Q&A on lending for Victoria real-estate developers and businesses in challenging economic times
Ten on the 10th
Published October 10, 2022
Citified's Ten on the 10th is a monthly question-and-answer segment connecting our readers with the insight and knowledge of Victoria's top real-estate and business professionals.
Ten on the Tenth's October, 2022 segment features Glen Welin, Senior Associate at Scotiabank's Roynat Capital.
Asking the questions is Ross Marshall, Senior Vice President of the Victoria offices of commercial real-estate brokerage CBRE. As a leader in facilitating large-scale commercial real-estate transactions throughout the Capital Region – which include apartment complexes, industrial retail and office properties, and land/development opportunities – Ross and his team are at the forefront of market-leading real-estate transactions on Vancouver Island.
Would you like to be featured as part of a future Ten on the 10th Q&A? We'd like to hear from you.
Tell us a bit about yourself and Roynat.
Roynat Capital was formed 60-years-ago, and is a wholly owned subsidiary of Scotiabank, to provide innovative financing to small and medium size business enterprises through the use of senior term, subordinate debt, as well as mezzanine capital and common share equity. I have over 20 years of banking experience throughout BC. My role as team lead is to support businesses on Vancouver Island in their growth and work with their team of advisors to ensure all facets of their financial picture are working as efficiently as possible. As a born and raised Islander I understand the unique challenges and opportunities that our area provides to those that live here and the businesses that support our economic success.
I understand Roynat also has different specialty departments, could you tell me a bit about those?
Most definitely! There are two specialty departments that I work closely with inside Roynat:
- Technology and Innovation Banking provides tech business focussed lending for venture backed or bootstrapped companies.
- Roynat Equity Partners is dedicated to helping middle-market companies grow through tailored investment structures including common equity, preferred equity, and convertible debt.
This is one of the most challenging real-estate environments in quite some time. Could you describe what you're seeing from a commercial lending perspective?
I agree, the speed at which Bank of Canada has increased rates this year has shocked both real estate and stock markets. The large amount of stimulus that governments injected into the economy along with geo-political issues have created a very serious surge in inflation that has forced Bank of Canada to act aggressively.
While interest rates have put pressure on cash flows, I find that there is still ample demand to provide creative solutions and advice to businesses. I have recently seen less activity in the real estate purchase space there has been a noticeable increase in mergers and acquisitions, and owners looking to transition to the next generation.
I've heard that many lenders have turned off the taps given what's happening in the market or have restricted access to capital. Are you still open for business, even to new clients?
Roynat is definitely still open to supporting our existing clients and looking to grow new relationships. I believe it is important to ensure business owners understand covenant requirements and grow some of their financial knowledge where needed. While many larger businesses are well versed in these, some businesses that are scaling and moving from small to mid-size may not have experienced more detailed lending requirements that come with larger loans. Taking the time to properly understand the business model and how it operates ensures that businesses can receive the best possible recommendations. By being open and communicating, in detail, how financing can be provided, or what can be done to receive financing in the future, everyone benefits.
What about potential clients who have business equity, who may be looking at acquiring a building or real-estate holding for their business? Are you able to work with them?
Roynat is able to provide creative financing solutions to unlock equity in their businesses. We primarily utilize cash flow as a measure of ensuring capital can be deployed. Our ideal client is owner managed or closely held and has a desire to grow the business. Roynat is able to utilize real estate holdings in the commercial and industrial space to help provide security at a higher than traditionally accepted in many instances where the cash flow supports.
It appears as though we'll see another interest rate increase in October. What will the bank's lending appetite be if we see another raise?
As primarily a cash flow lender we test our financial covenants against potential increases in interest rates to ensure clients and prospects have adequate cash flow to absorb interest rate shocks. While this may reduce some borrowers’ ceiling on the amount the Bank can provide if cashflow is tight, we work with clients and prospects to ensure they have a clear understanding behind the numbers.
Given the slowdown in economic activity and falling inflationary pressures, do you think there's potential for an interest rate reduction in 2023, perhaps in Q2 or Q3?
While today’s macro-economic turbulence can be difficult to foresee; currently our economists are predicting the Bank of Canada may be under pressure to reduce rates again in the latter part of 2023 to support business development. This is further supported in the market given the inverted interest rate curve in bonds showing a decline in longer term rates. This can be a leading indicator of larger market expectations around interest rates and predictions around central bank movements down the road.
There are significant headwinds for a lot of my developer clients that have hit pause on their development projects, considering the uncertainty that exists in the market and increase in costs. Are you experiencing the same from your developer clients?
While there has been a large increase in cost of borrowing this year, and some clients have put expansion on hold throughout 2022 due to uncertainty both close to home, and globally, there is a renewed optimism in the market to look for investment opportunities into 2023. Industrial land is especially sought after throughout Vancouver Island and holds the lowest vacancy rates on record.
Are there tools available to lenders to help their clients carry loans until interest rates depress and construction cost pricing stabilizes?
Each of our deals is looked at on an individual basis and can have some interesting possibilities.
- A property under active development for resale, for example, may have a deal structured with an interest reserve to service payments throughout the construction period.
- Another strategy could be looking into hedging the interest rate. Roynat utilizes Scotiabank’s derivatives team to provide specialized advice in this area. While this does have additional maintenance costs involved it can be worth a discussion to see if hedging provides enough benefit against further interest rate changes.
Any final pieces of advice you would like to provide to our readers?
As with any investment, and especially during turbulent times, it is important to engage a team of advisors (accountant, lawyer, realtor, banker, etc.) to ensure as many risks are mitigated as possible.
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