(Part one of a three-part series)
NEW YORK CITY—The impact of a changing regulatory environment on commercial real estate is not limited to Dodd-Frank and proposed new standards for lease accounting. A report from IBISWorld makes it clear that as the financial services market continues adapting to regulatory changes over the next three years, the industry will face higher costs for project financing services, corporate treasury services and commercial lending.
However, according to IBISWorld, “Although these changes have resulted in rising prices for borrowers, the regulations benefit borrowers overall by decreasing the amount of risk involved in using these services. Further, borrowers can combat rising prices by locking in lower rates through long-term contracts and inquiring about related services.” In the first of a three-part series, GlobeSt.com will examine the implications of new regulations on project financing services.
Such services, covering loans on long-term projects ranging from construction to energy, are highly regulated due on account of the sums of money involved in most loan transactions. In order to comply with regulations, including the Water Resources Development Act of 2013 and the Equal Credit Opportunity Act, financing companies’ costs have risen, causing interest rates as a total cost of the project to increase.
IBISWorld estimates that project rates have gone up an average of 2.9% annually over the past three years. Conversely, however, the research firm notes that “such changes should prevent project delays by reducing insolvency rates and lowering the risk of a supplier declaring bankruptcy.”
Section 225 of the Water Resources Development Act, for example, outlines the amount of private and nonfederal public funds that may be allocated for a project. The intent is to ensure that projects are more heavily supervised to determine whether their benefits will outweigh the costs, whether they meet environmental regulations and whether they’re technically feasible. “Such management should ensure that each project that project financing companies fund is successfully completed and meets specific requirements critical to long-term success,” according to IBISWorld.
Companies that provide project financing must increase their costs and the amount of time needed to review each project due to the Act, and will pass these costs on to the borrower. “Though borrowers will then need to pay more for services and wait longer to begin a project, they are expected to ultimately benefit from the increased oversight,” according to IBISWorld.
The ECOA is already 40 years old, but has become extremely relevant over the past three years. For project financing firms, it prohibits discriminating against borrowers due to their race, religion, sex, age or marital status, though borrowers must still be deemed creditworthy. Originally administered by the Federal; Reserve Board but passed on to the Consumer Financial Protection Bureau in 2011 under the Dodd-Frank regime, “ECOA creates demand for services because more borrowers can procure project financing, enabling financing companies to raise their service rates.”
During the three years to 2017, IBISWorld reports, “greater regulatory change is only one factor that is anticipated to raise prices for project financing services. An improving economy will increase borrowers’ cash on hand and make them feel more confident to seek loans for long-term projects.”
IBISWorld forecasts that service rates will rise 7.7% per year on average over the next three years, “which is far greater than the estimated 2.9% growth rate of the prior three-year period. Though financers will raise rates in part to cover addressing regulatory changes, borrowers may be able to avoid price growth” by locking in lower rates via long-term contracts.
Next: The impact on corporate treasury services