Greedy RSL's??

18/09/2009 1:26 pm

Harry, speaking as a 'Development person', this is something that has always baffled me. What you describe, however, is not a general shift across all RSLs. I have worked for RSLs that use anywhere between 25 and 60 years as their payback period.

Those of us in development are always fighting for a 60 year period to make us as competitive as possible. After all, that's how long the HCA tell us the buildings are supposed to stand up for.

My understanding of the variation between payback periods is that they are related to the profile of people's loans. An RSL that doesn't have a lot of capital to spend will assess a scheme on the basis of obtaining finance for it as a stand-alone, and that will be offered on a repayment of period of 25-30 years. Where they've got more money, it's up to 60 years (although 40 is far more common).

There are plenty of other factors to take into account, though. For instance, an RSL may have a 60 year payback on its loan but have a higher interest rate than one with a shorter loan period, so it's not quite as easy as just adding another ten years.

The short answer, I guess, is that payback periods have got shorter as a result of the current economic climate. Longer loans are less available and more expensive, and RSLs are running a bit scared and making their models more robust. To be honest, I don't know what the word is, but it occupies the space between 'greed' and 'prudence'.

18/09/2009 2:34 pm

I take the "risk" argument on board to a point, but essentially RSL finance is about the closest to a "sure thing" that I can think of, financially so why they get treated the same as everyone, I don't know. I hope with the emergence of the massive RSL's that is occurring through rationalisation and mergers that more will "go to the markets" like Circle Anglia and others and raise their own finance through bonds which hopefully wil improve the capital available. I totally understand RSL's not loaning more at the moment when the only way the banks will allow that to happen is if they refinance all ther outstanding loans at that %. That's always baffled me - If I have a mortgage and take out a further loan I've never had a lender demand to me to take my mortgage into account if I want £5k to buy a car.....

21/09/2009 12:33 pm

Sancho, sorry, I exaggerate for effect (it's that Friday afternoon feeling). I can assure that the board members who make the decisions on our development schemes are very experienced financial people, and Finance keeps Development on a fairly short leash!

I was really just pointing out that there is more than one way to skin a cat - shortening the appraisal period is a way of tightening the approval criteria just as much as is increasing the discount rate, and easier to explain to non-financial people, as it's more intuitive to think in terms of 'payback periods' than internal rates of return.

Call it RSL greed if you like (in response to the original post); given the increased uncertainty in the current environment, I'd call it prudence.

21/09/2009 3:13 pm

In my experience, prices drop and so do RSL offers, but that is because they have a financial responsibility as a whole association - we can't and shouldn't 'overpay' for land or property - we are just artificially proping up the market if we do so.

Increased grant or reduced pay periods also does a good job of protecting that Association's 'gearing'. Which is good news for our existing tenants that we are not risky or reckless and can operate as a viable business.

The background workings in proval are 'managed' by the Financial Directorate normally - so even within an association the payback periods can change from time to time.

It's not the buildings crumbling after 30 or 40 years - it's the financial payback periods that are agreed for that lending. So a good 'lending rate' (normally accompanied by a savvy Financial Director) can make a huge difference.

21/09/2009 4:01 pm

The point is, Harry, that the long, cheap loans don't exist anymore. You can either have a loan with a shorter term, or a long term loan with a higher rate. Either way, there isn't a way around it for the RSLs.

I can't remember the last time I came across an RSL that had money in its 'reserves' to put into schemes. It all got spent when the Government dreamt up Decent Homes.

The real problem you've got is that the developers paid too much for land and aren't willing to take the hit. That's the genius of the 3 Dragons model that all Councils use without question. If you pay too much for the land, affordable housing is suddenly not reasonable to ask for. And they wondered what was propping land prices up for so long.....