Economic growing pains

As I write, the retail sector is bracing itself for the onset of what is its busiest and most important time as Christmas shoppers surge onto the high street. For once, analysts seem to agree that retail, at least, is going to enter the New Year in a less upbeat mood than previous years. Only time, and analysis, will tell for sure to what extent consumers have voted, or not, with their feet.

Have consumers opted for one last blow out at Christmas or are they already starting to tighten their belts?

The obvious signs
It's a tough call to make. Consumers have, indisputably, less money.
Higher interest rates, wary lenders, higher costs of living and, with a high proportion of fixed rate mortgages ending over the next 12 months, higher mortgage costs are, and will continue to, take their toll. It's true to say that these factors, many of which can be attributed to the fallout from the credit crunch, will be felt for some time ahead.

Already, and especially apparent in the North West, we're seeing pressures building on property developers, property investors and builders taking significant hits. As thousands of new homes, flats especially - often built with the buy-to-let market in mind - stand empty, with building still continuing. Cheap debt, often the mainstay of property developer's funding, is less likely to be available or is being reviewed, and sometimes withdrawn at very little notice.

Funders are applying a higher risk profile, or shying away completely from these projects which are causing cash pressures. Whilst this may, and will, translate into more bargains to be had for buyers, there will be fewer of them. City high fliers are less sure of sizeable bonuses, and many buy-to-let investors, at least the shrewd ones, have opted out of adding even more to their already strained portfolios, where rent is falling short of rising mortgage repayments.

For lenders serving the property market, it is a time of real concern and strategies and books must be reviewed and, if necessary, reconsidered.
It is here that we're finding more and more demand for our services, as lenders approach us to advise on their lending, and any potential exit strategy when faced with these real issues, therefore, funding challenges.

At MCR we have developed a product which assists both the developers and the funders, direct or indirect, to manage the risk to acceptable levels, reducing the need for an insolvency process.

Lack of cash
You can make as many losses as you like, providing you don't run out of cash, and this has never been truer. The fundamental impact of the credit crunch quite simply means there is less cash circulating, and this touches and hurts everyone.

Back to retail, as this is often such a common indicator of what lies ahead in terms of consumer spending. Consumer confidence is decreasing, and it is those who differentiate that will win. The lower end and the top end of the retail market are performing well. It is much harder in the middle ground and that is where differentiation is key. The likes of Lidl, Aldi and Primark may well perform better when cash is tight, as consumers look for value for money. At the top end of the spectrum, luxury and specialist retailers will continue to do well by such differentiation, with a sizeable consumer market seemingly unaffected by credit crunch fall out.

Recession or correction?
With less cash, comes less buyers potentially of troubled or distressed businesses, and this is where pre-determined and well planned exit strategies are required. With both existing and new lends, detailed exit strategies should be fundamental to any review or proposal.

There are undoubtedly more signs of a recession looming than in previous years,and there's been much media speculation, albeit quite sensationalised, of the economy wilting, with doom and gloom headlines growing in their volume. Even the failure of any of the home countries to qualify for the European championship is estimated to take £2bn out of the economy next year. There is now some real substance to this speculation and it is right to air concerns.

The past 10 years or so has seen property prices especially, escalate more than ever, and growth overall has been good. But, economics tells us that this is not sustainable, and the key statistic of average house to price average earnings supports this as it approaches the heady heights of 10 times earnings.

I do think though that what lies ahead is more corrective than anything else, and in many ways this could be a welcome change. And, if it makes for more considered lending by ABLs, and more marketing awareness and savvy from many organisations, then that must be a good thing. The world is shrinking, and this global village that so many companies find themselves competing in has to be addressed. China, Eastern Europe and India are all vying with home grown and UK-based companies to grab market share.

The successful companies will be those who embrace this and deal with the current financial situation. They will become more efficient, innovative and forward thinking as a result.

For lenders, the situation is likewise. There's no avoiding risk! Risk taking is part and parcel of the lending process, but do review your books regularly, plan your exits and try to pre-empt any surprises.

Keep ahead and keep innovativing. Remember, with less cash circulating, this could be good news for those who can lend, bringing greater returns. By all means tread carefully and remember in times of threat, come great opportunities.