drop in the market before going into negative equity) seemed an eminently sensible level of borrowing.
Occasionally I might be able to persuade the bank to reduce their margin to 2.5 per cent and even to 2 per cent. A couple of times in the 1990s, I can remember going to see the regional branch manager to persuade him to give me these preferential rates. He appeared to me like a wise professorial figure, weighing up the merits of my candidacy and then granting my request.
But then in the late 1990s, everything began to change. In the space of a couple of years, property prices in the UK shot up by 30 to 40 per cent. Thinking the market was getting overheated, I became cautious about buying – far too cautious in retrospect. Little did I realise that over the following decade prices would rise inexorably another 200-300 per cent.
Unfettered ebullience
Whereas the watchword of the banks previously had been prudence, now it was unfettered ebullience. At annual corporate hospitality events, I noticed a chubby, bald man at the bar with a very crude way of speaking (he would refer to all problems as a “ball-ache”) who appeared to be a new employee at the bank. He appeared to be the type of person who would be selling you second-hand cars or “rock-solid investments”. Then to my amazement, I learned that this was the new regional manager.
And then, as we all know, the whole banking industry went completely insane. They poured tens and hundreds of millions into any property project brought before them. They decided it was perfectly reasonable to lend at 100 per cent loan to value – more if necessary.
For several years I remained locked in a cold war with the Irish bank with whom I had been doing business for 15 years
But if their behaviour was reckless before the financial crash, afterwards it plumbed new depths. Now, cash starved, they needed every penny back as quickly as they could get it, and they did not particularly care what they did to get it.
Any obscure clause
As interest rates collapsed and I looked forward to seeing my monthly repayments reduce, I discovered the bank insisting they would keep me on the higher repayments as they combed through the terms of agreement to see if there was any obscure clause to trip me up on and claim I was in breach of agreement.
There was no sense at all that it was they – the bank – that had behaved with reckless abandon. Now they wanted prudent customers such as myself to be the fall guys.
For several years I remained locked in a cold war with the Irish bank with whom I had been doing business for 15 years. I politely requested that they abide by the terms of our agreement: they responded by cutting off my overdraft facility and all avenues of new funding. And so eventually I left them and took my business to a bank from continental Europe.
But the big question is – to what extent have the banks reformed themselves over the last 10 years? Have they recovered their former sense of judgment and restraint?
On the plus side, I now enjoy once more an excellent relationship with my manager at my new bank. Yet I feel in general that a sense of normality will never entirely return to the banking sector. Everything the banks do is informed by reaction – usually considerable overreaction – to their frenzied behaviour in the previous market cycle.
Crony relationships
For example, one of the problems during the bubble years was the lack of scrutiny applied to property deals because very often banks and purchasers shared solicitors and enjoyed crony relationships with surveyors. In the current cycle, banks and customers must maintain separate legal teams and the requirements for surveyors are much stricter.
This might sound much better, but it comes at a cost – and one funded by the customer. Property investors are regularly required to pay both their own and the banks’ legal fees, which can often be extortionate. And because the banks have little incentive to keep down professional costs, they can be entirely cavalier about spending the customer’s money. I was recently required to revalue my portfolio – at eye-watering cost – less than two years after it had been comprehensively valued. All of the properties came in at the same or slightly higher values.
Tricky business
I had always thought the banks would be a wise, avuncular presence in my life, but these days I tend to think of them slightly more like Uncle Paulie in Martin Scorsese's film Goodfellas, in danger of telling you that they want their money back or they'll torch the place.
Dealing with this powerful and psychiatrically unpredictable presence in your life can be a tricky business. A culture of quiet reasonableness can be quite a difficult commodity to reinvent. There is no point being frustrated when the banks do not live up to your expectations: much better to admit these are institutions with a troubled past that are always going to be compensating in some form or another for their former excesses.
Damian Flanagan is a property developer, writer and critic.
@DamianFlanagan
