25 Sep Banks call the shots

Mark Jennings-Bates Castanet Sept 24, 2010

Recently I have been spending a lot of time meeting former developer clients and existing developer clients. The similarity between recent history should perhaps not be too surprising. There are very few western Canadian developers who have not been impacted by the change in the economy in recent years and yet one can look beyond the developers to see perhaps where the challenges came from.

Admittedly in a macro sense we are still trying to evaluate the magnitude of a banking meltdown that thankfully was less severe here in Canada compared to our neighbours to the south and across the Atlantic. What we are in agreement on, is that lending practices and re-sale of packaged financial paper with little due diligence has played a very significant part in getting us to where we are today.

Most developers several years ago had negotiated financial paper in various formats to allow them to develop projects. The level of due diligence in the development world is extreme. It is not an industry that the banking sector has been very open to and yet, several years ago there was a migration of money from other financial sectors into real estate lending that supported the bullish outlook rightly portrayed by developers at the time.

As they moved forward with their plans, many were in a pre-sales phase as the financial crisis unfolded. In one instance and not uncommonly, a very good friend and developer had his bank of fifteen years call on a development loan of $110 million. At the time, he was sitting on close to $90 million of pre-sales and the bank advised him that they no longer supported his plan and they would proceed to foreclose. Thankfully he managed to negotiate a forbearance agreement with the bank and closed on almost $87 million of those pre-sales during this difficult time. Of that $87 million in sales, every single penny went to the bank he was not able to put aside funds to pay various overhead, taxes etc, a very challenging situation and one that thankfully he is through now. In the mean time, his bank is continuing to report handsome profits.

I tell the story, simply because, the various unfinished projects in and around the Okanagan are not there simply because there is no market. The truth is the same banks that encouraged the development, changed terms part way through leaving many developers with very few options.

Our real estate market is certainly driven by consumer demand at the end of the day, however the financing markets in the development industry are notoriously cyclical and before too long the appetite for more serious real estate lending will return. Today the chambers are empty, the banks have fired the bullets and we all wait patiently to see when the commercial lending markets will ease up.

The fall real estate market has been busy and August stats from the Okanagan Mainline Real Estate Board indicate a year to date sales volumes are on par with last year despite a weak middle of the year and values continue to climb modestly which is encouraging.

Despite the ramblings in real estate forums, the current low interest rate environment is likely to remain that way for some time. With 5 year rates as low as 3.9% it would appear that the banks don’t agree with the rather amateur projections of double digit interest rates in the next several years. I know where I will keep my money!

Pam Martin of Invis, Mortgage Broker – Kelowna,Vernon, Penticton, Okanagan, British Columbia, Canada