Bridging & Commercial Magazine — The Evolution Issue

ISSUE 14 MAR/APR 2021

THE RESULTS ARE IN We exclusively reveal what the bridging landscape really looks like

+ Untapping our potential p12

BRIDGING FINANCE

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Registered in England and Wales (company number 06749498). Registered office: 2 Charter Court, Broadlands, Wolverhampton WV10 6TD.

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Acknowledgments Editor-in-chief Beth Fisher beth@medianett.co.uk Creative direction Beth Fisher Caron Schreuder Sub editor Andrea Johnson Contributors Anthony Beachey Illustration Madiha Hasan Sales and marketing Caron Schreuder caron@medianett.co.uk Special thanks Michael Yianni, Belleveue Mortlakes Alexandra Booth, RICS Christina Hoghton Bronte Parkinson, EY Nick Parkhouse, EY Meera Gokani, Atomee Aman Singh Bajwa, Fairbridge Capital Gary Walsh, Optima Property Funding David Shiel, Arcstone Printing The Magazine Printing Company Design and image editing Russ Thirkettle, Carbide Finger Ltd Bridging & Commercial Magazine is published by Medianett Ltd Managing director Caron Schreuder caron@medianett.co.uk 3rd Floor, 71 Gloucester Place London W1U 8JW 0203 818 0160 Follow us:Twitter @BandCNews | Instagram @BridgingCommercialMagazine

T

Since the last issue of Bridging & Commercial, a lot has happened. Boris Johnson broadcast his roadmap out of lockdown and, ever since, diaries have been filling up with Zoom-less meetings for later this year. I am looking forward to catching up with the industry over lunch or a couple of drinks at my favourite venues (our Limelight section has also missed you), and finally being allowed to go back to the cinema! The B&C Awards 2021 was announced (for the last time, fingers crossed) to take place on 6th October—signalling that we (and 650 others) will be obscenely hungover on the 7th. Rishi Sunak also revealed the long-awaited Budget, confirming a series of measures to boost the economy and property market, including the extension to the stamp duty holiday, the launch of the mortgage guarantee and Recovery Loan Scheme, and the introduction of Restart Grants. Like the weather, things are looking up.

In terms of what hasn’t changed, the conversation around bridging completion timescales goes on. On p20, we discuss the industry’s obsession with this and why we have been looking at it in the wrong way. Furthermore, the hardening professional indemnity insurance market for surveyors has seen no improvement— in fact, it’s got worse. We investigate how we got here and the ramifications this is likely to have on the bridging market [p54].

As always, we have a series of exciting interviews for you, including Roma’s female collective giving us the low-down on its rebrand [p12]; our conversation with Reim Capital and Fairbridge Capital’s heads, Kunal Vaitha and Dalian Gill [p34]; and MSP’s MD, Martin Higgins, takes us on a 40-year journey [p28].

Later in the issue, we explain the ins and outs of equity finance, particularly in the current economic climate [p66], and why SME developers may be staying on the sidelines until the haziness clears [p76].

Finally, this issue’s cover story [p43] is a standout—literally. We collaborated with EY to exclusively reveal the fourth annual UK Bridging Market Survey, which illustrates how the space has evolved since the onset of the pandemic. We hope the results will help you better understand what the landscape looks like and assist you with your business decisions this year and into the future. With the 21st June just around the corner, it’s finally time for us to start getting back on with our lives.

Beth Fisher Editor-in-chief

3 Mar/Apr 2021

8 12 20 28 43 54 66 76 80 84 It will grab people’s attention and change the way our existing and potential partners see us for the better p12 4 Bridging & Commercial

News Exclusive Zeitgeist Interview Cover story Series Explained View Feature Backstory

How to spend half a billion pounds

‘People seem to want us to grow and succeed’

A problematic USP

MSP Capital / Reim Capital & Fairbridge Capital

The state of the bridging market, in numbers

The surveyor profession is under siege

Understanding the world of equity funding

The hunt for profitable projects

Emily Machin

Anita Maclean

InterBay Commercial: Supporting the rise in commercial distribution for 15 years Emily Machin, Head of Specialist Finance, InterBay Commercial

Celebrating 15 years of InterBay Commercial

The growth in commercial distribution how InterBay Commercial could help

InterBay Commercial was launched as a new specialist commercial and buy to let lender back in 2006.

As one of the UK’s leading commercial lenders, we’ve always got a close eye on the market to watch for emerging trends. This enables us to design products and criteria that can help your clients realise their goals.

After being acquired by OneSavings Bank (now OSB GROUP PLC) in 2012, we’re now one of the most respected names in the market, known for being a lender that understands the sector and for having extensive knowledge and experience in handling complex deals.

In the decade and a half since our launch, we’ve gone from strength to strength, lending more than a total of £3bn to thousands of businesses.

Why choose InterBay Commercial?

We specialise in supporting commercial, as well as semi-commercial and complex buy to let applications, and we’re experts in providing bespoke solutions for brokers and their clients. We’re able to do this by working closely with our key introducer partners, which enables us to deliver a market-leading commercial lending proposition.

Our people are experts so you know you’ll be getting the very best in fresh thinking and a forward-looking approach. All of our teams have the know-how to adapt to the ever-changing marketplace.

If you have a customer with a complex ownership structure, we’re skilled at taking on challenging cases, including individual ownership, limited companies, LLPs, partnerships, trusts and pension schemes. We’re also adept in portfolio lending and can put multiple properties together under one loan application.

Our underwriters look at every angle to pull out the positives, treating each case on its individual merits and looking at every detail to form a full picture.

Our specialist finance account managers have extensive experience in working across commercial, semi-commercial and buy to let, and can also support with Precise Mortgages’ bridging finance and second charge loans if your client needs an alternative borrowing solution.

If a case falls outside of our criteria, it’s always worth referring it to one of our specialist finance account managers to see if we’re able to provide a solution.

We work tirelessly to ensure our broker partners are able to access support when they need it most, whether online or via the phone.

Whenever you contact us, you’ll have direct access to our team of underwriters because we know how valuable it is to be able to speak with someone you can work in partnership with to find a solution.

Visit interbay.co.uk or call 01634 835006 for more information

Take the growth of e-commerce, for example. According to the Office for National Statistics (ONS)1, online sales grew by 46.1% in 2020 compared with 2019, the largest annual increase since it started keeping records in 2008. ONS figures2 also show there was a rise in the number of new companies registered in the second half of 2020 as people started their own businesses in the wake of the pandemic, many of them online.

It means the UK is going to need a lot more warehouse space in the coming years to store all of this online stock. Research undertaken by global real estate advisor Knight Frank3 has found that growth in e-commerce means the UK will need an extra 92 million square feet of warehouse space by 2024 – that’s an area of land equivalent in size to around 1,200 football pitches!

With this in mind, you may see an increase in commercial cases.

Imagine you’re approached by a client who’s been successfully running a distribution business for the past two years. Their business has grown in recent months and they now need to purchase a larger warehouse to help them keep up with demand.

They’ve found a brand new 3,000 square foot warehouse within an industrial estate in a good location and with excellent transport links.

The warehouse is valued at £600,000.

So where do you go to find the product they need? This is where InterBay Commercial is ideally placed to help.

Our commercial range offers a choice of 2- or 5-year products up to 65% LTV. In the above scenario, the client would have been able to borrow up to £390,000.

The range can also support properties with the following usage types: office, medical, industrial, retail, and food and drink. Loans of between £150,000 and £2 million are available, with larger loan sizes considered subject to specialist finance account manager referral.

This is just one example of how we can help clients looking for a loan on a commercial property.

For our full criteria or more information on why you should ‘InterBay it’, speak to your specialist finance account manager today.

Sources: 1

https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/december2020#online-retail https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/conditionsanddiseases/bulletins/coronavirustheukeconomyandsocietyfasterindicators/latest#company-incorporations-and-voluntary-dissolution-applications https://www.knightfrank.co.uk/blog/2020/10/08/rise-of-online-retail-sales-will-drive-demand-for-92-million-sq-ft-uk-warehouse-space

2 3

For your commercial cases: • Up to 65% LTV • No maximum property value • Interest-only options available

InterBay it.

We use our experience and determination to support bespoke solutions to meet the needs of your clients. So let us do the work for you, all you need to do is InterBay it.

Contact your local specialist finance account manager today or call 01634 835006 for more information.

FOR INTERMEDIARIES ONLY

LendInvest’s £500m licence to take on the BTL market WORDS BY ANDREEA DULGHERU

LendInvest started 2021 with a bang after securing a hefty half-a-billion-pounds funding line from JP Morgan in January, enabling it to broaden its capacity to lend in the UK BTL market. The finance provider appears to be set for a great year, ready to expand into new areas of BTL lending. To find out how it will be doing this, I spoke to sales director Andy Virgo

News

A

lthough we’re conversing via the power of technology, the excitement and pride at having obtained such a significant amount of money radiates through Andy’s every word. “This is a huge vote of confidence. JP Morgan are a fantastic partner to have on board, as they share our vision and recognise our achievements as a leader in our space.” He adds that, since the multinational investment bank acted as a joint lead manager on LendInvest’s last securitisation, which was closed at the start of the first lockdown, it already has a deep knowledge of the business and its objectives.

“They understand and support what we are doing as a lender and are looking to integrate themselves more into the fintech industry,” he states.

Straight off the bat, Andy tells me that the additional capital provides a huge opportunity for LendInvest’s continued growth in the BTL sector, with the company’s intention to increase its offering and current criteria. In addition to product expansion, it brings another source of funding to its diverse mix, which includes Citi and National Australia Bank.

Only a month after gaining the funding, the lender announced a number of changes to its BTL product suite, including rate reductions, higher LTVs and larger maximum loan sizes. “Our proposition was always going to evolve, and the recent tweaks are part of the focus on boosting our appeal to our broker partners and delivering a tailored offering for landlords,” explains Andy. “As we navigated the turbulent landscape of the past year, we adjusted our risk appetite accordingly, so some of our recent changes are a move back towards previous product norms.”

But LendInvest is aiming beyond product updates; it’s currently exploring adjacent areas, specifically consumer BTL, as Andy says this would be “a natural progression for the business”. It is also interested in upping its appetite for different property classes, in particular the short-term let sector. “With the great staycation on the cards this year, assisting landlords with holiday lets and Airbnb mortgages would be prudent.”

As LendInvest is somewhat defined by fintech, it’s no surprise to hear that this is something the team will also be working on, in order to offer an improved customer experience. “There is more that can be delivered as a fintech lender to speed up the deal process, cut down on admin by automating much of the journey, and make everything easier for the broker and landlord alike,” he details.

Updating its tech capabilities and BTL range are not the only targets in the company’s sights for the coming months—it is also looking to expand its distribution panel and attract more interest from the broker community. “As word has spread about the success of the LendInvest BTL proposition, more and more brokers have been beating a path to our door. The same can be said for our relationship with mortgage clubs—our team of BDMs has been educating club members on our products, pricing and processes, and

awareness has risen rapidly as individual successes have been shared,” he expounds. “We decided early on in our evolution to not restrict access to LendInvest, in favour of a more open-door policy, as there are some very talented brokers out there who don’t always get to access lenders directly. We value repeat business from brokers and the pool interacting with us more frequently is growing as they get used to our process and platform.”

The lender has been building on its foundations with those mortgage clubs and networks—noting that it had seen an increase in applications from club members, following a big effort from the sales and marketing teams to educate brokers on why the LendInvest BTL range is a winner. “The percentage of business being delivered via these channels is growing quickly,” he adds.

Just recently, the business announced its strategic partners for 2021, with The Buy to Let Broker and Dynamo for Intermediaries among the 35 selected.

The panel gives LendInvest the opportunity to get direct feedback on what these brokers’ landlord clients are looking for from a specialist lender, which helps it to shape its proposition. In return, they get dedicated support via direct access to named team members, an early heads-up on what’s coming down the line with invitations to product launches, and the chance to be the first to trial new products in the future.

While BTL forms a large part of its focus, LendInvest’s objective is to grow across all three of its product lines: bridging, development and BTL. “Our overarching goal that governs what we do not just in the BTL space, but for our full offering, is to make property finance simple,” says Andy. “To this end, we are concentrating on delivering technology solutions—ID verification, e-signatures, open banking and APIs. This supports our efforts to continue the rollout of further process enhancements that will better serve our broker and landlord clients, as we aim to break the mould in an industry that has been crying out for change for many years.”

Underpinning these aspirations is the desire to reach and surpass £2bn as an overall loan book for all lending divisions. According to Andy, the company will achieve this very soon as a result of the increased business it’s experiencing, which he believes will rise further with the SDLT extension. “If the start of 2021 is anything to go by, we are in for a huge year, but we’ve learned not to take anything for granted after what’s been thrown at us all in the past 12 months.”

It seems that with the funding line from JP Morgan, LendInvest has all the pieces of the puzzle necessary to make this an important period for the business, and is optimistic that it will succeed in doing so. “There will always be challenges, and I’m sure I’m not alone in saying I hope none of them will be of the pandemic nature again,” Andy says. “But the PRS is needed now as much as ever, so I’m confident the momentum will continue.”

9 Mar/Apr 2021

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Charlotte Rutter

Exclusive

UNTAPPING OUR POTENTIAL Words by

BETH FISHER

In late February, Roma Finance rebranded, unveiling a completely new look as it entered its 11th year of lending. It followed a successful 12 months, during which the lender doubled business activity, made numerous high-profile hires and broadened its intermediary distribution

13 Mar/Apr 2021

Exclusive

AS WE LOOK AT LAUNCHING NEW, INNOVATIVE PRODUCTS IN THE NEAR FUTURE, OUR FUNDING LINES CONTINUE TO SUPPORT US AND ARE FLEXIBLE ABOUT US CHANGING OUR OFFERING TO FIT THE EVOLVING NEEDS OF OUR CUSTOMERS”

Deborah Chaplain

W

ith the revamp just the starting point of a long-term growth strategy, I was keen to find out why Roma decided to overhaul its brand now and how it is evolving in the specialist finance field. As more than half of the company is powered by women— including at senior management level—I was excited to speak with five of them who are driving the upward trajectory: head of collections and customer service, Deborah Chaplain; head of credit operations, Lorraine Hart; key account manager, Laleta Buctkuar; underwriting relationship manager, Emma Barker; and head of marketing, Charlotte Rutter— the mastermind behind the new look.

Charlotte joined the specialist lender in January 2020 with an agenda to facilitate the rebrand early that year. However, the agreement with the agency she had sourced couldn’t have come at a worse time—the day before lockdown. “We were stopped in our tracks,” she recalls. Roma, too, halted its lending for a short period and its priorities changed. Navigating the storm, as Charlotte puts it, had to take precedence.

As part of this, the finance provider moved its focus to communicating with the broker market and introduced new

initiatives, such as its fee-freeze Covid programme. It also scaled up its staff to 36. Twelve people have been hired to date during the health crisis—including Laleta, Emma, Deborah and commercial director Nick Jones—all of whom have helped shape the lender’s recent progression.

“The pandemic clearly impacted our customers and the wider economy last year, so we decided on a pre-emptive contact strategy,” explains Deborah. After listening to intermediaries and their clients, the finance provider worked to agree individual arrangements based on their circumstances.

“In order to further support existing customers, we enhanced our forbearance toolkit, including extending maturity dates, interest reductions and no additional charges or fees.” As a result, Deborah claims that no customer was adversely affected in terms of their facilities with Roma.

Its funding lines continued to back the lender throughout, too, and, in some cases, even extended their facilities.

“As the pandemic took hold, given the difficulties with valuers visiting properties, we wanted to be able to offer AVMs as an alternative where we could,” Lorraine tells me. “Our funding lines supported us all the way with this.”

14

Bridging & Commercial

This groundwork resulted in a series of record achievements for the company last year, including its best-ever months for new applications in October and November, and for completions in August.

After joining the panels of a number of leading specialist distributors, networks and clubs throughout 2020 and early 2021, Roma’s broad product offering is now available to more intermediaries than ever before—in 2020, it expanded its distribution network by 26% year-on-year.

“The business has ramped up considerably,” highlights Laleta, “with a 100% rise in activity and a significantly increased loan book.” She summarises how packagers play a significant part in this: “They have expertise in complex markets and unrivalled relationships, with access to a wide range of funders offering different products, particularly in niche areas. And they have relationships with a huge number of intermediaries in need of direction and support with borrowers’ funding requirements.” Laleta believes these partnerships have been a natural step in Roma’s evolution.

Consequently, the lender started transacting bigger cases, with an appetite for deals of up to £3m. It is also “thriving” in development and refurbishments, according to Laleta. The company introduced a commercial bridging offering and a ground-up development product in September and is set on doing more research to further flourish in those spaces.

“As we look at launching new, innovative products in the near future, our funding lines

Emma Barker

15 Mar/Apr 2021

Lorraine Hart

Exclusive

WE WERE DESCRIBED AS ‘PROFESSIONAL’, ‘FRIENDLY’ AND ‘HONEST’, BUT THE ONE THING THAT REALLY RESONATED WITH ME AND OTHERS WAS OUR ‘UNTAPPED POTENTIAL’” continue to support us and are flexible about us changing our offering to fit the evolving needs of our customers,” adds Lorraine, who works closely with the backers.

“Having multiple and diverse funding lines gives us the opportunity to revise our products more easily than we might be able to with more restrictive funders.”

When the rebrand was put back on the table towards the end of last year, Charlotte felt it was the perfect time because the business had really come into its own during the pandemic. “I think people know a great deal more about us now,” she says. And, with the lender becoming a “better version of what it was”, she illuminates that the brand refresh was a very positive exercise.

As Roma is a family business—named after managing director Scott Marshall’s late grandparents, Rose and Max—every employee is treated equally as a member of that family. Accordingly, Charlotte interviewed the entire team to involve them in the new look. She then went much wider, spending weeks talking to borrowers, brokers, packagers and industry bodies over Zoom. Helpfully, the feedback was consistent. “We were described as ‘professional’, ‘friendly’ and ‘honest’, but the one thing that really resonated with me and others was our ‘untapped potential,’” she divulges. “People seem to want us to grow and succeed.”

The company’s new strapline, ‘lending less ordinary’, encapsulates its personalised underwriting, collaborative approach with brokers and their customers, and flexibility for applicants with unconventional circumstances.

Coinciding with the update is the introduction of a single and more streamlined application form (including additional fields to gather more information upfront, with fewer queries later on) and new product, packaging and processing guides to help reduce the time between

Laleta Buctkuar

submission and completion. “It’s not just about putting a fancy new logo out there; it’s about making everything easier and cutting through the clutter,” Charlotte asserts.

There is also the recently created underwriting relationship management team, which was introduced to improve the day-one decisioning and the conversion and journey of applications through to completion. “This helps us to significantly improve our front-end decision-making, reducing the time taken in underwriting and referrals,” Emma explains. “And it enables us to structure applications more efficiently, to ensure we’re supporting intermediaries and the borrower’s needs in the best way, while managing our own risks.”

The business now issues a new submission checklist with every agreement in principle. “This allows intermediaries and borrowers to see, at a glance, what information is required,” Emma adds.

Later this year, Roma plans to launch a broker-focussed lender portal.

“We’re constantly looking at ways to innovate,” Lorraine states, pointing to its new ID verification solution, which involves real-time document scanning with chip reading and facial recognition capability.

“This can be carried out by the borrower in the comfort of their own home and

has cut down the number of times ID is requested during our loan processing.”

She notes that the lender prefers to “lead rather than follow” the market. For example, it has recently implemented a means by which selected packagers are able to instruct their own valuations.

When discussing the effects of the brand overhaul, Lorraine believes it shows that the business has grown up.

“I think it will grab people’s attention and change the way our existing and potential partners see us for the better.”

Laleta feels that it promotes their vision more clearly. “A lot has happened in the last decade and now is the right time for us to update and modernise our brand, ready to continue our growth.”

And Emma reiterates that it has come at the perfect time. “Our relationships and distribution channels are on the way up, we are seeing a fantastic increase in volume, and the potential for the business going forward is huge,” she confirms.

When I cheekily ask how much was invested in the rebrand, Charlotte says she isn’t at liberty to divulge exact figures.

“But when you look at value for money,” she affirms, “it’s worth every penny.”

17 Mar/Apr 2021

For introducer and professional property trader use only.

Less stress

More success

At Roma, we like to think we do things differently.

Because of this, we have created a streamlined legal and underwriting process ensuring applications complete on schedule and to expectation.

Lending less ordinary

romafinance.co.uk

obsessed

Why are we so with bridging timescales?

Words by caron schreuder

Zeitgeist

of the problem of how we arrive at ‘accepted’ market statistics. We are still a sector that is all too aware of its largely unregulated nature and this stands in the way of truly representative information finding its way to all stakeholders.

A LinkedIn post that I used to test the waters in December attracted sufficient attention to confirm that I’m not alone in believing this subject is worthy of exploring beneath the surface. So, in early March, I gathered a group of willing experts on Zoom to hash it out.

Spoiler alert: as with most intriguing discussions, there is no definitive answer; our chat did, however, bring a level of clarity that will enable us to move forward in a more intelligent way. And that’s good enough for me.

efore you frustratedly throw your mag across the room (or slam your laptop shut), I get it. Bridging equals speed—it always has. It’s its thing. The bee I have in my bucket hat is how superficially we defend the product’s hallmark.

I have worked in this market for 10 years and have witnessed its progress in many forms: increased professionalism, its ability to attract institutional funding, and more consistent adherence to TCF principles, to name a few. Numerous variables contribute to how a bridging loan is transacted, and these have undoubtedly changed. Is it, then, fair to cling to the timescale expectations of 2011, when bridging’s borrower base, breadth of uses and diversification of provider have all evolved?

It struck me that it might be a case of, if we don’t have speed, what do we have? But the events of 2020 surely answered this; short-term lenders stepped in, yet again, while traditional providers scrambled to cope. Elsewhere in this issue, we report that the majority of the bridging industry saw time to completion increase last year, but did that make it any less valuable a solution in a time of crisis? Whether it takes five or 50 days, shouldn’t the focus be on the fact that it got the job done?

It is worth prefacing the rest of this article by saying that the extremely limited amount of available bridging industry data is somewhat at the heart

Appreciating bridging for what it was In order to see how far bridging has come, it’s imperative to appreciate what it once was. Commonly considered ‘emergency funding’, it rarely factored into a borrower’s long-, or even medium-term, property plans. While chain breaks and auction purchases are still prevalent reasons for taking one out, its uses and developing borrower base have expanded so that customers can now be ‘front-footed’ about this type of finance. “They’re no longer caught out thinking, ‘Oh no, I need a bridging deal to get me out of this situation.’ They’re actually going in with that as part of their overall strategy,” says Emma Cox, head of commercial sales at Shawbrook Bank.

Bridging has also divorced itself from being classified as an asset-only lend, for which all you needed was a valuation and, ahem, a pulse. Exits must be fully verified—and interrogated—before an application is placed. A bridging lender has had to become far better acquainted with the mortgage and refinance market. It is now a prerequisite for providers to have sound insight into term lending and the wider property industry as part of their ability to assess exit strategies—something that, again, pushes us further away from the fast, asset-based lending of yore.

Despite a concerted effort to raise awareness in the sector over the past decade, it is still a product that comes with many pre- and misconceptions, according to Danny Robinson, director at Grey Matters Specialist Lending.

“We need to educate the industry more regarding what bridging actually is, as opposed to what it was,” he urges. “Yes, the stigma’s gone, but the whole idea

22 Bridging & Commercial

Zeitgeist

of bridging has completely changed.

It’s a lot more sophisticated and complex now.” The group agree that the pigeonholing of bridging has to stop.

What’s the hurry?

One of the strong associations bridging has, and the one we are looking at in this piece, is with speed. I am told that applications may be accompanied by a vague reference to ‘ASAP’ when asked about the desired timeframe in which a case needs to complete, as if the introducer assumes that this comes with the territory. “There is no actual timescale on it,” says Alex Upton, commercial director at Hampshire Trust Bank. “Bridging and time don’t always go together. We have to start the process of separating the two. What bridging does is provide solutions.”

The shift in customer profile, as well as the prominence placed on the exit, means that packaging and underwriting bridging loans simply takes longer. Add to this the substantial rise in business volumes, and the burden on service standards increases, too. Danny argues that competitive pricing and breadth of choice come at the cost of haste. “You can’t have both. If you want speed, you’ll pay for it. We can all put a bridging deal through in two weeks if we want to, but that doesn’t mean it’s going to be right for the client.” He adds that he is astounded as to why, as an industry, we are still hung up on the idea of the two-tofour week bridge.

Gavin Diamond, commercial director of bridging at United Trust Bank, notes that, yes, completing a bridging loan in two weeks is possible, but is it the norm? “Absolutely not.”

And herein lies the rub. Surely, there are wider effects on broker and borrower expectations through the creation (and perpetuation) of average timeframes? Is it even feasible to arrive at such figures in a market whose products are increasingly complicated and multifaceted?

Lucy Barrett, managing director and founder of Vantage Finance, questions the legitimacy of such data without

If the stats do

not respect the multitude of borrower and deal specifics that factor into the number of days it takes to get it done, what exactly are we comparing ourselves against?

a level of granularity that drills into product subtypes. “It’s smoke and mirrors,” she says. “We still see a lot of time-sensitive bridging, but if someone was to ask us, ‘On average, how quickly can you complete a bridge?’, I couldn’t pull that data from my system without it looking really ‘bad’.” If the stats do not respect the multitude of borrower and deal specifics that factor into the number of days it takes to get it done, what exactly are we comparing ourselves against?

“My view is that people try to have this homogenous idea of what a bridging loan is,” Gavin proffers. “Are we talking about a straightforward downsize, a classic bridge scenario, which [can] be done very quickly with AVMs and dual rep etc? Or about a really specialist lend where an underwriter needs to consider various different issues?” He stresses that one cannot equate a case involving, say, complex ownership structures with a standard, vanilla deal.

Quoting average timeframes is a bit like asking: how long is a piece of string?

“You have to be comparing it with something that is comparable.” Danny concurs that industry data that fails to take into consideration the nuances of profile, asset and other elements “dumbs down” the true figures.

Bridging Trends is a quarterly publication of bridging finance data, developed by specialist lender MT Finance, and one of the only regular sources of statistics since its launch in 2015. At present, a panel of ten packagers contribute to the figures. MT Finance’s sales director, Gareth Lewis, addresses some of the ideas and criticisms presented.

“Attitudes to bridging have certainly changed over the years,” he says. “It’s no longer used purely in distressed circumstances, where the speed element is vital. So, while time isn’t always of the essence when it comes to transactions, there is a necessity to show the brokers and clients alike the [full picture] around service delivery, and completion timescales will always play a big part in this information.” He explains that, because the space is attracting more inexperienced brokers, stakeholders have an obligation to promote clarity on all aspects of what can be expected— including turnaround times. “Bridging Trends purely provides an overview of the market,” Gareth tells me. “The data provided by the contributors goes a long way in giving the wider community insight into what is happening, and while the sector remains opaque, infrequent users need greater access to 23 Mar/Apr 2021

Zeitgeist

We need

information to help guide them through what can seem overly complicated.”

Lucy recognises that each bridging client is individual—and so are their requirements. Take refurb, an area in which the use of bridging is flourishing, as a prime example: there are numerous moving parts, all of which take time.

“They might agree a six-month completion timetable, or three months between exchange and completion,” she reveals, underscoring the fact that the determination of the schedule is down to the borrower and the specifics of the scenario. If this schedule is protracted due to the overall changing of the bridging customer profile, this is inevitably going to contribute to longer averages.

If only the deals that need to be completed by a certain date were concentrated on, the industry would probably hit those timescales “a hell of a lot more often,” Alex proposes.

As with many aspects of specialist finance, working with a broker who knows their stuff is going to make all the difference—especially when it comes to their up-to-the-minute knowledge of lenders’ appetite and capacity for quick turnarounds, as well as the many variables that can influence this.

“There are certain lenders that have great products and fantastic appetites, but they’re just not designed to do quick bridging,” comments Lucy. In response to banks being typically less likely to be categorised as the speediest bridging providers on the block, Emma admits there are “a few more hoops to jump through”. It is well known that brokers and borrowers highly value a quick ‘no’; she posits that a thoughtful, considered ‘yes’ is just as important.

Taking that extra bit of time to provide strong assurance from the outset should outrank a half-hearted answer delivered solely in the name of speed.

to consider when a usp becomes more problematic than promotional

Marketing tactics I am very aware of the irony of the media scrutinising the way in which lenders, and some brokers for that matter, choose to market themselves.

It is not lost on me that I am, if not biting, at least examining the hand that feeds us. However, I have always been a firm proponent that words matter, as does the way the bridging market collectively brands itself. We need to

consider when a USP becomes more problematic than promotional.

The bridging market has welcomed an abundance of new introducers over the past few years, and this influx was heightened as mortgage brokers and IFAs increasingly turned to specialist property finance in 2020. What might their first impressions have been? Lucy returns to the importance of working with an expert who can cut through the headline turnarounds with the knowledge of lenders’ real ability (and desire) to deliver in the required time.

“There’ll be some brokers that will just put a case in because they see a headline rate or there’s some old piece of marketing that says that a bridge can be done in two weeks,” she details.

“They just assume, ‘It’s bridging, so it doesn’t matter which lender I go with.’”

She acknowledges that it must be tempting for a lender, if they can pull off a loan in a week or two, to shout about it—averages and caveats don’t make for a very snappy campaign, after all. However, it is a fallacy that speed is solely lender driven. A fast transaction needs all parties to commit—and a broker’s job is to get everyone on board.

Sophie Mitchell-Charman, sales director at LendInvest, comments that it categorically does not advertise sensational promises of quick turnarounds. “That doesn’t paint a clear picture, nor is it a true reflection of what we’re doing day in and day out, or the cross-section of business that we could be writing,” she states.

Is it possible that lenders who boast super-fast bridging could be cutting themselves off from opportunities, perhaps of the more intricate kind?

Someone who would like to see more responsibility shown through lenders’ marketing is Danny. His take on it is that the many brokers and clients who go direct to lenders carry with them these unrealistic standards that they’ve been exposed to. “No one’s going to be losing business if we’re honest and say, ‘It’s likely to take six weeks, because of this and this.’”

Looking at the ‘obsession’ from another angle, Emma reveals that overall flight times are important to Shawbrook, but more so from a client satisfaction point of view. “What really matters is the customer and broker experience.” This is a metric based on the delivery of what the borrower wants, rather than how the lender performs against an industry benchmark. “I think having a measure of sorts is useful; it helps keep lenders

24 Bridging & Commercial

Zeitgeist

honest. It’s irresponsible to overpromise and underdeliver.” Gavin believes that Emma is “spot-on” in this way of thinking. “What’s most important is that people are, on average, getting money within the timeframe that they want it. If they’re not, well, that’s where the problem is—not the absolute number of days.” Lenders appraising their individual performance based on internal measures of their own customer service standards is surely more important than basing this on a blanket headline expectation.

What’s re-bridging got to do with it?

Quite a bit, it turns out. Although Alex considers bridging enquiries where time is of the essence to be in the minority, she notes that, when it comes to rebridging requests, brokers are prone to “chasing”. When considering cases like these, it is even more essential that time is spent on really delving into the reasons for taking out the existing loan.

Gavin sees re-bridging cases fall into one of two camps: bridges that have been used for their original purpose with the new loan simply facilitating their next move; and those in which the borrower was either unrealistic or downright deceitful about their intentions. “It’s a duty of both brokers and lenders to a) place the deal with the correct lender in the first instance, and b) lend on the correct premise at the outset,” he asserts, adding that, ultimately, the placement of that deal by the broker is the genesis of limiting re-bridging of the second, nefarious variety.

Alex would like to see more progress in the way of determining appropriate loan terms. “When I look at some of these re-bridges, I think, ‘Wow, that exit was never going to work in six months—that’s where the market needs to evolve a bit more.”

Another consequence of the setting of unachievable expectations, Danny finds that too many clients and brokers approach him at an unacceptable stage when looking to re-bridge: “They think they can get it done in two-to-four weeks, when it’s already too late.”

Other matters of time Accepting that what appears to be a regression is in fact predominantly due to advancement, there are aspects of the system that do need addressing.

Unsurprisingly, sluggish legal processes is one of them. “There are two types of traditional bridging borrower,”

outlines Ian Wilson, CEO at Acre Lane Capital. “One is experienced; they go into a bridge as part of their strategy and usually have solicitors who know their way around a bridging loan. It’s the clients that get into an unforeseen situation who tend to ultimately use a conveyancing solicitor as their legal backup. In those cases, it can take a very long time to complete.” Despite pointing less experienced borrowers in the direction of specialist firms, Ian claims that many of them forge ahead with their chosen representation.

Sophie shares this frustration. “We get so many people who insist on using a conveyancer or a solicitor they’ve worked with before on longer term deals.” She adds that this often leads to things being held up due to a lessthan-thorough understanding of what a bridging transaction requires.

Emma divulges that she feels a certain sense of conflict when questioning a borrower’s plans, particularly around the term length, given that the lender must be comfortable with the strategy yet also wary of influencing the customer outcome. “On occasion, we’ve suggested that the customer needs to take a longer term, and we do get a lot of pushback from brokers insisting they can do it in three or six months,” she explains. If the lender continues to argue the point, it runs the risk of losing the deal altogether.

When I ask for suggestions as to how we, as a trade publication, can update the narrative, Sophie reiterates that education is key. “It would be good to say to brokers and clients: ‘There is a raft of reasons why we should be looking at bridging, and these are the things that you should consider . . . this is what the norms are. However, in this scenario, it’s completely different.’” Her message really encompasses what I’ve always understood bridging to be: a product for which you need to know the rules precisely in order to work them flexibly to arrive at a bespoke solution.

As Gavin puts it: time is only relevant to the actual transaction you are being asked to arrange or fund. I believe it is vital that we start seeing bridging in 3D and appreciate that it is far more nuanced now than ever.

If the information I gained from speaking to these experts is anything to go by, we should be celebrating the fact that bridging is the answer to complex questions—and something deserving of taking time over.

25 Mar/Apr 2021

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WI N N E R

YEARS OF ENTREPRENEURIAL SPIRIT

Interview

Since providing its first loan—against a car number plate, back in 1981—MSP Capital has financed the building of football stadiums, Co-op stores across the South and numerous residential developments. But it has been a progressive journey. I sit down with managing director Martin Higgins, who, since 1994, has helped to grow what was once a small Dorset family business into the prominent, privately owned lender it is today Words by

BETH FISHER

30 Bridging & Commercial

B

efore the credit crisis, MSP was a mezzanine lender, owned by Martin and his father and backed by their own family money. Sitting behind the mainstream banks’ development loans and providing the second-charge debt, the business watched many clients build and sell. When the banks retreated, MSP eventually stepped into the resulting space.

“The dramatic changes during and after the 2007 crunch showed us that the standard tick-box approach of the high street lenders just didn’t cut it for an MSP developer,” explains Martin. “Most of all, they needed certainty to navigate the challenges faced and to amplify the opportunities they had.”

With an increasing demand for finance in these trying circumstances, the business’s initial need to hire more experts quickly transitioned into hiring only experts. These skills enabled it to deliver what clients wanted: an approach to deal structuring that was bespoke and always had their objectives in mind. While the principle remains the same, today the company has a team of 24, and its product range has evolved; alongside development finance, it now also offers short- and medium-term bridging loans, between £30,000 and £10m, from six months to three years.

2021 sees MSP’s 40th anniversary, an occasion that was marked by an online celebration involving mandatory dressing up, company sponsored cocktail making and takeaways. By chance, the entire staff had enjoyed a weekend away at a hotel in January 2020, just before Covid hit. “We have a great team covering all ages, experiences and interests, and it was an amazing time together,” Martin reminisces. “Work was not on the agenda or discussed, so it was a pure focus on fun. Of course, against the backdrop of the pandemic, this memory is even more appreciated by us all now.”

Reflecting on the past four decades, Martin believes the lender’s biggest achievement was when it moved from being family to privately owned. Paul Miracca and David Capra, director of development finance and commercial director, respectively, along with one other, bought Martin’s father out. Private ownership was split across the four of them, with the fourth person leaving when Cabot Square Capital came on board much later.

“This was nearly 10 years ago and, with new stakeholders, it meant that we could plot a steady course with growth and opportunity firmly on the agenda,” Martin says.

And its most challenging moment? “The credit crunch,” Martin replies, putting the pandemic to one side, as we’re still enduring it. “We had clients who we’d known for decades having a torrid time and banks retreating with little rationale for their actions,” he recalls. “Our business

Interview

was stuck in the middle of it all.” Looking back, he deems that this period defined what MSP is today. “The lessons we learnt during that time, watching others while we kept on funding, gave us the opportunity to [help] create a sector many are now in.”

Martin pinpoints 2018 as a particularly prolific year, when Cabot acquired a majority stake in the company. NatWest also joined Shawbrook Bank (in addition to funds managed by Insight Investment) as senior backers, thus increasing MSP’s institutional support to £90m, alongside its own capital resources.

With its loan book already beyond £100m and growing, the addition of Cabot paved way for a bright future. “Cabot has been a great partner; from the start, they saw the value and experience in the MSP team and trusted us to get on and deliver our market-leading service. They also gave us the confidence to continue to grow, employ more talent and launch new products that our clients wanted and needed. Their broad experience in the financial services sector means they are good at asking relevant questions which, as MSP are property people first and foremost, keeps us objective.”

Martin tells me that, while the lender has been supported by bank funding for around 10 years, the positive change of its capital structure with a syndicate of funding lines has made it think differently about its business. “We have created infrastructure and systems that have enabled us to have experts leading the charge on customer experience, while the platform does the heavy lifting.”

In 2020, its loan portfolio doubled to £200m, despite Covid-19 restrictions battering the property industry early on.

“Having been around for decades and seen numerous economic cycles, we are ready for every challenge,” Martin states, confidently, “but the very word ‘pandemic’ was completely new to us as a nation.” He imparts that a vital lesson he learnt in earlier years was never to chase rapid expansion.

Instead, MSP follows the simple logic of staying close to its clients and supporting them in making the most of their assets.

“This will enable them to make the best of any challenges and, of course, opportunities.

One: you survive. Two: your clients survive.

Three: you find that growth occurs naturally as you come out of a tough time.” He divulges that seeing clients maintain their livelihoods was the best thanks it could have had for the sheer number of extra hours worked to navigate the past 12 months.

Further showing its commitment to the market last year, MSP designated an initial £30m in funds for a new low-cost, premium residential bridging product. It has since continued a measured release of the offering—which Martin says has been

“swept up” by brokers and developers.

The proposition covers unregulated loans on single or multiple residential property assets and on vacant or tenanted ASTs, in areas south of Birmingham.

On top of this, Martin hinted that the business is exploring a green programme within its product range—something likely to become more prevalent across the specialist finance industry as the government’s Green Industrial Revolution further encourages sustainable building. “Our team supports local charities and initiatives within our Dorset-based community and, after feedback from our clients, we see the vital need to step up and each do our bit to help protect the environment we live in.”

The employees at MSP, who clearly love being active, are heavily involved in broader corporate responsibility initiatives too, supporting several charities in their area. In recent years, they have walked the equivalent distance to Iceland (one million steps in the space of two weeks) and cycled the length of the country for Dorset and Wiltshire children’s hospice, Julia’s House. The business also sponsors its resident football team, AFC Bournemouth, which Martin notes has helped widen the lender’s reach. “We’ve all seen in lockdown just how crucial access to open spaces and exercise are for our mental health and, over the next few years, our community is going to see some initiatives come to life that will enable more people to get involved with sports facilities and suchlike.

It feels great to be at a stage where we’re giving back, and long may that continue.”

Looking to the future, MSP aims to boost its relationships with introducers and increase and diversify its funding. “I think we mirror our clients in our attitude to opportunities and, as they’re constantly developing, so are we,” Martin says. “There’s lots of potential in this area if you have an entrepreneurial spirit. Our current long-term funders recognise that our market position is all about being the best in class. They want us to do more of the same and listen to any innovations we have on the horizon.”

In line with its ambitions, the finance provider is soon to reveal its overhauled website—something which has helped bring the team closer together during Covid, as it affirms its ideals and mission moving forward. “I am keen to share what we do and our values with a much larger audience,” Martin comments. “Pressing ‘go live’ on the new website will be a definite milestone in the MSP journey.”

I end our interview by asking Martin one last question: “What is your biggest goal for the business this year?”

“I wish for the health of our team and their families, and growth— in that order,” he responds.

31 Mar/Apr 2021

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Interview

Reim Fairb in conversation

34 Bridging & Commercial

Interview

ridge Words by

caron schreuder

Launching a lender in such a competitive market is tough at the best of times. Add a global pandemic to the mix, and the challenges surely increase exponentially, right? Well, not entirely.

In fact, 2020 proved to be a pivotal year for new and smaller providers in terms of opportunity. Amid the waning appetite from some of their peers, or the pausing of lending altogether, space was created for them to explore new distribution. By most accounts, the events of last year spurred entrants and mid-tier lenders to reach new heights and carve out reputations as bastions of reliability.

Reim Capital and Fairbridge Capital are two such specialists that are coming into their own. At the beginning of March, I spoke to Reim’s co-founder and principal Kunal Vaitha, and Fairbridge director Dalian Gill, about what it’s been like to start making their mark during such a strange time.

As newer funders—Fairbridge launched in August 2019 but embarked on a product expansion plan in early 2020, and while Reim started trading in May 2019, its real push began just over a year ago—do they feel a certain sense of responsibility to raise standards in the specialist lending market?

What did the landscape look like from the outside, and how did that perspective shape their offerings?

With the absence of a cumbersome loan book going into the crisis, the conversation is unsurprisingly light and optimistic. Could it be that 2020 was precisely the best year to establish oneself in the field?

35 Mar/Apr 2021

Reim Capital co-founder and principal Kunal Vaitha

Interview

Kunal Vaitha: Reim Capital launched about 20 months ago, and officially came into the market at the start of 2020, which, as everyone knows, was a very hard year.

But I feel as though we saw a different side to the sector; the opportunities it offered were advantageous in certain aspects, purely because we had some longstanding relationships within the industry. Our costs were fairly low, too; we didn’t have many overheads. We were able to win a good amount of business because of what was happening in the market and by being more active than others. We started off very much driven by our previous relationships with borrowers and brokers, forged by me and my business partner [principal Amar Khiroya].

And that’s where we sourced many of our new loans, which really helped us gain some level of introduction into this space.

remotely, including instructing valuers who might not be able to visit sites to complete reports, and having to sign documents electronically. We’re always working towards a more technology-based business but, as we were just starting out, it was a bit more difficult because it was all so new.

When we moved to working from home, we found navigating communication to be really important, as we hadn’t spent years in an office learning how we all operated together in a shared space. I’d say the most advantageous part and where I saw opportunity, was that we were well funded. And when others were struggling to do deals—especially the larger ones, which we focus on—we were able to come in and work with brokers that we hadn’t expected to be working with so soon. We delivered and got our name out there.

Dalian Gill: We had quite an unorthodox start. My background is in property; I’m a planning consultant by trade and I’ve very much been ‘boots on the ground’, working on developments across the scale from housing projects all the way up to major schemes. I had a client who engaged in both development and bridging loans and became involved in assisting with their underwriting of the planning deals. In doing that, I saw a niche for a lender that clearly understands the risks of planning and development.

I’d been working with Fairbridge’s then soon-to-be co-founder Aman [Singh Bajwa] on development sites in the South East.

He has a strong background in property finance and accounting and has worked with some of the UK’s leading REITs and asset managers. So, in mid-2019, the two of us set up Fairbridge Capital out of a small basement office in Kent. At the outset, we focused on bringing in industry expertise to support our existing knowledge bank, but what it came down to was a lot of hard work and late nights setting up our infrastructure and processes, and securing our first round of funding. We are a relatively new entrant, but our ethos for being a reliable lender means that we’re becoming more and more recognised. Eighteen months on, a lot has changed, particularly our view—we moved into our new office in 2020 and I’ve actually got a window now!

It is an exciting time for us in our journey.

DG: Being a new lender, it’s important that we’re proactive in showing the industry who we are. Our existing partners know we’re very personable, with much of our growth having been based on building these good relationships. So, we were concerned that the lockdown restrictions might prevent us from engaging with people in the way that we do best. But we’ve been busy holding events via virtual platforms and active on social media—and having open discussions like this will help convey the message. In terms of opportunities, many of the new permitted development rights released in 2020 were designed to stimulate and address the issue of vacant high streets post-Covid.

We’re already starting to see applications come in that are looking to use these changes, particularly for upward extensions.

We’ve got a good light development and refurb product that suits these scenarios and are excited to see just how popular the new PDRs will be. There also appears to be an influx of small, rural coastal developments, due to a surge in demand for second homes in those areas. Lockdown, in a way, has created development opportunities that may have previously been considered unrealistic. We’re also seeing a lot more applications for our second-charge product.

The quiet periods have given businesses that breathing space to re-evaluate their infrastructure, adapt and plan for growth.

Caron Schreuder: It’s not often that there’s a seismic event that causes such disruption. Can you speak about what you found most challenging and what the greatest opportunities have been in the past 12 months?

KV: The most challenging part was that we were in lockdown and having to work

When others were struggling to do deals—especially the larger ones, which we focus on—we were able to come in and work with brokers that we hadn’t expected to be working with so soon. We delivered and got our name out there”

CS: What would you say the split of your business is, in terms of product types?

DG: We are looking to continue to grow a diversified book, not overly weighted in one product. Currently we’re at 40% residential, 30% commercial and mixed-use, and 30% finish and exit.

Our average loan size is £500,000. I find that property developers and investors 37 Mar/Apr 2021

Interview

typically have a varied portfolio, so it’s important that we’re open to supporting our base on all transaction sizes.

But we have made a start, by default— because of lockdown, it was something we had to learn as a way of working.

KV: Our focus is on bridging. I’d say 75% of what we’ve done to date has been bridging (commercial and resi) and 25% development. We’re currently rolling out a 90% LTC development finance product.

It’s still fairly fresh, but as we originate new loans, we’re planning to offer it to more developers. The main thing for us has been a shift in loan sizes; we’re now looking at mainly £500,000-plus, and our average loan size is about £1.7m. That’s across bridging finance. We’re aiming to expose ourselves more to development but, at the moment, bridging is at the forefront of our business.

CS: Dalian, what are your views on tech within bridging and specialist finance and its implementation? Can we fully automate the process or do we need a hybrid approach?

CS: Was that a conscious decision to increase the loan size or a consequence of the types of deals you were getting and which you feel is your sweet spot?

KV: We found that the sophistication of borrowers at that level is slightly higher; we can work with them more easily with the small team we have. For us, it is more beneficial to write the bigger stuff. We have a team of three-and-a-half, which is not many for what we do. To be writing high volume at loan amounts of £200,000– 300,000, it’s just not worth our time.

CS: They say that pretty much the same amount of work goes into a bridge regardless of the size, so if you’ve got a small team, it makes sense to target larger loans and higher returns.

KV: Correct.

CS: I’d like to pick up on something you said, Kunal, about technology. We wrote in February last year about how you wanted to simplify the process. Do you think that was expedited through the events of 2020, or have your ambitions to bring in technology taken a bit of a backseat because of Covid?

KV: It’s a mix. The company’s target was to automate the whole application process, rather than just the legal and valuation parts. These aspects are already relatively tech-based from our end. We use VAS Panel for our valuations, which helps us be more efficient in terms of getting them done, and on the legal side we use DocuSign and the like. In reference to that article, I’d say we’re not quite there yet, based on what the plan was and is. Automating the entire process is something we’re looking to work on more over the 12-18 months.

DG: Technology has undeniably made a tremendous impact across all industries in recent years, and this has only been accelerated by the pandemic. This has absolutely had an effect on our business through the greater usage of tools like video conferencing and electronic document signing which has helped to further optimise our processes—and deliver a faster and more effective service to our customers. Regarding full automation, some of our processes are probably more amenable to such treatment, particularly with respect to emerging technologies such as smart contract-enabled blockchain and machine learning, AI and robotics.

When it comes to building trusted relationships with our customers, a core part of how we do business, we’re not expecting to automate that anytime soon.

CS: When you entered this space, what were your impressions of the providers that were there already? How were you hoping to make a difference and what were your ambitions?

Is that still how you position yourselves?

KV: The initial ambition was to build a reputation by providing an efficient service to our clients, borrowers and brokers. One thing I saw from the start was that most providers, if not all, focus heavily on client interaction and customer experience. We thought it was important that we treat all of our brokers and borrowers with a high level of respect and understanding to make things as smooth as possible. From day one, all the feedback we received, and still do, is that the efficient lifecycle of a transaction is crucial.

We try to pride ourselves on providing that same level of service, if not better than what the sector already offered when we joined.

DG: Being a new entrant has given us the benefit of being able to analyse the landscape and understand the current dynamic regarding existing brokerlender relationships—and to really gear our core ethos and USPs around that. So, from the outset, we had that ingrained within our company.

CS: Are brokers your most prevalent distribution channel? What are your views about taking business directly from borrowers?

38

Bridging & Commercial

KV: Reim has evolved from direct borrowers to working more with brokers. When we first came into the sector, we had a good number of contacts who were direct, and still do. But that is not the way this business works for achieving long-term growth. It’s a broker-driven market, as everyone knows.

Through direct relationships, word of mouth, increased marketing and awareness of our business, we’ve been able to onboard a lot more brokers over the last year.

DG: Yes, I agree with Kunal on that. It’s a broker-led industry. We started out with an extensive network from our property development base and that’s why we were mainly looking at light development and refurb, because that came from the network we knew. But it’s not a good strategy to solely rely on B2C for deal flow; brokers are essential to growth.

CS: Dalian, because you come from more of a development and planning background, what are your thoughts on bridging lenders working in the development finance space?

DG: Development is complex. There are so many pitfalls to watch out for. It’s vital to have the right people and experience in your team, but I do believe that many lenders that offer development finance recognise that and offer the in-house expertise to be able to manage it. I do get concerned sometimes, particularly during lockdown, that there isn’t enough understanding of the delays that can occur on site. I’ve been there; it can happen quite inadvertently. During Covid, even though construction was allowed to go ahead, there were logistical issues with the supply of materials, which inevitably caused delays. We certainly saw a lot of developments that were in trouble with their incumbent lenders. That’s why our bridge-to-finish product has been so popular, because there were many developments out there that needed support to complete.

KV: I agree that experience and expertise in that area are very important when you’re lending on that asset, which is one of the reasons why we’re quite cautious when it comes to development. We haven’t done too much. One of my partners had worked in development for about seven years prior to us setting up, so we do have experience—but we’re still learning. We’ve also seen high demand for bridge-to-exit and development-exit type transactions, where construction sites are 80-90% complete and need that extra bit of capital to finish, mainly due to Covid delays.

Interview

CS: Is there anything missing from the sector, either from a product or conduct point of view?

DG: We’ve highlighted the dev-exit and bridge-to-finish products which weren’t as prevalent as they are now. We know that more property investors are finding opportunities outside London and the South East which are offering better yields—an area where we have been successful as we are not geographically biased. Typically, those acquisitions are made outside the more traditional routes, needing to complete in a matter of weeks, rather than months. I believe one thing lockdown has had an impact on is speed— and that’s where conduct comes in. We’ve ensured that we have a very streamlined operation; our entire team is heavily geared towards responsiveness.

CS: Interesting. Elsewhere in this issue of the magazine, we have a feature on the market’s ‘obsession’ with speed.

DG: Speed of execution has always been important, due to the nature of bridging— especially, for example, if it’s an auction purchase or an off-market deal that needs to happen quickly. There are often rebridge cases where it needs to happen yesterday. But there is also a lot more emphasis on reliability and communication, stemming from the initial lockdown.

KV: Speed is probably one of the things that has been affected most over the past year.

CS: In order to make things as streamlined as possible—as this is something you both consider important—how do you demonstrate your reliability, aside from successfully doing deals?

Generally, the industry is well catered for in terms of liquidity, and there are lots of short-term funders out there. But I feel that being backed by just one of them could be problematic, unless you have absolute certainty they will continue to support you during trickier periods, like a lockdown”

CS: Understanding funding models has become increasingly necessary for brokers and clients in order to really know the lenders they’re dealing with.

Do you get people enquiring about your backing? How has the make-up of your funding dictated your ability to continue lending throughout the past year?

KV: We have had people, especially at the start, ask us how we’re funded, and we’re fairly transparent about that, though obviously we can’t give names. Back to the previous point, if you’re completing on loans, people aren’t going to repeatedly enquire about your funding. A lot of the time, they don’t really care—they just want to make sure that things are being delivered.

DG: We only really started getting that question post-lockdown. A lot of enquiries we were receiving seemed to originate from reliability issues. I think, moving forward, there will likely be a greater emphasis on consistency of funds. It’s difficult to build a strong relationship with brokers if your funding lines are constantly changing their criteria. Generally, the industry is well catered for in terms of liquidity, and there are lots of shortterm funders out there. But I feel that being backed by just one of them could be problematic, unless you have absolute certainty they will continue to support you during trickier periods, like a lockdown.

Will the lending criteria remain sensible?

Are the loan funds diversified enough?

CS: Do you both have multiple lines from which to draw?

KV: We don’t, no. We work with one partner—a private debt fund.

DG: We have the backing of a number of funds and a portfolio of HNWs who have diverse but consistent risk parameters across the market. It was crucial for us to implement a strategy that focused on supplying that trustworthiness. That’s not to say being backed by one of them, as Kunal mentioned, is the wrong way to go about it, if you’ve got that absolute certainty that they can deliver.

KV: As you say, the most obvious way to portray it is by completing deals. But I think another level of this would be the service that we offer: taking the client through the full process, showing confidence that we’ve done this before and know what we’re doing, instructing lawyers and valuers… that gives them a degree of comfort. And, of course, we’re spending time and effort with the client to get them the best funding possible.

CS: There seem to be differing views in the broker arena as to what they consider most sound. Some say that deposit-backed banks offer more confidence, whereas others believe multiple lines mean there are varying appetite options—a plus. Are you always on the lookout for additional funding?

DG: It is completely down to performance.

You can sing from the rooftops about how fast and reliable you are, but it’s all sizzle and no steak until the broker goes through that process with you, then once that happens, your growth will be organic through word of mouth and referrals, which I believe is the most powerful tool to grow.

KV: We’re backed by a private debt fund which is exclusive to Reim in the 39 Mar/Apr 2021

Interview

You can sing from the rooftops about how fast and reliable you are, but it’s all sizzle and no steak until the broker goes through that process with you . . . I believe that organic growth through word of mouth and referrals is the most powerful tool to grow”

UK, so we’re pretty confident with our funding at this stage. But, going forward, of course we would consider multiple lines as and when the opportunities come up. Our focus this year, however, is to finesse our underwriting processes and loan management from start to finish.

DG: Yes, I think those new relationships are always on the radar as the market will become more competitive. But, at the moment, we’re very comfortable with the set-up we have.

CS: It is currently very competitive and there are several wider economic factors that have been driving demand in bridging, such as the stamp duty relief.

What are your thoughts on the idea that this may be prompting an unnatural amount of appetite from people who may not have necessarily considered a bridge prior to the events of 2020? What opinions do you have on typical mortgage customers finding themselves in bridges?

What could this mean for the sector?

KV: Volume has increased. However, with our loan sizes, not many of our clients are directly benefiting from the stamp duty holiday. But I have seen, for example, where there’s a block of 10 units being sold at less than £500,000 each, an increase in our exits on those kinds of assets. We did a couple of those recently, and the sales were a lot quicker than we anticipated.

DG: That’s a good question, because the number of completions in 2020 is still down from 2019. But if you look at the final quarter, that had the most completions for five years. So, I’m not sure whether or not it’s a surge… I think it’s probably more pent-up demand.

CS: Acknowledging that it’s not necessarily your specialist area, do you have any comments about ‘regulation creep’, as it’s known, in bridging?

KV: I feel as though there’s potential for the bridging space to become more regulated—and I believe that there’s a requirement for it in certain aspects. But it depends on how much the industry is looked into and what can be done to make it more regulated. It’s hard for me to say because, for us as lenders, increased regulation will mean increased cost…

DG: I have a slightly different view. I think introducing new regulation would be like using a sledgehammer to crack a nut, considering the very small number of lenders that are letting the industry down 40

Bridging & Commercial

with their practices. The better solution is probably for all lenders to commit to industry best practice, transparency and fair treatment of their customers. And the intermediaries have a part to play as well, in terms of avoiding putting their clients with lenders that take advantage when things go wrong. If something like that could be implemented, it would be a win-win for the industry and consumers.

CS: Are you part of any bodies or trade associations?

KV: Yes, we’re a part of NACFB and FIBA. DG: We’re in the process of joining the ASTL. But, in any case, we operate in a transparent manner. We treat our customers fairly. We’re unregulated, but we are registered with the FCA for AML supervision, as required.

CS: Regarding plans for your businesses, are there any specific aims or milestones you’re heading towards that we can look forward to hearing about this year?

KV: We’re seeking to double our loan book.

CS: When is the new 90% LTC product going live?

KV: We’re still working on it.

Hopefully, in the next two months.

DG: We are growing our team and continuing to invest in our people and infrastructure. There are business models in the sector which have an ambition to scale and exit but we’re in it for the long run with an ambition to be market leaders.

CS: One final question: do you think that brokers’ memories are long or short in respect of what’s happened over the past year? Will the relationships you’ve built as a result of the retrenchment of some other lenders stand in the coming months? Or will there be a return to previous dynamics?

DG: I think when you can perform as a lender during the difficult times, it showcases your ability and, in my view, forges the deepest relationships. Our strongest broker relationships have originated from the time that we were able to deliver either when nobody else would or where it, perhaps, was expected that we might falter.

CS: I believe that kind of support will last.

Fairbridge Capital director Dalian Gill

41 Mar/Apr 2021

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Cover story

THE 2021 UK BRIDGING FINANCE MARKET SURVEY Bridging & Commercial has collaborated with EY to exclusively reveal its fourth annual UK Bridging Finance Market Survey, providing the latest views and insights into trends and challenges the industry faces.

Over the past 12 months, the sector has evolved dramatically after having to adapt to the frequently changing environment brought on by the pandemic. We hope the results will provide you with a better grasp of what the bridging landscape looks like and possibly help shape your plans for this year and beyond

43 Mar/Apr 2021

Cover story

Who took part? - The survey had 48 participants—40 lenders and 8 brokers/ packagers—31 of which are unregulated. The majority (48%) are based in London, while 27% are in the South, 13% North, 6% Midlands, 4% abroad, and 2% in Wales.

THE STORY OVER THE PAST 12 MONTHS Average LTV 4%

40% to <50% 50% to <60%

29%

Average monthly interest rate

60% to <70%

4% 2%

1.25% or more 1.0% to <1.25%

67%

0.75% to <1.0%

31%

0.5% to <0.75% 63%

Average loan size 100

80

8%

£800k or more

6% 4%

£700k to <£800k

15% 15%

60

Average loan term

£600k to <£700k £500k to <£600k £400k to <£500k

100

15 months to <18 months

6%

£300k to <£400k 19%

40

£200k to <£300k

12 months to <15 months 9 months to <12 months

80

38%

£100k to <£200k

6 months to <9 months

60

20

29% 4%

0

40

54% 20

2%

0

Regulated loans as a percentage of total loans <10%

25%

10% to <30% 38%

Average monthly cost of origination

30% to <50% 50% to <70%

21%

70% to <90%

4%

2%

<1.0%

90% or more

4%

1.0% to <1.5% 1.5% to <2.0%

8%

2.0% or more 21% 44%

33%

44 Bridging & Commercial

Cover story

54%

Slow borrower response times

31%

40%

Slower valuation responses

Brokers providing piecemeal information

FACTORS CONTRIBUTING MOST TO PROTRACTED TIMESCALES

23%

Unforeseen issues

OTHER SIGNIFICANT CHANGES IN PAST 12 MONTHS

40%

Working from home/ lockdown restrictions

75%

tightened underwriting criteria to help navigate Covid-19

29%

retracted from certain products

54% 92% Slow legal process

of market paused or reduced originations at some point

79%

experienced an increase in extensions as a result of Covid and government measures

45 Mar/Apr 2021

Cover story

WHAT ISN’T DEEMED A CHALLENGE FOR THE SECTOR IN 2021?

ONLY 2% JUST 4% see Brexit as the biggest hurdle

3

think a change in regulatory rules will pose difficulties

BIGGEST CHALLENGES for bridging businesses in 2021 Increased competition Ability to access flexible and efficient debt funding sources A decline in property values and limited access to talent and human capital

48%

With citing the aftermath of Covid-19 as the largest challenge the market faces as a whole

46 Bridging & Commercial

Cover story

65%

expect foreclosure on properties to increase within the next year

47 Mar/Apr 2021

Cover story

“The survey brings together insights across a range of topics impacting the market and, in particular, highlights the rise in importance of technology within the bridging market. The use of AVMs and biometrics, as well as the ability to automate the underwriting process, have progressed quickly and risen up the priority agenda, accelerated further by the 2020 lockdowns. Similarly, Open Banking has also grown in importance, with almost a quarter (21%) of respondents believing it will significantly improve origination and underwriting, up from just 8% last year.”

Nick Parkhouse, partner of corporate finance at EY

42%

44%

think that lenders are increasingly using AVMs on property to assist them in their due diligence process when carrying out a valuation

63%

agree that automated loan management systems allowing live data to be extracted accurately at the click of a button is a key differentiator among lenders

implemented new tech into their underwriting processes in the last 12 months, however, the ability to use AVMs and automating the underwriting process has been deemed among the least important capabilities for bridging businesses to remain successful going forward

Strong origination capabilities and relationships with brokers are deemed most important capabilities for bridging businesses to remain successful

10%

of market rank direct-to-customer business as their primary channel for origination

27%

while mark it as their second most important 48 Bridging & Commercial

Cover story

The impact of the pandemic

73%

60%

21%

29%

witnessed a rise in forbearance requests

of the market made redundancies in the past 12 months to help navigate through Covid, while almost half (48%) furloughed staff

have seen borrower default rates increase

actively reduced their cost base

77%

of the market has seen an increase in average days to completion on loans as a result of Covid-19 and associated government measures

Main reasons to obtain a bridging loan

MAIN REASONS TO OBTAIN A BRIDGING LOAN

50% of the market think that the most popular reason to get a bridging loan is for refurbishment purposes

100%

4%

90%

with almost half not expecting any significant change to this over the next 12 months

48%

2% 6%

15%

80%

8% 13%

2%

8%

21%

27% 15%

21%

70%

25%

50%

60% 17% 50%

15%

27% 23%

40%

13%

27%

30%

50% 20%

25%

10%

21% 21%

8%

8%

0%

Auction Purchase most pouplar

Business purpose

Refurbishment

Re-bridge

17% 8% 4%

Mortgage delays least pouplar

49 Mar/Apr 2021

Cover story

OVER THE NEXT 12 MONTHS

67%

are looking at product diversification

are considering M&A opportunities

£

40%

£

£

are looking at regional expansion

£

31%

£

10%

65% 46%

are eying international expansion

are considering significant investment in tech

are considering raising equity capital

“Over the next 12 months, bridging lenders will be considering a number of strategic options for their businesses, including raising debt finance or refinancing their existing debt facilities, making significant investments in technology, and product diversification. We will be watching developments closely to see how the market continues to evolve.”

Nick Parkhouse

60%

will be reviewing where they source their funding over the next year

£

50%

think institutional funding will increase over the next 12 months

Level of support from funders during the crisis 11%

20%

65%

Very supportrive

£

Quite supportive Quite unsupportive None of the above

50 Bridging & Commercial

£

£

4%

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Series

The PII S aga: Part One

Words by

HER S I F H BET

54 Bridging & Commercial

Series

55 Mar/Apr 2021

Series

“WE ARE STARTING TO SEE SOME VALUERS BEING ACTIVELY ENCOURAGED BY INSURERS NOT TO CARRY OUT BRIDGING FINANCE WORK, MAKING IT INCREASINGLY DIFFICULT FOR LENDERS TO PLACE VALUATIONS, ESPECIALLY IF THEY HAVE A SMALL PANEL” 56

Bridging & Commercial

Series

One of the most integral parts to assessing risk in the lending process is under serious threat and could result in less choice, slower transaction times and a hike in valuer fees

T

he bridging market ground to a halt when surveyors joined the rest of the UK in lockdown last March.

While the property sector is no longer under such restrictions, we may face a similar scenario if the number of active valuers falls dramatically—a real possibility if the hardening state of professional indemnity insurance (PII) is not addressed.

The PII crisis was first investigated by Bridging & Commercial in our July/August issue of 2019, when we found that smaller and more nimble valuers and surveyors—crucial to the quick turnarounds required in specialist finance—were likely to be affected first by the rigorous application processes and higher premiums at renewal. At the time, we thought things couldn’t get worse.

HOW DID WE GET HERE? Currently, the PI sector has more demand than supply, meaning that rates and excesses have skyrocketed, insurers are writing smaller limits, policies are offering less cover and firms are experiencing severe delays in receiving quotes.

A questionnaire of 61 valuers conducted

by VAS Group in August 2020 found that three-quarters had to provide extra information when renewing their PI insurance compared with previous occasions. Some 89% saw the price of it escalate, with most reporting a 20–50% upsurge; 14% saw it climb above 100%.

Surveyors are likely to need to set aside a whole month just to fill out these increasingly laborious application forms, eating into valuable income-earning time.

While the market has always been cyclical, a long ‘soft’ phase has led to it becoming one of the worst performing sectors of insurance in recent years.

There are not enough insurers at present that believe they can make a return out of protecting surveyors in respect of their PI exposure, with only a handful said to be active in this space. I am astonished when David Parry, who has spent three decades underwriting surveyors’ business, reveals that insurance providers haven’t made a profit from this sort of work for almost 20 years. “It became a vicious spiral of people following the rating down to beyond rock bottom,” he claims.

During this period, some lenders were injudicious in allowing individuals to borrow money, with the 2008 UK economic downturn resulting in scores

57 Mar/Apr 2021

Series

of homeowners and businesses unable to pay their mortgages and loans.

In 2018, as part of a risk-based oversight programme, Lloyd’s of London took action to help return the market to long-term and sustainable profitability. With non-US PII being the second least lucrative class of insurance, it asked poorly performing syndicates to get their houses in order.

Since then, there has been a gradual diminution of capacity. As it is quite easy to move from one insurance class to another, it’s logical that they would shift to a less capricious area. Those that have remained are purely focusing on profitability; getting new business isn’t a priority.

Consequently, the unwelcome realignment in the PI market has caused a reduction in capital, which surveyors are feeling keenly. In March last year, Michael Yianni, managing director at Belleveue Mortlakes, launched the Professional Indemnity Fairness Association (PIFA), a trade body for chartered surveying practices affected by this disastrous situation. More than 50 of its members have found it extremely gruelling to obtain terms this year— and these are surveyors that haven’t made claims.

RICS has its own market facility—an assigned risks pool (ARP)—which is open to all UK RICS-regulated firms that are unable to obtain PII to apply to. As of 1st March, there were 36 firms in the ARP, and all but three of these had valuation exposure. This is up from 24 in the year 2019-20, and a surge from just two in the year 2018-2019, when the body started to see a real change in the market.

“We have seen more firms come to us who have had difficulty in obtaining cover,” confirms Hugh Garnett, senior policy specialist at RICS. He illuminates that while surveyors were previously able to obtain £7m–10m from insurers, it’s now being whittled down to £1m–2m, with a significant increase in premiums.

He describes the situation as teetering on a “market failure”. “The PI issue is one of the biggest threats to the profession at the moment,” he declares.

GRENFELL Amid the market readjustment, the Grenfell tragedy struck. Ever since, there has been a spotlight on removing aluminium composite material from high-rise buildings which has, over time, broadened to encompass other types of combustible cladding.

In 2019, mortgage providers began requiring assurances about the safety of external wall systems as a condition of approving applications. This resulted in surveyors valuing flats in blocks at significantly less than the asking price— or £0 in some cases—if they didn’t have a certificate showing compliance.

The number of rejected mortgage applications mounted and sales started to fall through, causing considerable distress to struggling leaseholders.

To assist, the External Wall Fire Review process, referred to as EWS1, was established by the industry in December that year. It requires a fire safety assessment to be conducted by a suitably qualified and competent professional, delivering assurance for lenders, valuers, residents, buyers and sellers. Almost a year later, an agreement was reached between the government, RICS, UK Finance and Building Societies Association so that owners of flats in buildings without cladding would no longer need an EWS1 form to sell or remortgage their property. More recently, RICS has issued further cladding guidance to offer more clarity and consistency.

The painstakingly slow process to address the cladding crisis has unquestionably added to the toughening PII state.

“Insurers did not want to be the ones left holding the baby,” says David, “meaning that they will potentially have to incur enormous investigative defence costs, if not claim payments, due to the culpability of a surveyor.” Much of the expected remediation hasn’t even happened yet.

Fogginess in the regulation of the building sector drives the claims environment.

With PI mostly written on a claimsmade basis, historic issues can be picked up, and this does not lend itself to improving insurers’ waning appetites.

BREXIT AND COVID Just as the property market was starting to recuperate from Brexit’s drag on housing transaction activity, it was hit with a pandemic.

Any surveyor that is currently doing more than 20% of their work in Red Book valuations—which can be seen to hold more risk as a result of the potential repercussions if an error is made, as they are required in circumstances that are riskier—is now likely to be in hot water when renewing their PI insurance. “[Surveyors] that don’t do secured loan valuations shouldn’t have too much 58

Bridging & Commercial

trouble getting cover, unless they are working on high-rises or relying on or signing off EWS1 forms,” comments Charles Manchester, CEO at Manchester Underwriting Management (MUM), a specialist underwriting agency that principally focuses on PII. “It’s a different story for valuers, though; here, we have the double whammy of Brexit and Covid-19 creating huge uncertainty of what will happen to the property market—both residential and commercial—if and when there is a severe economic downturn that leads to mortgage defaults.”

While a material valuation uncertainty clause, in response to Covid-19, was implemented early on, a general lifting of this on all UK real estate, excluding some assets in the leisure and hospitality space, was recommended by RICS in September.

Nevertheless, the fiscal fallout of the health catastrophe has yet to bite, and no one knows how this will manifest in the property market. “There will be massive losses for lenders if there is widespread defaults on secured loans, and those lenders will look very carefully at the valuations that they relied on when entering into them,” warns Charles. “We’ve been there with previous recessions.”

Christopher Jones, director of legal and market services at the International Underwriting Association of London (IUA)—an organisation for non-Lloyd’s international and wholesale insurance and reinsurance companies in the London market—emphasises that, in a downturn, property and construction are among the first sectors struck. This inevitably leads to a more volatile claims environment.

Accordingly, there is little desire to protect valuers, especially for small firms and those that do commercial, development or bridging business. “Insurers are risk averse in nature,” explains Hugh, “and the current market conditions, reduced availability and economic uncertainty have all coalesced to further reduce their appetite to actually underwrite these risks, even though they may not actually in themselves be risky.”

Charles adds: “MUM is still writing valuers very carefully, but we avoid firms with material exposure to development, commercial or bridging finance. We also avoid firms with material exposure to secured lending valuations above £5m, regardless of sector.”

Series

“THE PI ISSUE IS ONE OF THE BIGGEST THREATS TO THE PROFESSION AT THE MOMENT”

59 Mar/Apr 2021

Series

“LENDERS HAVE TO ADJUST WHAT THEY EXPECT FROM VALUERS”

INSURERS AREN’T A FAN OF BRIDGING Despite the professionalisation of the sector over the past decade, short-term lenders are still considered sub-prime and high risk by insurers. Stephen Todd, co-founder of VAS Group, posits an explanation as to why: “While the bridging space has become more sophisticated and regulations have improved, I think this message is not promoted enough to the insurance market, as it continues to be perceived as high risk, whereas, in many circumstances, this is not the case.”

It is often seen as an area that attracts niche lenders hungry for increased risk and reward, and is therefore more acutely affected when economic conditions turn. “These lenders have different types of investors and can be very aggressive claimants,” Charles asserts.

“The PI market is generally hard for all professions, so insurers really don’t need to write these heavier risks to get the income and returns that they want.”

Michael alleges that often “frivolous and unsubstantiated” claims are being made, particularly by smaller, inexperienced short-term lenders. However big or small, these “confetti claims”—as one surveyor calls them—must be reported to insurers; and, even if they are not ultimately valid and paid, they still need to be investigated and defended—a cost that will be picked up by the consumer in the long run.

“The insurer, at that stage, doesn’t know the specifics of what’s gone on—it’s just a big black mark against [the surveyor’s] name,” Michael states. For high street banks, I am told, there is a process to go through, rather than firing off letters at the first moment of trouble. “Lenders need to reconsider their litigious approach, as they soon won’t have any valuers left to provide advice,” one surveyor argues.

Belleveue Mortlakes also acts as an LPA receiver, and the majority of cases it deals with in this capacity come via bridging lenders. “Like many receivers, we have never been busier than in the past five to eight years. The same period, coincidentally, has seen a huge expansion of the bridging market,” Michael explains.

“There are so many great, professional and intelligent people in bridging, but it only takes a few to let the rest down.”

He stresses that there should be more barriers to entry, something Bridging & Commercial continues to advocate for.

60 Bridging & Commercial

Series

Michael conveys there are now sections on insurance application forms that ask whether the surveyor works for bridging lenders, which is pretty telling of their stance. Christopher adds that this will act as a flag to seek more details, such as how often, the purpose, average LTV and geographical location. One surveyor firm— which has a no-claims history—divulges it had to agree not to provide valuations for P2P lenders, which are considered high risk, or its premiums would go up even further. “We are starting to see some valuers being actively encouraged by insurers not to carry out bridging finance work, making it increasingly difficult for lenders to place valuations, especially if they have a small panel,” Stephen notes.

CUTTING VALUERS SOME SLACK Valuations are frequently cited as the cause of transactions falling through, with the phrases ‘downvalued’, ‘more expensive’ and ‘slow’ often verbalised among specialist finance brokers and lenders. The concerns are genuine and will ultimately negatively impact borrowers. But it’s important to note what the current valuation process entails, and whether the benchmark on fees and timeframes had been distorted from the jump, to better ascertain whether today’s demands are reasonable.

In addition to assessing market value, surveyors look at a wide range of factors, such as structural and planning issues, problems with the lease or tenancy, and dilemmas with neighbouring properties.

This often involves long drives in traffic to get to city centres, trouble with access and reporting (especially during lockdowns when a firm’s own internal procedures, government-imposed restrictions or the occupant’s unwillingness to grant entry creates obstacles), and a lack of appropriate documentation (such as tenancy agreements and leases). They may also need to call councils, speak to planners and get hold of agents for information.

This all takes time and is aggravated by numerous parties working from home, in addition to reduced employee numbers.

“It’s a very long process when it’s done well,” says Michael, “yet bridging lenders and brokers want it all completed in 24 hours.” For this reason, most of Belleveue’s work is for private banks and mainstream lenders. “We don’t do that much work for bridgers; we don’t like the way they operate,” he admits.

For a standard residential valuation, he advises allowing at least three to five days as an absolute minimum and,

for a basic commercial, between four and seven days—and that is assuming access is provided immediately. With the bridging market becoming much more competitive in recent years, one of its USPs has been speed of service. But do all bridging loans need to be provided in a matter of days? [Ed: Check out our feature on the industry’s obsession with bridging timescales on p20 for more] What should be the exception now seems to be the rule.

“Lenders have to adjust what they expect from valuers.You could be valuing a high risk, very high value property with all sorts of complications, yet they want it done in 24 hours at a minimal fee. This simply isn’t feasible and will only lead to issues and cutting corners, which it often does. The lenders appear to dictate to the surveyors and bully them, and it should not be that way,” Michael stipulates.

This isn’t to say that lenders are solely to blame for this cost and time fallacy; surveyors are also not helping themselves.

A number of firms are undercutting the market with what is being labelled as ‘loss leading quotes’. Michael divulges that some are charging as little as £300—simply because they’re desperate for the work. “You can’t function as a business on that sort of fee scale.

Problems and negligence will occur.” In turn, this will add fuel to the PII fire, ruining the market for everyone else.

THE REAL IMPACT All these underlying issues will impact valuation fees and availability. The VAS questionnaire found that a staggering 68% of valuers have hiked up their prices as a result of PII costs. “Ultimately, valuation fees might need to rise as valuers have such a larger expense to pay for their premiums,” Stephen says.

This comes at a time when fees are under downward pressure as the lending market becomes more competitive. “Clients only seem to want cheap valuations, while costs are increasing massively,” an anonymous surveyor—that is seriously considering shutting its doors—remarks.

With Covid driving down the level of instructions, pushing up fees has not always been possible. “If this continues, many smaller valuation firms are likely to exit the market, leading to future capacity issues and a lack of options,” another surveyor comments.

within the short-term lending sector.

While Stephen doesn’t believe a decline in valuer coverage will affect quality, he expects that lenders will find it harder to place valuations in desired timeframes.

Larger surveying firms are less likely to face as much trouble getting PI cover because of the volumes they are transacting; they can afford the higher premiums. “Insurance providers are not interested in the small money, especially one- and two-man bands—they just don’t want to know,” Michael asserts.

This could also wipe out some of the smaller businesses that have unrivalled local knowledge, making it arduous for lenders to expand into new regions.

To make matters worse, salaries are rising due to the shortage of surveyor skills. Michael says that, over the past seven years, wages have doubled. “It’s making the valuations business unviable, which is why so many people are pulling out of what was already a very ageing profession.” And there’s scant hope for new firms to arrive; the confidence in gaining insurance is simply too low.

He claims that this has resulted in some companies recruiting wider, but not training adequately—further amplifying the problem. “I’ve seen valuations done by builders; they haven’t got a clue what they’re doing.”

Insurers are now often offering surveyors aggregate policies, particularly in areas of perceived higher risk, such as bridging.

With these, the limit of indemnity is the total amount that the insurer will pay out over a policy term for multiple claims.

Michael believes that lenders are less likely to want a surveyor with this type of policy on their panel—and surveyors may also be more reluctant to undertake this sort of work. A potential logjam that will unnecessarily protract bridging timescales.

While the market may end up with fewer options, Michael warns that bridging lenders should not be overly reliant on one surveyor, believing they shouldn’t be exposed by more than 20% to any single firm.

Are bridging lenders and brokers aware of the PI crisis we are in? Yes, but it’s clear there is a need to promote greater understanding of it. After all, it’s in everyone’s best interests to resolve it.

The harsh landscape has made 70% reconsider whether to continue working 61 Mar/Apr 2021

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THE SOLUTIONS SO FAR PIFA, which has already attracted 347 members (at the time of writing), aims to prevent surveyor firms from going out of business. It has recently been working with senior figures at RICS, government officials and the House of Lords, and has pledged it will not rest until reforms are achieved.

As part of this, the organisation has made 10 recommendations, which include: • strict timescales for responses to PI renewals. This is to avoid surveyors receiving them too close to the expiry and having little time to adjust or go elsewhere for a quote • a standardised, industry-recognised form that is simpler to fill out • a detailed, written report from the insurance broker on the progress in a standardised format • RICS to publish guidance on which brokers and insurers specialise in PI and how many cases they have done each year • the government to intervene and underwrite some of the insurance for smaller firms, taking on some of the risk, or provide interest-free loans to surveyors to pay their PI • surveyors to charge a fee for their work, plus a percentage on top as a ‘PI fee’ • limits to be made on the PI required • RICS to potentially have its own cover—different from its ARP and on more reasonable terms— backed by the government • a minimum fee scale set by the industry that every surveyor must adhere to, including for panel managers • a logbook for surveyors so, if a claim is made against their work, individuals should be accountable in some way.

“It is crucial that purely independent individuals with practical, relevant, long-term experience lead the way with the many possible changes, as only they are really aware, first-hand, of what the practical challenges in obtaining PI at ground level are,” PIFA states.

So, what is the market’s primary professional body doing to help? RICS already provides the ARP for surveyors that are unable to obtain cover on the open market. However, it offers only £1m, and Hugh admits this is unlikely to be adequate for those undertaking bridging work. Through UK Finance, the institution has been working with lending panels to highlight the cover that the ARP offers, and has amended its terms to make it more flexible. Further changes are set to come into effect in April 2021, primarily around the simplification of the rules of admission.

This includes making it easier for firms that are concerned they will be unable to arrange insurance to apply, and that a business review is not required unless it is actively requested by RICS (due to concerns around a firm’s practice) or by a prescribed insurer.

“There’s wider engagement going on to really educate the lending panels around the suitability of their requirements,” Hugh says. “Does a valuer need to have £10m cover to value a £10m house? No, they’re never going to be liable for that £10m.”

I ask whether this is actually helping and if lenders are indeed changing their attitudes towards how much cover they require.

“It’s an iterative process,” he responds. “It’s probably not happening as quickly as many members would like, but our ability to tell [lenders] what to do is limited.” At the end of the day, finance providers are commercial entities and can set their own requirements and decide who they do business with.

The institution is working with insurers, too; it has a liaison group with all the listed insurers that underwrite RICS policies, and undertakes regular education initiatives around the risks of specific aspects of the surveying profession, including specialist finance. One fact that surveyors think needs more recognition is that many bridging loans exit in 12 months or less. Therefore, they should not impact on new PI, as they are closed.

RICS is also interacting with the government to signal the impact that the hard market is having on surveyors.

“We’re seeing government intervention in professionals underwriting EWS1 forms; there is potential for further intervention, because we know that they’re considering the wider PI market as well,” Hugh discloses. “I think there’s a real call for government to get involved.”

Furthermore, RICS is producing guidance on risk liability and insurance in a bid to give surveyors—particularly 62

Bridging & Commercial

SMEs—direction on how to reduce their liabilities, establish adequate risk management strategies, and present themselves to insurers in the best light.

According to the VAS questionnaire, 52% of valuers have had to put extra risk management processes in place following their PII renewal. “Ultimately, accurate valuations are fundamental to making sure there are no claims,” states Stephen. VAS Audit has seen an uptake in its services, especially retrospective auditing for valuers to help them maintain or improve report quality and accuracy.

Short-term lenders equally must help the scenario by improving diligence, credit scrutiny and risk management.

Importantly, surveyors will need to learn from any claims experiences they may have had. Christopher poses the following questions: “What mitigating factors do they have in place? How are they engaging with insurers? Are they doing renewal processes at an earlier stage?”

A few years ago, the IUA established a qualification for introductory-level practitioners looking at key risks in the insurance sector, specifically for PI cover— and around 200 people have taken the test so far. Long-term initiatives like this should also help better the landscape.

Solicitors, financial advisers, brokers and accountants who need PI cover are also being affected, though Hugh tells me that there are early indications that these other PI markets are witnessing a small loosening. “I think that will take time to trickle down into the surveyor market,” he speculates, “and it’s also going to be subject to the wider economic recovery as a result of Covid. If we see significant impact on the property market, then it’s going to take longer to feed through.”

Other resolutions are more wait and see, such as new insurers entering the market or existing ones writing new business again. With rates presently high, insurers can expect better returns—if they select the right risks and moderate their aggregate exposure. Still, the downside of getting it wrong could be regretful.

While it is surveyors that are being intensely impacted right now, this will eventually domino onto the rest of the lending market.

If we continue undervaluing our valuers, our next headline might be ‘Save our industry’.

“DOES A VALUER NEED TO HAVE £10M COVER TO VALUE A £10M HOUSE? NO, THEY’RE NEVER GOING TO BE LIABLE FOR THAT £10M”

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63 Mar/Apr 2021

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Explained

A guide to equity and JV funding Words by

caron schreuder

66 Bridging & Commercial

Explained

A property developer will typically fund their project using several ‘layers’ to make up what is known as the capital stack. Senior debt forms the foundation, followed by a possible stratum of junior (or second-charge/ mezzanine) finance. Whatever is left is filled with equity. Here, we speak to several development finance pros about the composition of the equity part, how the size and stake of it impacts projects and profitability, and what the current outlook for financing equity looks like

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The options available to a developer for raising any type of finance are only as good as their experience and proven track record”

EQUITY VS JOINT VENTURE FUNDING Equity can be defined as the gap between the debt funding for a development project and the total required. It is the most expensive slice of the stack, as it carries the most risk and is unsecured. Debt, on the other hand, has the benefit of being tied to the underlying property, creating downside protection.

Broadly speaking, an equity partner is one that puts money into a project for a share of the profits. This investment may sit alongside the developer’s own equity (more on this later).

Simple equity (sometimes called investor or third-party equity) can be sourced from friends and family, suitable for when the developer is somewhat less experienced, or from more sophisticated investors, such as family offices and institutions, once they have established a track record of delivery.

A coupon is charged—a fixed percentage of the profit that the equity provider expects to receive once the project realises its value—and may be set anywhere from, say, 5–20%. Some providers will charge a lower coupon, but combine this with a share of the profits, too.

When the equity stake tips to the point where the investor may now be considered a mutual partner in the project, the model becomes a joint venture (JV). Although an approximate 50/50 split is typical, it can vary. A JV agreement sets out each party’s

roles and responsibilities and houses rigorous controls that give comfort to the partner.

“There would be metrics written into the JV agreement that the developer couldn’t surpass,” expands Emma Burke, senior originator at Maslow Capital, citing that conditions relating to delays and cost overruns, for example, would be detailed, and step-in rights could be granted to the JV partner should the developer fail to meet these expectations. It would be standard practice for a special purpose vehicle (SPV) to be created and all parties appointed directors.

Given that the JV option results in the highest financial input, it constitutes the most expensive type of equity financing. However, a project structured in this way may benefit from certain skills, management capabilities and fiscal firepower brought on as a result of the mutual interest in the venture. By the same token, there is also the risk of it ending up being a case of ‘too many chefs’.

Lenders who advertise up to 100% funding for developments are essentially extending an offer for borrowers to enter into a JV with them. One such provider is Arcstone, which acts as a JV partner in cases that meet its criteria by financing up to 90% of costs, in return for a split of the eventual profit, as well as interest on the loan.

Cain McKinnon, investment director at Arcstone, details that the equity ratio can be anywhere from 90/10 to 50/50

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in the lender’s favour, however it now tends to prefer deals with a higher equity contribution from the developers.

SKIN IN THE GAME The money that a developer injects into a project is in exchange for a disproportionate share of the profits, also known as a ‘promote’.

This means that, once the expected (or preferred) threshold has been met, the excess profits are divided disproportionately in the developer’s favour, thereby incentivising them to exceed expectations.

According to Emma, developers who have been in the business for years, know how to “recycle” their earnings, and have cash in the bank, will choose to plug the equity gap with their own funds. “That is the most effective way to turn a profit, because it doesn’t cost you any money.”

As a senior lender, Maslow would expect 10–30% of developer equity in a deal, with that range dependent on a number of factors, including the level of gearing required, the developer’s experience, sale velocity, profit margin and the ability to cope with cost overruns.

Emma notes that the most common combination is a mix of developer and third-party equity. However, “if the profit and costs are slim, we’re looking at the cash position of the client”.

The overall viability of a scheme and the make-up of the entire debt package are vital to a developer’s ability to attract equity—as is their personal stake in it. “If the margin is too skinny, unless they’ve got a high level of hard cash in, they’ll just walk away,” says Emma. The need for a healthy profit increases still when entering a JV partnership, as the developer is giving up 50%-plus. “Each deal can only ‘carry’ a certain level of debt before it impacts on the profit metrics. We need to consider this over a two-year (sometimes longer) timeframe and the various pressures that may occur in this time.”

James Bloom, director at Alternative Bridging Corporation, comments that, while a level of skin in the game is always important, it is also viable for developers to want to expand their activities and maximise gains by spreading their capital. “This is why we launched our Development 90 product, which provides a stretched senior loan for mid-sized residential development, providing 90% loan-to-cost without the requirement to enter into an equity funding arrangement—which is ultimately an expensive way to fund a development.”

WHEN IS IT SUITABLE—AND NOT? The options available to a developer for raising any type of finance are only as good as their experience and proven track record. The emphasis on strong profitability infers that developers that have successfully completed projects will naturally be able to provide more assurance that adequate returns will be realised. “With any funding type (secured or

The returns on equity investment are considerable if all goes to plan, but on-paper profits can easily turn into losses if house prices fall” 69 Mar/Apr 2021

Explained

Time overruns can be of particular concern, as they will increase the interest of the debt, eating into equity returns and, eventually, capital”

equity) we require each of our developers to provide proof of their capacity and capability,” Cain states. “This involves a detailed review of their financial stability, track record of completing projects of a similar size and type, current capacity of their development team and any other projects under construction, and comprehensive KYC background checks.”

I ask Cain to break down the way in which potential equity partners judge the existing structure to gauge whether it’s deserving their investment. “The equity provider will review the profit left in the project once all costs are paid and make an assessment of the risk based on this and the likelihood of the project being delivered on budget and on time. Because your funds are subordinated, it is important to be aware of the risks of the deal. If the debt is leveraged high but there is still sufficient profit to provide an adequate level of return and protection from risk, then the project is worth pursuing.” He goes on to warn that time overruns can be of particular concern, as they will increase the interest of the debt, eating into equity returns and, eventually, capital.

20% based on senior debt alone. This goes up to 25% on a stretched senior or senior plus mezzanine basis, and north of 30% for an equity provider putting in up to 100% LTC. According to Gary, for a developer to bring their costs down to achieve this enhanced profitability, it really is all about securing land at the right price. He cites well located, starter to mid-market family housing as one type of project that is favoured for attracting equity, adding that large, lengthy schemes and flatted developments are more challenging to source this type of funding for. It stands to reason that retail and office assets pose a higher risk and also fall into the less sought-after category.

“JV funding typically requires a minimum total project cost of £1m,” claims James Waddicker, director at Positive Commercial Finance, “and equity funding is more suited to larger schemes, given the senior debt funders which most equity providers prefer to work with also generally have a minimum loan quantum of £1m.”

James advises that more unusual schemes with fewer comparables are less likely to secure equity financing, again coming down to a desire for predictability of the outcome.

It is also imperative that a developer is bringing demonstrable value to the table, perhaps by way of securing an option on the land then proceeding to obtain planning consent, or in the capacity as a contractordeveloper who can build at cost.

Gary Walsh, director at Optima Property Funding, shares that “bog standard returns” won’t cut it. The generally accepted minimum target return on costs is said to be around

Emma considers there to be two primary reasons why a developer would structure their funding in the form of a JV: “One, you could spread your equity over a number of schemes

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and therefore get quick growth and return because you have several up and running. Or, two, it may be that you are starting up and you don’t have a lot of equity or the experience to get the other two types of equity into the deal.”

progress onto their next project. Cain notes that unpredictability related to Covid-19 and Brexit has caused some of Arcstone’s investors to favour mezzanine lending over equity. “As we emerge from the pandemic, however, we have been offering a greater number of JV deals through our co-developer structure.

Using our considerable experience means we protect our investors’ interests more closely and bring a strong management team with a deep, proven track record to the development.”

DEMAND AND SUPPLY When I ask Gary how he goes about sourcing equity, he answers: “With some difficulty.”

There is an abundance of debt providers who are hungry to lend, however, those with an appetite for equity prefer to remain somewhat under the radar, in order to effectively field unsuitable requests. “Much of the market is funded privately. Brokers who have access to equity, cherish it!”

James weighs in. “It’s quite a niche marketplace.

Currently there are lots of developers trying to find equity and JV funding, and therefore demand outstrips supply. These providers often have very defined parameters.”

Crucially, he notes that, as with any type of finance, it’s about pairing the developer and the project with the right funder.

He believes that brokers such as Optima, and providers, must kiss a lot of frogs to find a prince; less than 10% of his enquiries go the distance. Gary explains that a shrinking funding market (a sustained effect of the events of 2020) has seen these requests for equity increase, something that is further buoyed by solid housing performance as developers wish to make their capital go further. He highlights that equity providers are cautious, and many have withdrawn or reduced exposure as a result. “The returns on equity investment are considerable if all goes to plan, but on-paper profits can easily turn into losses if house prices fall.”

Echoing this sentiment, Chris Oatway, owner and director at LDNfinance, admits that his brokerage has become “very selective” when it comes to supporting clients’ requirements for equity. “We need to be confident that not only do they have a good enough project for our equity investors, but that the two businesses are a good fit for each other.” He adds that the trusted panel of investors which LDNfinance has access to are exclusively interested in “exceptional” projects that will yield the highest returns—and that it all comes back to the strength of the developer’s track record. “Even a great project can take a quick turn in the wrong direction if the

Widespread delays in construction over the past year have deeply impacted developers’ cashflow, driving demand for investment so that they can

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management team in place are not experienced enough to deal swiftly with the challenges that arise regularly in property development.”

Referencing a reduction she’s witnessing in the popularity of JV partnerships, Emma outlines the escalating cost of sites, pressure to maintain high profitability over a two-tothree-year period, and the inclusion of larger, Brexit-related contingencies having to be written into the overall budget as some of possible reasons for this. “There have been very successful JV partnerships and ones that I know continue to do quite well, but I feel that it’s become less common now.”

THE RISE IN JUNIOR DEBT AND ADDITIONAL STRUCTURES With debt financing at higher leverage scarcer under current market conditions, demand for equity has grown, as has the requirement for junior or mezzanine debt. Junior debt typically comes in cheaper than equity (payable via a fixed coupon, rather than profit share) and might form the second largest slice of the capital stack to maintain optimum profitability of the project. It does, however, have associated drawbacks. “It will carry additional legal costs,

set-up time, and most often a second charge over the asset, which many senior lenders do not like or care to structure, especially at lower deal sizes,” imparts Paul Oberschneider, founder and CEO at Hilltop Credit Partners.

Beaufort Capital, a mezzanine and equity finance provider, has “undoubtedly” seen a surge in enquiries for both of these over the past year. Its managing director for UK real estate finance, Mark Quigley, observes that this is in part a consequence of high street, challenger and alternative financiers reducing leverage since the onset of Covid-19. “The knock-on effect is that ‘gap funding’ is required between the sponsor’s equity cheque and the amount that the first-charge holder has been willing to lend, which in turn has seen an increase in demand for Beaufort products.”

As a senior funder, Emma tells me that Maslow is having to reach out to mezzanine providers more and more, especially those with whom it has a well-established relationship and that are experienced and sufficiently capitalised.

She suggests that this is somewhat due to the cost of equity having risen in accordance with the level of risk in property development.

BALANCING THE BENEFITS AND DRAWBACKS OF EQUITY

+

-

Provides funding above the capabilities of traditional banks and lenders

Profit shared between developers and investors

Allows a developer to grow and scale by spreading capital across multiple schemes, if cash is tied up elsewhere

Reduced control over the development

Offers fast solutions for funding shortfalls

Cost overruns usually need to be funded through developer equity

Provides retail investors the opportunity to gain exposure to development funding

High reward, but also high risk and subject to negative forces such as construction overspend and delays, reduced demand for housing, falling house prices—because the on-paper margin is low, small variations in constituent elements can have a major impact on profitability

Increased involvement from an experienced development and property investment firm

Not widely available to developers who lack a track record

Minimal cash at risk

Heavier burden to build and sell quickly

Increased ROI

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As developers seek to find ways of releasing their tied-up working capital in a bid to invest in new schemes, it is cost-effective to explore mezzanine options. “There has definitely been an increase in the number of developers looking for alternative ways to achieve greater leverage,” confirms James.

“Part of this may be down to some senior lenders constraining their appetite, but it’s also a result of developers rising to the challenge of the current environment.”

development to come through.” The vendor has a charge over the property, behind the senior debt provider, however, there is a risk, in the worst-case scenario, of losing any monies deferred should the profit end up being significantly lower than projected.

At one end of the spectrum is equity and at the other end is debt; how far you go towards one side will determine your returns, as Paul puts it. Provided the unusual construction and sales environment, it is very likely that developers may have their own equity already tied up in schemes, meaning that they are bound to increasingly seek out equity (or other) arrangements until such time as they can invest their returns into further projects.

However, this will eat into overall margins, sliding them further down that spectrum of profitability. And that is, of course, if they can even source investment of this kind. Specialist brokers who have the requisite contacts and know-how to accurately ‘match’ projects and equity partners will, as we see time and again, be worth their weight in gold.

In the same vein, Chris mentions a trend that has arisen whereby the developer agrees to defer some equity with the vendor, who is paid partially up front and receives an additional sum once the development is completed. As long as there is an uplift to be had, this can be an option. “It can work well for both parties as the vendor can receive a higher return for their asset and the developer can use the deferred equity as their own,” he details. “This strategy can minimise the amount of equity required to go into the purchase, meaning a developer may be able to move forward with limited funds on additional projects instead of having to wait for the profit from another

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Some small- to medium-sized developers say that while obtaining finance for new projects is not a problem, the highly unclear outlook for the property market, compounded by rising costs, makes it difficult to gauge whether a scheme will be profitable.

Unsurprisingly, some have decided that extreme caution is the wisest approach Words by

Anthony Beachey 76 Bridging & Commercial

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77 Mar/Apr 2021

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“Looking at new sites now, I probably wouldn’t go ahead with a project based on the profit margins that I was happy with before Covid, because there’s not enough of a buffer to reflect the heightened uncertainty”

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gainst a background of rising residential prices and hopes of a rapid economic recovery, one might expect SME developers to be eagerly looking for new opportunities.

However, some interviewed by Bridging & Commercial following a recent webinar hosted by TrustedLand—a recommendations-led portal for the SME property and development community— reveal that is not always the case. They believe the outlook for the market in terms of demand and prices is almost impossible to judge, while at the same time they are facing increasing costs. Making the wrong decision now could have fatal consequences for their businesses when new developments eventually come to the market.

Certainly, while the mainstream press is full of reports of house prices going up, which is influencing the price at which landowners are willing to sell, the reality is far more complex. According to Simon Levene, group chairman at Levene Chartered Surveyors, there has never been a more difficult time to value property and land. “Due to the impact of Covid-19, microclimates have been created across the UK, with residential values rising in rural parts and falling in some urban areas,” he explains. “The commercial market is facing similar problems. Some areas of retail are buoyant while others are dead in the water.”

In this climate, SMEs are seeing price increases in the three main inputs of land, labour and building materials, says Immanuel Ezekiel, co-founder of Broadwing Homes. Consequently, the property developer is adding around 5% in costs across the board, which means it is “much harder to find deals that stack up right now”. Indeed, he admits that he is rejecting around 98% of opportunities he looks at, acknowledging that he is currently “quite conservative”.

Chris Price, director of property at Open Vu, a privately owned Surrey-based development company specialising in economical and environmentally friendly homes, has a more positive view, arguing that there are certain “sweet spots” in the home counties for residential. “It is a fundamental question of limited supply and continuing demand,” he reports, with three- and four-bedroom starter homes with outdoor space performing strongly. Using a broker with whom he’s had a long relationship has made “quite a difference” to obtaining finance during the pandemic, he adds.

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SURGING COSTS INCREASE UNCERTAINTY Regarding land costs, Immanuel cites unrealistic expectations among landowners, reflecting the overall rise in residential property prices as a complicating factor.

This market has indeed confounded the predictions of a slump that were made at the time of the coronavirus outbreak; house prices were 6.9% higher in February on an annual basis, according to Nationwide.

Chris echoes Immanuel’s view. “Finding value from landowners is problematic at the moment. The economic fallout from the pandemic will hit at some point, perhaps when the furlough scheme ends, then we might see a softening of prices and new opportunities will emerge.”

Meanwhile, the pandemic and Brexit are driving the rise in labour and materials costs. Immanuel notes that many workers returned to their home countries for Christmas and, because of the lockdown, were unable to return. This has led to labour shortages which are forcing up wages, although this is not yet reflected in official figures, which only cover 2020.

Brexit has escalated the cost and time involved in importing building materials, while the pandemic has disrupted global supply chains. The Office for National Statistics reports that while the cost of building materials, held steady for the first nine months of 2020, it shot up in the final quarter, with particularly steep hikes in items such as imported wood.

SECOND-GUESSING THE MARKET Richard Peutherer, founder of Inspired Equity, an investment company specialising in property acquisition and development, concurs that the main challenge facing developers isn’t in obtaining finance, but rather the unpredictability of so many factors, from building costs to land, that makes it difficult to determine whether a project will prove successful or not.

“Looking at new sites now, I probably wouldn’t go ahead with a project based on the profit margins that I was happy with before Covid, because there’s not enough of a buffer to reflect the heightened uncertainty,” he imparts, highlighting that developers must always look into the future and take an educated guess on where things will be further down the line. “We can’t even compare the current situation to the financial crisis of 2008, because this isn’t simply a recession; essentially, the world has closed down. There is also not much data to base decisions upon and we know that, as an SME, a bad decision now could end our business in 18 months’ time. So, prudence and caution really are key at the moment.”

Richard adds that, despite “plenty of

opportunities in terms of potential sites and properties for sale”, his pipeline is the lightest it’s been in five years. “I can’t see a profitable exit even without factoring in any downturn in the market, so I’m really struggling to find new sites that I can actually proceed with,” he claims.

THE PATH AHEAD Chris and Immanuel anticipate that the market will begin to normalise over the next 12–18 months and people will return to offices, even if they go in less often than they did before. However, Richard is more cautious: “Although there’s still a lot of money out there and people are eager to spend it, I’m not certain that they will decide now is the time to buy a new home.

There is also the question of what happens when the furlough scheme ends—a lot of companies are still on life support. So while certain areas of the housing market will remain buoyant, we still don’t know what will happen to commuter travel. I still plan to invest in property development, but I think prices will soften over the coming months. If and when furlough ends and unemployment rises, for example, the market will be much less liquid.” He concludes that the strange times we are living in make it very difficult to predict what will happen to prices, and the market in general, in six months or a year’s time.

Factoring in possible changes to interest rates, which clearly have an impact on both demand and the cost of developing a property, makes it trickier still to try to determine the influence of government incentives. Immanuel expounds on these: “The market might be inflated at the moment because of the stamp duty holiday, while the new mortgage guarantee scheme to help people with small deposits get on the property ladder could also distort demand.”

He points out that companies like his need more certainty that they have enough of a profit margin to take on projects.

“SMEs are very different to large national housebuilders; our margins aren’t as great and our schemes aren’t as big,” he says.

“Whereas a big housebuilder can take a movement on a scheme of 200, 300 or 400 houses, a 5–10% movement in prices and costs can affect us significantly.” He adds that while the public tends to have a perception that developers make a decent profit, “the truth is that more developers lose money than come out ahead”.

LOOKING FOR HELP Is there anything policymakers could do to make life easier for SME developers and encourage them to build more houses? It is a pressing necessity in the

long term, given the UK’s expanding population and changing demographics.

Immanuel claims that he has tried to work with Homes England—which describes itself as the “government’s housing accelerator” with “the appetite, influence, expertise and resources to drive positive market change”—in terms of its financing options, without success.

Chris has had a similar experience with Homes England, divulging that no matter how much effort is involved on both sides, “it just never seems to go anywhere, and it’s just pushed back or never meets overly high criteria”.

Immanuel feels SMEs could be helped if local authorities made land that they own available for developers to build either social or private housing. He notes that “although they have tried this in the past, red tape makes it difficult to proceed”.

Chris sees the whole planning process as highly inefficient and politicised. On that point, Immanuel believes that privatising planning, as has been done with building control, would be beneficial. There were concerns when building control was taken private, but the system now works very efficiently, he argues. “If the same was undertaken with planning, we would have professional people who understand their local areas making decisions, and that would allow the planning process to operate much more smoothly.”

Meanwhile, Richard would like the government to end the stamp duty holiday.

“It’s creating a false impression of the state of the market and means that when I am trying to negotiate with landowners, they are demanding unrealistically high prices,” he states. But rather than just implementing a cut-off date for the holiday, which could unfairly impact some buyers, he believes the best approach is to gradually end it, as had been the case with, for example, mortgage interest relief at source.

STAYING ON THE SIDELINES The main problem lies in trying to secondguess what valuations will be six months or more down the track. And we probably won’t have a better idea for some months yet, when lockdown measures finally cease and we find out whether the effects on areas such as working from home have been temporary or permanent. It may take even longer, until the government’s various support schemes—for the economy in general or those targeting the housing market specifically—are withdrawn. Meanwhile, SME developers are likely to remain somewhat circumspect, and who could blame them?

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‘I’m looking forward to being able to meet our key partners face-to-face’

EMILY MACHIN At the start of this year, OneSavings Bank, now the OSB Group, announced that it had restructured its sales team at Precise Mortgages, Kent Reliance for Intermediaries and InterBay Commercial. As part of this, Emily has taken on the new role as head of specialist finance, where she leads the sales teams covering bridging, second-charge and commercial lending at Precise and InterBay. Having taken the time to get to know the people in these divisions, Emily is using their feedback to help shape future strategy, create trust and respond to changes their broker partners have made How would you define your management style?

I remember reading an article in which Richard Branson said, “Hire people who are smarter than you.” It’s a mantra that really resonated with me and I’ve always stuck to it.

Our specialist finance team is highly experienced, with a vast amount of knowledge between them.

It’s central to my role to empower them to be the best they can be at their jobs and to ensure we are all strategically aligned and working towards the same goals. Collaborating with internal stakeholders is just as important as the relationships we build externally, and I am keen to carry on working closely with our underwriting, real estate and completions teams to make sure we use best practice and continue to offer a great service across all our lending brands.

offs, pub quizzes or tea break sessions. It’s really important that we keep an eye on their wellbeing, as we all know there are many difficulties with this new way of working, including isolation and the mental health impact—and don’t get me started on home schooling!

I haven’t yet had the pleasure of meeting my whole team face-to-face so, while I’ve booked in regular one-to-ones with each of them, as well as virtual team sessions, I can’t wait until we can all get together in the same room.

You’ve been a part of the OSB Group since 2016. How has the business evolved following the merger with Charter Court?

It’s been great to be a part of this fantastic story. The group has really accelerated since the merger nearly 18 months ago and there’s no doubt that we’re a bigger, better and stronger organisation. Having brought together two successful businesses with similar cultures has been a real positive. Despite the complexities of running a newly formed multi-site operation, we got everyone working from home quite quickly, even though some people within the same team had not met before the start of lockdown.

As a company, we’ve made a big effort to encourage our teams to get to know each other better, whether that’s through charity home bake-

Taking into account the constantly changing environment we’re in due to the pandemic, in addition to the Brexit deal, what new things does a head of specialist finance need to consider?

Despite Covid/Brexit, there are a number of factors I need to think about, including how we expand our distribution network while maintaining excellent service levels. As the specialist lending space is moving rapidly, it’s really important to keep up to date with our broker partners to ensure we are meeting and exceeding their expectations.

In broad terms, the impact of Brexit is just one element within an already complex space. I think clients and lenders will consider the effects of it and what this may mean for rates in the long term but, at the moment, Brexit is a secondary consideration compared to the pandemic. The stamp duty extension has possibly killed some bridging deals as now there’s no immediate rush to complete, but all this will do is kick the can further down the road.

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What products and enhancements can brokers expect to see from Precise and InterBay this year?

Our product team has quite rightly taken a prudent approach in deploying our offerings during the pandemic. We’ve recently made enhancements at InterBay to both commercial and semi-commercial product lines, including more competitive rates, the extension of asset classes, loans from £150,000 and interestonly options on purchases and remortgages.

These are the first in a series of improvements and additions we have planned for the specialist finance division and, as the macro-economic position becomes clearer, we’ll be looking for opportunities in this space to expand our proposition and support our broker partners.

You can expect InterBay to bring plenty to the market; we will continue to be a significant lender within the commercial space. I believe these areas are going to come back very strongly towards the end of this year and into 2022, and we’ll certainly be firm supporters of this.

Specifically, within our semi-commercial and commercial range, we’ve just removed the maximum property value and are now accepting new property classes, including multi-let offices.

We’ll also consider adverse credit.

The national lockdowns have forced changes in relationship management. Have you found more efficient ways to operate as a result?

It’s been a demanding year for us all, but our team has pulled together and looked for new ways to do business and use channels that our broker partners feel comfortable with.

We’ve worked closely with intermediaries, educating them through our regular webinar sessions, where we’ve discussed everything from tenants in common to mental health.

We’ve also kept everyone informed about our products and criteria via email and offered webchats, video meetings and twoway feedback to stay in touch regarding case progression, or simply to check in.

We’re fortunate that our group sales director, Adrian Moloney, has been great in upgrading our home office technology and making sure we’re equipped with everything we need—and no, he didn’t bribe me to say that!

After the pandemic, we will all work smarter, and a combination of in-person meet-ups with virtual chats will likely become the norm. We’ll also be responding to the changes our brokers have made and what their preferences are, as not all will have the same requirements.

I’m looking forward to being able to meet our key partners face-to-face.

Tech became an integral part of keeping businesses lending in 2020. How will you be approaching it this year?

Across the OSB Group, we’ve already invested heavily in technology. This really put us in pole position when Covid-19 hit, as we were able to have 90% of our staff working effectively from home within three weeks and came out with new products a week after that. It’s an area that we’re always looking to improve but, at Precise, for example, we’re able to give a DIP in minutes, as long as we have all the relevant information.

We’ve been noting changes in broker behaviour with regard to their contact preferences and how they want to access lenders and, in response to their needs, we’ve set up a dedicated phone support system at both Precise and InterBay where it offers direct access to underwriters.

At InterBay, we’ve successfully implemented webchat and are considering the benefits of introducing this at Precise as well.

We’re also looking at online application improvements at InterBay, which we’ve already established at Kent Reliance, so there’s plenty to keep me occupied.

What was the biggest lesson you and your team learned last year?

There have been many lessons along the way, such as the adaptability of our market and how we’ve come together as a stronger team and overcome the obstacles.

There’s also been a focus on work/life balance; I’m sure we all agree that the year has made us realise how important family and friends are, especially when access to them is restricted. It’s been a time of reflection, but also great innovation, as we’ve all strived to make the best of the situation and continued to service our broker partners in the best possible way.

For me, the hardest thing is that I haven’t spent as much time in person with my new colleagues as I would have liked. Video calls are great, but this is very much a people business so I, like many others, am looking forward to meeting up when it’s safe to do so and getting back out on the road.

What hurdles are specialist lenders and brokers facing right now?

There’s been a growth in the specialist market, where financial circumstances are more complex, and therefore the need for tailored advice is paramount. In terms of the commercial sector, it’s good to see it opening up with new propositions and, in bridging, rates are pretty competitive overall. The key for brokers at the moment is managing the stamp duty extension as, even though urgent completions have been eased out, there’s still an end of June deadline to be mindful of.

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It’s no secret that all lenders are rightly focused on risk appetite as it’s played a major role since the start of the pandemic.

However, we seem to be in the home stretch and, with Boris’s roadmap announcement, this will get easier to manage.

We’ve paced ourselves through the past year to ensure all the right resources and people are in place at the right time to deliver the service that brokers expect. Judging from the feedback we’ve received, we’ve managed well in the eyes of our broker partners, but we have an ongoing responsibility to be certain that we are balancing the risks correctly and, for this reason, we will remain cautious.

What one thing would you like to see change in the bridging industry this year?

This is a difficult one but, generally, I’d like to see wider acceptance of bridging as a purposeful financial product, rather than one of last resort. For some customers, it really can help in cases such as chain breaks and auction purchase etc. The label of it being expensive and complex is completely misguided in my opinion and should finally be put to bed, but I know this won’t happen overnight.

I would also call for a broader debate on the practice of charging bridging default interest rates, as this should be a thing of the past. At Precise, we underwrite to the correct terms, look at the realistic deadline and don’t charge default penalty interest. We treat every customer fairly, whether they are a short-term bridging or long-term borrower.

There are some lenders who impose eyewatering penalty charges—practices like this contribute to bridging’s negative image.

It’s vital that the industry becomes more transparent in the way it does business.

What one thing does the industry not know about you?

I’m currently studying towards a degree in Management and Leadership, which was one of my New Year’s resolutions for 2021, as was paying off my credit card. I know I played a key part in Amazon’s amazing profits last year!

THREE WAYS OPEN BANKING IS RESHAPING THE LENDING LANDSCAPE In 2020, the global pandemic put the economy under tremendous pressure, and this looks to continue well into 2021.

What’s needed now more than ever, for businesses and individuals, is faster access to credit of all kinds – and more accurate affordability assessments to make sure that loans offered are appropriate.

YTS Account Information Services (AIS) allows businesses to access customers’ bank accounts and data (with their consent) to offer financial management, loan application and other information-based services.

From faster loan applications to improved customer experience and enhanced security, open banking has a wealth of benefits to offer both lenders and consumers.

1. ENHANCED LOAN APPLICATION PROCESS Open banking improves the lending processes by putting customer data directly in the hands of lenders meaning instant access to customer financial data and helping loan officers quickly assess loan eligibility and affordability.

On the consumer side, better decision-making on the part of lenders also improves access to suitable loan products, including financial products that may have been previously unavailable to consumers. Borrowers can also benefit from a vastly simplified loan application process without lengthy application and approval procedures for faster access to funds when they need them.

2.

INCREASED LOAN ACCEPTANCE RATES

Lenders can get instant bank account statements from borrowers thanks to account information services (AIS).

By accessing customer financial information, lenders can view a detailed analysis of a borrower’s income sources and transaction history to identify spending patterns, investments, and other creditors.

Having instant access to up-to-date financial information enables lenders to quickly assess creditworthiness and determine whether a loan product is suitable for the borrower. This level of detailed and — more importantly — accurate financial information about an applicant reduces risk on the part of the lender, meaning loans can be granted with higher repayment confidence. What’s more, access to a borrower’s historical financial information allows lenders to better understand their regular spending habits and liabilities to determine the amount a borrower can repay within their budget.

3.

FASTER ONBOARDING THROUGH OPEN BANKING

By using AIS to instantly verify an applicant’s identity without the need to manually process data, the onboarding process is reduced from a few weeks to a matter of minutes for new customers, providing a significantly improved customer experience at the same time.

ABOUT YOLT TECHNOLOGY SERVICES Yolt Technology Services unlocks its Open Banking expertise to other organisations through a single and secure API - building, managing, and maintaining AIS and PIS connections for top financial institutions and ambitious tech businesses. Yolt Technology Services is available throughout Europe and makes on average 26 million API calls each week, passing the 1 billion API call milestone in October 2020. Yolt Technology Services was recently recognised as the Alt-Fi Open Banking Provider of the Year in their 2020 awards.

yts.yolt.com

Backstory

‘Recognise takes much that was good about business banking from the past’ Anita Maclean, Recognise Bank’s new director of strategy, discusses the company’s plans for the near future, which include product roll-outs and national expansion There’s no denying that when it comes to finance, Anita knows what she’s doing. Throughout her almost 30-year career, she has worked for financial heavyweights such as Santander, Deutsche Bank and BNP Paribas. She joined Recognise Bank in June last year after deputy CEO (and former colleague) Bryce Glover shaped the role with her in mind. Now, she’s excited to drive the bank forward in a bid to achieve its targets and expand its offering in the specialist finance space as it works towards receiving a full banking licence In your opinion, what is the main thing that distinguishes Recognise Bank from other specialist banks?

We believe that our unique blend of being relationship-led and technologically enabled is unrivalled. In banking, the SME community has drawn the short straw for too long, putting up with rigid, tick-box solutions and faceless service.Too often, SMEs are pushed through digital servicing channels and call centres that automatically reject applications which don’t meet banks’ inflexible criteria. Recognise takes much that was good about business banking from the past—namely experienced relationship managers who know and understand the businesses they work with and who are based in the local community.We pair this with the latest cloud-based technology and streamlined processes to offer business customers an unparalleled service.

How does the bank aim to take market share in the already competitive bridging and commercial finance sectors?

While we are aware that the conditions, especially in the bridging space, are highly competitive, we do benefit from having a clean balance sheet and no historic book, compared to a number of our traditional competitors who are likely to be distracted by legacy positions. I would refer to our digitally enabled, relationship-led proposition, which includes cloudbased, fully integrated plug-and-play technology that supports a tripartite relationship model.This provides speed of execution and flexibility.We’ve proved that through our second transaction—a £4m commercial property loan funded within three weeks of credit approval—which took place on 24th December.

What lending targets does Recognise Bank have for 2021 in terms of bridging finance?

Our targets for this offering, as with our other core products, are modest in the first full year of trading as we seek to develop our proposition and enhance services and capabilities. It’s important to the management team, as well as the regulators, that we grow gradually with the right clients, and this affords us time to continuously develop and enhance our front- and back-end processes— all with customer experience in mind.

What constitutes Recognise Bank’s growth strategy this year and what key projects will you be working on?

We are currently focusing on our third fundraise, which will enable us to get a full banking licence, and launch our personal and business savings products.We are also looking to introduce a professional BTL proposition in Q2 this year, as well as asset finance in 2022.The broker channel is of critical importance to us while we concentrate on building the brand in the wider market.We are also keen on establishing partnerships with industry bodies and affiliates.

Do you plan on expanding into additional markets and geographical areas in 2021?

We believe in having colleagues stationed on the ground, locally, as they are experts in the areas they operate within, know the resident businesses and the issues they face, and are therefore best positioned to understand client needs and how to address them appropriately.We already have hubs in London, Manchester, Leeds and Birmingham, but are looking to expand into Bristol, Milton Keynes, East Midlands and Newcastle by the end of 2023 How can the bridging sector help improve diverse representation?

I think one of the ways is to identify diverse talent from inside of organisations serving this market where leaders can mentor them to rise to the forefront of the sector. It’s also important to encourage the understanding of the sector in education and universities. Additionally, we should motivate industry bodies to introduce award categories specifically for diverse organisations.

What has been your biggest achievement to date?

At Santander, following the 2008 financial crisis and the UK government’s interventions in the economy, we looked at how we, as an organisation, could help the SME community and address the funding shortfall they faced. I set about coming up with a solution which was part finance (fairly pioneering at the time in terms of mezzanine SME debt finance) combined with a wider non-financial support package. For this, we included trade missions to introduce target customers and suppliers, as well as masterclasses on digital adoption by market leaders, such as Google.

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How did you spend your first pay cheque?

I bought a HP12C — I expect a lot of you may not have heard of this but in its day, it was a sophisticated calculator including discounted cashflow (DCF) functionality.

What is your favourite industry event?

Not really an industry event, but I was lucky enough to be asked to chair a Northern Powerhouse Policy committee co-ordinating across local business people to present short- and medium-term initiatives to be built into the updated northern powerhouse strategy.

If you didn’t work in finance, what would you do?

Interesting question! I’d have a few options: either doing something with local communities or supporting businesses, perhaps through an NED role.

If you weren’t in lockdown, where would you be spending your free time?

A wonderful local pub, the White Swan in Fence, Lancashire, that serves excellent food—it was awarded a Michelin star in 2019.