Developers in the Caribbean are
encountering a more conservative lending environment that makes it more
difficult to obtain financing, a KPMG lender survey has found.
KPMG’s sixth annual Caribbean
Region Financing Survey 2010, which focuses on lending to the tourism and
hospitality sector, confirmed a more conservative, cautious and “back to the
basics” lending approach by those surveyed. Consistent with this long-term
strategy lenders are requiring more collateral.
With regard to development
financing the results of the survey indicate that certain project financing
structures are no longer feasible. Projects that are highly leveraged or rely
on pre-sales as a funding source have become unattractive and will at the very
least be more heavily scrutinised by the bank. Promoters are in general expected
to put up more cash or equity up front. Some lenders may also “intend to
monitor development projects more closely, for example, by having an on-site
construction manager with joint reporting both to the bank and to the
developer,” the study said.
“Projects heavy in real estate as a
driver of success will not come back for a long time. Hotel projects will be
scrutinised more carefully by lenders, relying only to a very limited extent on
the value of land and other assets and instead focusing on the viability of the
hotel operation as a cash flow generator,” said one anonymous respondent.
While the Cayman Islands still
featured in the top 3 markets of many lenders, it was ranked behind the
Bahamas, Barbados, Bermuda, Dominican Republic and St Lucia.
In terms of interesting markets for
lenders in the future, Cayman was not mentioned by the surveyed banks. Instead markets
of interest like the Bahamas, Costa Rica or Jamaica were preferred for factors
such as “good airlift” or “good market demand”, or as one respondent were
quoted: “Good project fundamentals are key – strong sponsor, good customer flow
Those projects in the region that
did not succeed, failed most commonly because of unrealistic projections and
poor cost and financial control according to the survey results.
Lending policies have not changed
much, but are more strictly enforced and leave little room for exceptions.
The study found that among the most
critical covenants, debt service coverage ratios are higher than they have been
for a long time, while the average loan to value remained constant.
Most of the projects that will be
able to obtain financing “will be smaller, phased, not so high end, well
capitalised […] with sound fundamentals and experienced backers,” the report
said. Overall returns will be lower and investment horizons longer for equity
holders, the study concluded.