Bridging & Commercial Magazine — The So-called Summer Issue

ISSUE 16 JULY/AUG 2021

Why deals are doing the rounds and what it really says about the specialist lending sector

+Why are development lenders so ‘luddite’? p14

REFURBISHMENT BUY TO LET

Two loans.

One application.

For Refurbishment Buy to Let loans, we offer bridging finance rates and provide an exit onto a long-term buy to let mortgage based on the after works valuation figure – all in one proposition.

One application, which we key for you

One expert underwriter providing support for the entire case

One valuer for both the bridging finance and buy to let mortgage

One conveyancer with discounted legal fees

Two offers issued simultaneously

Two procuration fee payments

0800 116 4385

precisemortgages.co.uk

Contact your local BDM

FOR INTERMEDIARIES ONLY Product and criteria information correct at time of print (20/07/2021)

01-PM-BTL-03 (3) MKT000218-053

Bridging Finance Dedicated Fast Track team Self-service broker portal Simplified application process Faster payouts Biometric ID verification | Free AVMs | Dual legal representation

Find your BDM

Search

NOW

T: 020 3862 1002 E: bridging@utbank.co.uk

www.utbank.co.uk/find-your-bdm

we understand bridging finance

Acknowledgments Editor-in-chief Beth Fisher beth@medianett.co.uk Creative direction Beth Fisher Caron Schreuder Sub editor Andrea Johnson Contributors Anthony Beachey Chloe Fyfe Illustration Ali Hunter Sales and marketing Caron Schreuder caron@medianett.co.uk Special thanks Stephen Todd, VAS Group Jodi Lund, JMW Solicitors Simon Chapman, Pluto Finance Juliet Baboolal, Seddons Lorna Bithell, Be The Best Communications Mark Hawthorn, LDS Nimisha Cross, OSB Group Margarita Kouklaki Ntourou, Lansons Kim McGinley, VIBE Finance Will Lloyd, Brightstar Ben Rooth, Ben Rooth Media Keith Forster, PF&D 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

A

pparently, we’re at the peak of summer. Historically, this has been the quiet period for financial services but, with mass confusion over the constantly changing traffic light system, I’m not surprised to see fewer jetting off on holiday. With a general rise in bridging criteria searches, I expect the sector to hold steady over this period as confident investors make the most of a buoyant property market—despite what may await it after September when we see start to see the impact of the furlough scheme ending.

As the rest of 2021 plays out, brokers who identify back-up plans and contingencies with their clients will be best placed, especially as the industry feels the backlash from the recent ‘pingdemic’, further exacerbating the supply chain problems around building materials and construction staff shortages that are causing project overruns. Some Builders Merchants Federation members have even described this as the most challenging period of the entire pandemic thus far.

With the spotlight firmly on the property sector to help build more homes to meet soaring demand, increase spend in the UK economy, and create jobs, it is no wonder we’re seeing asset classes like BTR— which benefits from quicker build-out rates—attracting institutional investment [p24].

We also talk to two self-proclaimed techies who share their frustrations about development lenders’ reticence to adopt systems, and how continuing to work off spreadsheets could impact their ability to secure funding and grow [p14]. Later in the issue, we take a look at why developers are in danger of reducing their profits to rubble if they forge ahead with inexperienced solicitors [p50].

In part two of our ‘Save our Surveyors’ series [p64], we ask lenders to respond to confetti claim allegations and the plight of smaller valuer firms. Do they care enough? You’ll be the judge of that.

Over the past decade, shopping around online for the best prices has become second nature for most, so it’s understandable why borrowers are doing the same thing when it comes to securing finance.

Our cover story [p30] explores the effects of deals doing the rounds in the specialist lending sector, and how this can ultimately put consumers—and the industry’s reputation—at risk. “The best deal isn’t the best price,” imparts one broker during our group discussion, highlighting a central difference between providing mortgage and specialist finance advice. A suggested solution that I found particularly interesting is to make it mandatory for bridging loans, for example, to be introduced, and for lenders to only accept business from brokers experienced in this field. But, like we’re seeing in the real world with vaccine sceptics and Covid deniers, we know how challenging it is to get everyone on board—even if it is for the greater good.

Beth Fisher Editor-in-chief

3 July/Aug 2021

8 14 24 30 40 50 60 64 72 If you try to push for growth without that governance, control and rigour, things will go pop p14 4 Bridging & Commercial

News Exclusive View Cover story Feature Zeitgeist One Day Series Explained LDS/Offa

Spreadsheets are still powering lenders in 2021

Could BTR help end the housing crisis?

This isn’t just numbers

CG&Co / InterBay Commercial

This is not the area to skimp on

‘The ultimate sustainable mortgage market’

Lenders respond to confetti claim allegations

To plug in or not to plug in, that is the question

How InterBay Commercial can help landlords looking to diversify into semi-commercial Diversification.

It’s the golden rule when it comes to investing.

Whether it’s looking for the best return on your hard-earned savings, or putting your money into stocks and shares, spreading your investment, and therefore reducing your risk, is the sensible strategy.

It’s the same when it comes to investing money in property.

Following years of regulatory and tax changes, the days of the ‘casual’ landlord with a single let rental to top up their pension pot appears to be a thing of the past, instead replaced by a more professional type of investor with a portfolio of properties.

This new breed of landlord seems more prepared to adopt different investment strategies and explore other property asset classes.

Take their growing interest in semi-commercial properties, for example.

Interest in semi-commercial has increased in recent years as canny investors look to maximise their rental yields.

If you’re not familiar with semi-commercial properties, or mixed-use as they’re also known, they’re simply rental properties that combine residential with an element of commercial use.

They can include, for example, flats above shops, restaurants or offices; guest houses with accommodation for the owners; public houses with self-contained accommodation; or buildings with both self-contained flats and offices.

In my opinion, diversifying into semi-commercial is a smart move.

Not only do these assets have the potential to earn higher rental yields compared with a standard buy to let, they also avoid the additional 3% Stamp Duty surcharge which is normally levied on investment properties.

Landlords can also mitigate their risk, as if they experience problems with one of their properties, the performance of the others in their portfolio can help to limit the damage and make up for any rental shortfall.

Of course, as with any investment, there are things which landlords need to take into careful consideration before making the move into semi-commercial. The initial outlay and running costs can be higher compared to a standard buy to let, and a vacant commercial space will still incur business rates.

FOR INTERMEDIARIES ONLY Product and criteria information correct at time of print (26/07/21)

A problem landlords may encounter is finding a mortgage with a lender experienced in dealing with semi-commercial cases and who’s able to provide the support they need. Semi-commercial can be complex as they fall into the middle ground between commercial and residential borrowing.

The good news is that there are lenders out there who specialise in semi-commercial mortgages and can offer products specifically designed to meet the needs of investors.

Here at InterBay Commercial, semi-commercial lending is our bread and butter, and we’ve got vast amounts of experience in providing bespoke solutions. However challenging a case may seem, we work with brokers to help them find the best outcome possible.

We specialise in semi-commercial, commercial, buy to let and holiday let cases.

Our teams work together to craft tailored solutions to support borrowers with their lending goals, and our specialist finance account managers are always on hand to help you find the best way to handle your complex cases.

Our semi-commercial products are designed for clients investing in mixed-use properties, and with interest-only and owner-occupier loans considered at up to 70% LTV, we’re perfectly placed to help those looking to diversify their property portfolios.

Clients can borrow between £150,000 and £3 million, and an experienced member of our sales team is always available to discuss property valued at more than £3 million.

Loans are available to clients in England and Wales aged between 18 and 85-years-old. Eligible applicants include individuals, limited companies, LLPs, partnerships, trusts or pension schemes, providing there are no CCJs or defaults in the last 36 months, or missed loan payments in the last 12 months.

With landlords constantly looking for new investment opportunities, semi-commercial letting could offer them the ideal way to diversify their portfolio. And with the right lender by their side to help them make the move into a new market, they could soon be benefitting from the best of both the commercial and residential worlds.

Adrian Moloney Group Sales Director, InterBay Commercial

For your semi-commercial and commercial cases...

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 and InterBay it.

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

FOR INTERMEDIARIES ONLY

How sales guarantees are bringing developments to life THERE’S A NEW KID ON THE DEVELOPMENT FINANCE BLOCK. WITH OVER £1.2BN OF SALES GUARANTEES ISSUED IN HALF A YEAR, LDS IS LOOKING TO KICK THINGS UP A FEW NOTCHES WITH BROADER CRITERIA, EXCLUSIVE NEW PRODUCTS AND ITS OWN HOUSING ASSOCIATION, ALL TO REACH THE ULTIMATE GOAL—MAKING ITS OFFERING INDISPENSABLE FOR ANY DEVELOPMENT PROJECT

Words by

andreea dulgheru

News

n January, LDS, part of the Landmark Group, introduced something that has the potential to revolutionise the way development finance works—a sales guarantee. Designed to tackle the housing deficit, the offering was due for release in 2020, but then Covid-19 struck, forcing the company to push back the date and continue refining it. At the start of this year, when it was launched together with its online engine, it didn’t take long for the industry to respond.To date, LDS has issued £1,225,400,000 of sales guarantees, a significant effort towards its ambitious goal of £4bn in 2021.

As this proposition is relatively new to the market, some might wonder how exactly it works and what it brings to the table. A sales guarantee is a legal contract, agreed preconstruction, to acquire all units on a given site.This removes all pricing and demand risk, unlocking better finance terms as a result of the improved risk profile.While the contract binds LDS to purchase all units, it still enables the developer to sell them on the open market and maximise their returns; for each one sold this way, LDS receives a small fee for providing the guarantee. Should the developer opt to sell to LDS, it will buy the unit at a discount to OMV. “The contract price we agree is at a level where developers would only sell to us if they needed to; we set a discount at an amount that incentivises them to sell on the open market,” explains Mark Hawthorn, CEO at LDS and Landmark Group. “Most developers see us as a safety net that they don’t want to use, but are happy to have in place just in case.”

LDS will also pay 10% of the contract price as a deposit which can be released to the developer for their use.Typically, the sales guarantee reduces developer cash contributions by around 77% and increases returns by as much as 200%. “Because we advance funds to developers, this lowers their equity requirement; combined with increased leverage from lenders and reduced interest rates, this really drives returns.

For example, we have transacted on a deal where the developer’s shortfall on total costs versus senior debt was £1m and we provided 10 Bridging & Commercial

£750,000 of this via our deposit, meaning the developer only had to use £250,000 and could do this over another three sites.”

This, in turn, allows developers to work on large or multiple sites from the same capital base. From a lender’s perspective, it removes all speculative sales risk, which transforms the credit and risk profile of any site, enabling marginal opportunities to be comfortably written, as well as better terms to be extended to borrowers.

While at first glance it may seem only lenders and developers benefit from the sales guarantee, brokers also get perks—namely more business written and fees generated as a result of better conversion rates and the larger loan sizes it brings.What’s more, LDS pays intermediaries an amount equivalent to 0.1% of the GDV of the proposed development on top of the usual introduction fees paid by lenders. “There is a running joke with brokers that they should pay us a fee as we make their jobs so much easier and increase their earnings,” Mark shares.

“However, we see brokers as a key source of business, so we want to incentivise them to bring business to us. As such, we are happy to pay them this fee as transactions referred through brokers are far more efficient to process than those that aren’t.” While the product can make a developer’s capital go three to four times further, the broker can enjoy a similar increase to their income, says Mark. He illustrates this with the case of a broker who recently approached the company with two opportunities. “Without the sales guarantee, their developer client was going to have to select only one site to develop, despite both being quite lucrative.

With the sales guarantee, both sites are now live.The additional unlocked GDV was around £11m and the broker enjoyed an increase to their income, too.”

Sounds too good to be true? Funnily enough, that’s the challenge LDS faced when it went to market. People were sceptical, which required the business to be clear about how it benefits from the product.While developers and lenders put funds into a

News

transaction to increase their gain and then move on to the next project, LDS works in almost the opposite way. “We invest funds into opportunities and are content to leave them there for ultra-long-term rental.To an extent, this is by default, as, if the developer cannot sell the units, then it’s unlikely we can.

If we are called upon to purchase units, then we are happy to acquire new investments. If the developer sells out, we are happy taking a small guarantee fee.” Despite the initial doubt, the take-up of the concept has been much quicker than expected, possibly due to continued uncertainty around the economy, Brexit and the pandemic, Mark observes.

Moving forward, LDS has big plans to expand its services beyond the £4bn target it has set. “We will never rest on our laurels and will always seek to maintain our edge,” Mark says.That is why the company, with the help of its substantial group funds, is heavily investing in a range of innovations. Part of this strategy is partnering with providers— from small boutique lenders right up to major high-street banks—to create new loan products that combine a sales guarantee in the package, which are set to go live in the coming months. According to Mark, these will allow lenders to offer more attractive terms while transferring risk to LDS, and the firm is confident it will see a rapid increase in volume as a result. “As we are working with a healthy number of lenders, each will have their own benefits. Finance providers working with us are able to offer increased leverage, pushing towards 80%, while keeping the pricing consistent with lower-leverage structures, therefore offering developers and brokers the best of both worlds.”

There is a running joke with brokers that they should pay us a fee as we make their jobs so much easier and increase their earnings”

These projects vary from the SME-focused ones as there are differing dynamics, Mark explains. “Larger developers tend to have established debt facilities, which allow them autonomy over purchases, and are often cash rich.This means that our benefits around access to finance and our 10% deposit release are not as important. Instead, the offering will focus entirely on the risk removal of the guarantee, which can be offered at lower rates if we are not required to fund the 10%.”

He maintains that LDS keeps its criteria flexible, and if it can make something work, it will. “As soon as an opportunity comes in, we review and, in most cases, agree as quickly as we can.We use lender valuations and MS reports, as well as keep legals streamlined.

One problem we have, which is admittedly not a bad one, is that there are so many areas of expansion and opportunity!”

A sector that LDS is keen on branching out into is affordable housing—so much so, that it is working on establishing its own housing association to take all affordable homes from developers, as these are often slow to progress. “We are seriously exploring this as we know developers and lenders experience delays and disruption with the affordable elements. SMEs have issues selling down their affordable units, as many housing associations are not as commercial and don’t move as fast as we do,” Mark notes.While the plan is still in its formative stage, LDS’s ideal goal is to encompass a large social housing investment portfolio consisting of properties available for affordable rent and shared ownership, for which Mark claims there is big institutional demand. “Our vision would be for us to be a single point of contact, offering guarantees for open market units and a direct purchase for affordable homes.”

The company is also aiming to widen the use of the sales guarantee. Currently, it is primarily for SME-driven housing schemes (although it will consider housing schemes that also include a small number of apartments) between 10 and 60 units throughout England and Wales, with typical GDVs between £3m and £35m.

However, it is in the process of expanding its requirements to cover larger developments, while keeping the base requirements the same.

Everything LDS does is targeted towards increasing new housing supply. “We firmly believe sales guarantees are the future; it’s a no-brainer,” he asserts. “If developers increase returns, lenders reduce risk and brokers also enjoy compelling benefits— we have a genuine win-win-win.”

11 July/Aug 2021

Offa set to bring out new bridging products next year, targeting £100m of deals WORDS BY ANDREEA DULGHERU

Almost two years after its official launch, Offa is gearing up to introduce new refurbishment and development bridging offerings to fill what it believes is a big gap in the ethical finance market. To find out more about the proposition and the principles of Islamic finance, I spoke to the company’s CEO, Bilal Ahmed

News

W

hen it comes to the specialist finance sector, interest rate is often a key factor that comes into play for securing a bridging, commercial or development facility—but not in the world of Shariah-compliant lending. This relatively niche area prides itself on providing ethical finance, which removes the charging of interest from the equation.

“Paying, receiving and facilitating interest are all explicitly prohibited,” details Bilal. “Interest is an injustice to the needy and creates disparity between the rich and poor. It’s unjust because the lender gets no reward for lending to a successful business and generally suffers no harm from lending to an unsuccessful one.” He adds that it is also destabilising, as it encourages further borrowing and investment during a growth period and places high burdens, possibly causing bankruptcies, when profits are low.

Instead of regular Instead, Islamic finance employs Murabaha, a sales contract in which the bank buys a commodity in order to supply it to a customer who is unable to purchase it directly. The finance provider sells the commodity to the customer for a cost, plus profit, agreed by both parties, which is generally set up as a deferred payment instalment schedule.

Bilal explains that the ethical basis lies in the principles of the Shariah, or Islamic law, which is taken from the Quran and the example of Prophet Muhammad. “Linguistically, Shariah means the path to a source of water. Technically, it is the system of God that he revealed to mankind, which encompasses belief, practice and character. The connection between the linguistic and technical is that the code of conduct and system are means of sustainable development. Being a source of life means that its very principles do not jeopardise life, hinder sustainability, or exploit.”

Central to Islamic finance is the concept that money itself has no intrinsic value—to make money from money is forbidden, and wealth can only be generated through legitimate trade and investment in assets.This is why it is prohibited to invest funds into activities that are considered harmful in the Islamic ethical framework, such as businesses involved with alcohol, tobacco production, gambling, non-halal meat, and pornography.

Contrary to what some may believe, this is not a small finance sector. The 2020 ‘Islamic Financial Services Industry (IFSI) Stability Report’ revealed that its total worth reached $2.4 trillion in 2019 (11.4% higher than a year earlier), with three quarters of assets held by banks, and large enough to play a systemic role in 13 countries—including the UK. In fact, Islamic finance has a significant history in this country, from commodity-based short-term liquidity management and trade finance in the 1970s, to the establishment of the first Islamic bank, Al Baraka Bank, in 1983 (which closed in 1993), and the first Islamic mortgages offered by United Bank of Kuwait (now Ahli United Bank) in 1996.

However, while Shariah-compliant finance has been long established in the UK, Bilal states there is

a clear lack of specialist products available, despite strong interest. “Since our launch, we have seen huge demand from Muslims and non-Muslims; we’ve had to turn away £80m worth of cases as we don’t currently facilitate refurbishment and development bridging finance,” he imparts. To tackle this, the company has decided to broaden its offering to include Shariah heavy refurbishment and development bridging, set to launch in Q3 2022.

The heavy refurbishment range will provide finance between £200,000 and £750,000 at a maximum day-one FTV of 70% and a maximum gross FTGDV of 65%. Facility terms will go up to 12 months, with 0.75% profit per month. There will also be an arrangement fee starting at 1%, as well as valuation, monitoring and legal fees calculated at average market rate, provided upon application and paid upfront.

The product is set to be available to UK residents and limited companies for residential and commercial properties in England and Wales, and used for property conversions to residential or HMO, heavy refurbishments and extensions, and finish and exit projects for wind and watertight properties. They will all require approved planning permission or PDR consent prior to application. However, it cannot be used for ground-up developments, owner-occupied properties, homes or commercial units with adverse environmental conditions, or agricultural properties.

Meanwhile, the new development bridging product is expected to provide finance between £750,000 and £10m, with a maximum term of 24 months. It will offer up to 70% GDV or 90% FTC at a 1% profit rate. It will have an arrangement fee from 1% and be available for commercial, residential, HMOs and non-standard construction properties—freehold or leasehold with 100-plus years left on the lease—for UK and non-UK residents and companies.

Borrowers with no bankruptcy/IVAs, CCJs, missed mortgage payments of other property finance, and no voluntary, enforced possession in the 12 months prior to the application can access both products.

Clients must also be aware that, like the rest of Offa’s products, the range is not available for properties deemed unacceptable under Shariah finance, including nursing or care homes, grade I-listed buildings, pubs, banks, and agricultural properties and land.

“We have listened to our customers and developed a range of Shariah-compliant products to meet their various property investment needs,” says Bilal, adding that the bank is aiming to hit £100m in deals next year for the new offerings once they are launched.

Bilal’s optimism reflects his observation that the Asian community has always favoured property as an investment solution, with residential and commercial BTL popular among this group of clients. “Many Muslim property investors have been crying out for short-term halal finance to support the purchase of property investments,” he highlights, adding that the company has seen an increasing number of direct investors seeking funding. “Shariah-compliant finance will play a big part in helping the market recover.”

13 July/Aug 2021

Words by

BETH FISHER 14 Bridging & Commercial

T

he development finance process is in desperate need of improvement through technology. While the past year has seen an acceleration of digitalisation across most sectors, here we are with one of the most integral markets to our economy still largely run by spreadsheets.

Fortunately, a conversation with two tech enthusiasts, Mark Elliott, business development manager at Sopra Banking Software (SBS), and Mike Bristow, CEO and co-founder of CrowdProperty, highlights that the turning point is near.

Mark joined Apak (which was acquired

by SBS in 2018) as a graduate developer in 1996 and, over 25 years, has been involved in multiple areas of the business. In the last three, he has worked on the company’s Sprint and Freehand product lines and led the team that built the Aurius platform in the specialist banking and finance market. He sees the development of AuriusDF—a digital solution that brings enterprise levels of capability and scalability to providers in the development and bridging sectors—as an exciting opportunity for smaller banks and non-bank lenders.While he’s a firm believer in, and advocate for, the ability of technology to improve people’s lives, he understands that it’s often considered a frustration. His passion for working at the interface between the worlds of techies and non-techies and helping the latter to get the best out of their tech providers shines through in our discussion.

Mike, on the other hand, is a mechanical engineer and chartered accountant who spent 18 years as a strategy consultant advising international companies and private equity funds on M&A and corporate policy. He sits on the Pi Labs Investment Committee (a venture capital fund investing exclusively in the proptech vertical) as a voting member, and is a mentor to portfolio businesses.

His leadership at CrowdProperty— which was featured in the Deloitte Fast 50 list as one of UK’s fastest growing tech businesses—has helped fund over £300m of development projects.

With competition in the non-bank property development finance sector rising, lenders will need to look towards tech to differentiate themselves and offer what developers really want—quick money. The pair believe the benefits of this are starting to show, and it will only take a few to pressure others to follow suit.

LUDDITE? WHY ARE DEVELOPMENT LENDERS SO

15 July/Aug 2021

Exclusive

16 BridgingMark & Commercial Elliott

Exclusive

Mike Bristow: What’s interesting in the property sector, which is a niche part of financial services, is that it’s been incredibly slow to adopt technology.

Mark Elliott: Hugely.

MB: And it’s been massively frustrating for me, because I’ve been investing in proptech for over seven years, and I see many great ideas, concepts and applications that just aren’t, or weren’t, gaining traction... Now, that’s starting to drive up. The stuff I’m seeing on a weekly basis from the investment team at Pi Labs is really cool—from amazing robotics and AI systems that enable bespoke, detailed and better search capabilities than Google, to LiDAR-equipped drones monitoring sites. These will come on stream, and I envisage a future where we’ve got a fleet of drones on the roof of our office that go and visit sites.

ME: Drone technology is going to change a lot of things—and certainly the property market. I think the level of tech you can now pack into something the size of a mobile phone, then stick blades on it and put it in the air, is astonishing. I bought my first drone a couple of years ago and thought, ‘I can buy this for £500?!’ What might you be able to get for 10 or 20 grand?

From the perspective of conducting surveys from above, where you can build in sensors that allow you to get much more detail than you can from the ground, it’s going to be staggering.

MB: In general, adoption in the fintech/proptech overlap is definitely improving. During the past 12 months, there’s been a big change in communications, such as video calling. For me, though, the evolution of communications has helped us be productive, but not truly innovative. Our team of 44 are innovators; they love bouncing ideas around. It’s vital for one of our analysts, for example, to be able to overhear a conversation between me and one of our digital marketeers, and ask, “What about this? What about that angle?” That can’t be replaced.

The other thing we mustn’t forget is that specialist lending is specialist. That means human expertise. The way I describe our business is that we throw a lot of technology at the efficiency of lending, but it’s the expertise that applies that effectiveness. This is not

algorithmic lending for consumers or SMEs. Development finance is expert risk mitigation—and that’s fundamental.

ME: I couldn’t agree more. I think one of the problems is that development lenders tend to focus on expertise, understandably, because they see the value in it immediately—if you’ve got good people, you’ll have a successful business. And when you’re very small, it works brilliantly. But if you can’t provide them with data or disseminate it clearly and efficiently in meaningful ways across an organisation, it’s very difficult to scale. You need to rely on having solid core platforms to base your business on and, generally, the property development lending sector has been a bit luddite.

I think the opportunity now exists for companies to take advantage of technology in this space without having to employ 15 software developers to spend years building a platform”

MB: That’s been at our core from day one, when about half of our team were software engineers building a proprietary platform in-house— because one that was good and bespoke enough didn’t exist. Some do now, but owning and developing our own tech is a strategic advantage for us.

ME: They very much do exist now.

While I understand your approach, it’s a big investment. If you’re going to build your own scalable, fully functional platform from scratch, that’s a serious piece of work. But I’d argue that there are people, like us, who can provide that off the shelf. Every company wants its own unique offering, so this sort of product has to have enough configurability to allow you to still be your business, and mustn’t force you into a particular shape. I think the opportunity now exists for companies to take advantage of technology in this space without having to employ 15 software developers to spend years building a platform. I expect it will start to happen. How many of the non-bank specialist lenders have a solid core platform for their development finance portfolio?

MB: Many institutional backers often comment about the spreadsheet management nature of the sector— and that’s being polite.

ME: Absolutely. When I’m asked internally at SBS about the viability and potential in this sector and what my biggest competitor is, the answer is spreadsheets! That is crazy for a market of this size. It will turn at some point. Interestingly, one of 17 July/Aug 2021

Exclusive

Institutional funding will go to those that can control the capital best and leverage both technology and expertise together to scale”

the issues is getting lenders over the hump—showing them that they need to put a bit of time and effort into implementing a solid core platform. If you’re trying to run off spreadsheets, doing the exciting stuff is hard, because they aren’t universally accessible in the cloud. For example, lenders may want to build a broker portal so their intermediaries can see what business they’re introducing, or a customer platform so they can check what their lending positions are. They can’t do any of that if their data’s in a spreadsheet.

and everybody will be clamouring for decent tech, because the benefits will be transparent at that point.

MB: It’s scary. The problem is that there’s a lot of robustness and resilience to compromise with when using a spreadsheet approach. The other thing is that, from the specialist lender’s perspective, what you get in a fragmented sector is many businesses whose ultimate ambition isn’t necessarily to rapidly scale. Different lenders have diverse growth ambitions.

Ours are very high, hence building the tech and resilience from day one, and bringing in that scalability, for example in data analytics. Because we’ve now seen circa £6bn of deals, it has enabled us to build machine learning models.

And that attracts a lot of capital as well, because it drives success. The danger of scaling without tech underpinning the business naturally presents a huge key people risk, because you’re having to bring in a hell of a lot more staff to process stuff that doesn’t need to be processed by humans, in crude terms.

The toughest time for a lender is not the first pound out of the door—it’s when the growth kicks in and the need for staff increases and the recoveries overlap with the growth trajectory on origination—all of that basically goes into a melting pot. And, if you don’t have brilliant systems, it blows up.

ME: There’s certainly nobody exhibiting the advantages I’d expect to see if the tech was being leveraged. How do you prove to your investors that you’re not risking their money unnecessarily, if all you have is spreadsheet management of your book? If your book’s £30m—50m, then fine, you can probably handle it. Once you get up to £100m-plus, you’re really playing with fire. Because the reality is you don’t have control.

You might think you do, but you don’t, and you’re open to a massive pile of risk that’s not easy to account for.

Beth Fisher: Why do you think lenders are so hesitant to move away from this spreadsheet model?

ME: Fear. Technology is intimidating to many people working in this business.

They’re not technologists—they’re businesspeople, salespeople, property people. And it also has a terrible reputation, generally. Because of the horror stories—and there are plenty of them about—people see technology as a blocker and cost that spirals. Also, there’s no market pressure to do it because nobody’s got the advantages yet. It’s only going to take one or two of them and, suddenly, the dam will break, 18 Bridging & Commercial

MB: It’s like game theory. They’re not doing it, so I don’t need to.

ME: Exactly. Nobody wants to be the first.

BF: Are you saying that there aren’t any non-bank lenders in the specialist finance space that are using a platform similar to yours?

MB: I think this is the most pronounced area you’ve highlighted: the risk and governance overall. Your control is critical to the wholesale lines of capital and, if you don’t have that, then things will go wrong. And that’s going to drive up costs, resulting in more and more people, which will then become even harder to control. It’s a vicious circle, and one that we’ve mitigated from day one to turn it into a virtuous one.

BF: We’re seeing a lot of lenders being quite complacent, opting to focus on driving down margin rather than really being innovative. I think we’re getting to a junction where there are a lot of, let’s call them ‘tier two’ lenders, that are really pushing for growth. And if they’re looking to attract larger institutional funding in order to scale, technology has to be around the corner for them, surely?

MB: That’s definitely right. The funding line that we closed last week, that was eight months of interaction and six months of detailed due diligence— and systems were a huge part of that. Institutional funding will go to those that can control the capital best and leverage both technology and expertise together to scale.

Exclusive

19 Mike July/Aug Bristow 2021

Exclusive

You need to be able to understand what your book’s like and to monitor it properly. I think it’s a solid market, but if it does take a wobble, then you’ll want decent systems to support you”

BF: I’m interested to know how you both think technology and software can help lenders enter new sectors and geographical locations?

ME: I certainly believe that having a systematised process enables you to trust a remote team. Because, if you’ve got back-end systems that are in some way ordering the collection and analysis of data, then you can get over some of the hurdles of not all being in the same place. With any form of scale, as you grow, you need to be able to distribute information properly.

MB: Two months ago, we entered the Australian market—a business that has launched on our technology. That’s the utmost scalability. New databases and, effectively, clean books that sit on the processes we’ve created, alongside the tech and systems, makes it repeatable in another market. And that’s benefited from the seven years of development we’ve put into it. If we didn’t have that tech underpinning, there was no way we could have just walked in and made waves somewhere else. There are also product adjacencies in existing markets. If you’re in control of your data and analytics, then you can get the synergies from that into other products. And we have stuff in our pipeline that directly derives from that.

ME: Essentially, if you’re in the property development finance business, you’re financing projects. So, if you’ve got a systematised way of managing the risk and control that you need around the funding, then it doesn’t really matter what the project is.

Adjacent markets in other project-based finance areas seem entirely possible.

As a company, we provide software to all sorts of finance and deposit-taking markets. But property development is an extremely complicated form of finance so, if you can do that, then the rest is about systematisation, making it repeatable, and removing many of the people by automating it. You don’t want to do that completely, as the people side of things is essential. But, as you move into simpler markets, it’s essential to have the systems there, because you need the economies of scale that you get from automation.

BF: Technology is often said to bring a level of transparency to markets.

You both touched on how it’s helped offer a bit of clarity to funders— how can it do that for brokers?

20 Bridging & Commercial

Exclusive

ME: At present, they have very little transparency. Let’s face it, in this market, there is minimal online access.

There’s no visibility; a borrower can’t see what they owe right now. But the moment anybody does give a borrower that transparency, they’re going to recognise what they were missing. It will result in a sheer reduction in admin and the increased efficiency in driving more self-service from the customer. It would be really straightforward to have a borrower portal where they can upload their documentation and photos of their site when they need to, and for the surveyor to post information directly.

It’s simple, but it’s not done. We’re still throwing emails at each other.

MB: The way I look at it, which I feel is quite different from many in the sector, is what’s important to the customer?

A developer, first and foremost, is serving their customer, which is the vendor of that asset. Ultimately, that vendor wants speed and certainty of the deal happening. Therefore, if we as a lender can provide that developer with speed and certainty, and we throw in ease at frequent measure as well, they can deliver to their vendor’s speed and certainty. You can only really deliver that at scale when it’s all tech enabled. Another stakeholder that presents risk in development finance is the people you have working on site: contractors. What’s important to them?

Cash. Timely cash is what keeps them motivated. That’s the second element of financing, which is drawn down throughout a project. This involves booking the IMS, the reporting of that, and feeding it back to the lender and releasing the funds. When we see an IMS survey drawdown request come in, it’s the top priority in the office, because it’s the most important thing to the developer and contractor. So, let’s distribute that capital quickly. How do we do that? By backing processes with tech that feeds the human brain, which ultimately says yes. All of these elements can be fundamentally enhanced by technology, and that includes the complex parts. Everyone always says, “The surveyor, solicitor and IMS are slow.” It’s not good enough.

As a lender, you’re in control of the customer outcome. I’ve personally gone in and meddled with the systems and processes of our solicitors, surveyors and IMS parties to make it seamless.

ME: Tech also allows you to manage by exception—and that greatly improves efficiency. With regard to tranche funding, when the deal’s underwritten, you know how much you’re going to give them at each stage. If you can preset limits on that in a system, you don’t need a senior director to sign off on every single release of funds.

If those processes are automated— where you know the limit checking and risk management are already done—then it becomes much slicker and can be executed by somebody much more junior, because the system is doing the checking for you.

BF: I’m surprised there aren’t more lenders using technology in this way to be more efficient, especially while we’re seeing extreme delays for developers with material shortages and price hikes, all of which will impact projects.

Profit margins are being squeezed, so going to a lender that they know has those efficiencies is a no-brainer.

ME: I absolutely agree. Looking at it as a software supplier to the market, we see what deals are being put through our systems, and rate has never been the most crucial element—the sector is driven by service. Therefore, efficient service is at the top of the list.

Developers will happily pay a higher rate or more fees for a lender that will provide money on time, because building projects are all about ‘time is money’, aren’t they? Delays cost them cash, so efficiency matters.

MB: We find that borrowers are getting better at assessing their opportunity costs with time. We’ve done numerous focus groups with developers, asking them what they think of traditional sources of funding— then a lot of swearing happens. [laughter] The key thing they feel is that customer-centricity doesn’t exist.

That’s what we’ve tried to change by thinking about their needs.

BF: Looking forward, we’ve got government support schemes, such as furlough, due to end, and borrower circumstances will get ever more complex. How can technology help development lenders and their brokers cater to the changing borrower profiles we’re likely to see over the next 18 months?

ME: We both took a breath at the same time.

MB: We did. [laughter] In the medium term, irrespective of Covid, we’ve witnessed a massive reduction in housing production from SME developers, caused by market failures on a number of levels. Our surveys of 500plus SME developers say that the biggest issue is finance, and that’s what we’re here to address. So, is the borrower we work with going to shift? I think there will be more SME developers building out more stock, because of being able to serve them better. This is great, because that’s the only way you can unlock the almost infinite number of small parcels of land, infill opportunities and small conversions. I don’t think the developer itself is going to hugely change. You’ll probably get Darwinistic failures of the weaker players that were on the edge, but we need to enable the brilliantly entrepreneurial SME developers out there to build more homes and increase spend in the UK economy.

ME: There is vastly more demand than supply, and frankly, that isn’t going to change in our working lifetime.

We could treble the supply of houses every year, and there’d still be more demand than stock in 10 years’ time.

So the fundamentals are absolutely sound. If there is a bit of a Darwinistic culling then, from a lender’s point of view, we come back to risk control.

You need to be able to understand what your book’s like and to monitor it properly. I think it’s a solid market, but if it does take a wobble, then you’ll want decent systems to support you.

MB: This will prove out over the next five years. The tech adopters in this sector will grow faster, full stop.

ME: Absolutely.

MB: There is no doubt about it, because if lenders try to push for growth without that governance, control and rigour, things will go pop for those players.

[awkward silence] 21 July/Aug 2021

Lending is about more than just the numbers.

It’s about relationships.

With Allica Bank, every broker has an expert relationship manager to help find the best solution for their customers.

Paired with our bespoke Introducer Portal, you can expect clarity, consistency and collaboration every step of the way.

Find out more at allica.bank/introducers or give us a call on 0330 094 5555

99%

OF BROKERS RATE THEIR ALLICA BANK RELATIONSHIP MANAGER AS GOOD, VERY GOOD OR EXCELLENT. Source: Allica Bank’s Q1 2021 Broker Survey of 131 brokers

Allica Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (FRN: 821851). Registered office: First Floor, Eldon House, 2-3 Eldon Street, London EC2M 7LS. Registered in England and Wales with company number 7706156.

View Image by Mr London

Playing the long game with BTR Words by

Anthony Beachey Institutional investors are eyeing the build-to-rent (BTR) sector—an area that has shown its worth during the pandemic and offers long-term prospects. With an increased focus on this asset class, it is without doubt that more lenders and developers will look for opportunities to quench demand

B

TR is the description given to new-build apartment blocks that have been constructed specifically for renters. They need a minimum of 50 homes, all owned and managed by one landlord. The concept is in its infancy in the UK, developing as a legacy of the London 2012 Olympics, with the conversion of Stratford’s East Village athletes’ quarters into private rentals.

BTR accounts for a tiny percentage

of the country’s rental properties, but it is growing fast. By the end of March 2021, 188,456 BTR homes had been completed, or were under construction or in planning, across the UK. This could be due to the many benefits they offer renters. Ian Fletcher, director of real estate policy at British Property Federation, says the most prominent advantage is the way that they are managed. “Staff are often there 24/7 at BTR buildings 24

Bridging & Commercial

delivering hospitality levels of service, which makes them very secure.”

Peter Sloane, chair of Love to Rent, concurs that these types of homes offer a sense of security, as they are typically designed to be let in perpetuity.

Eliot Kaye, managing director at Puma Property Finance, highlights their affordability and flexibility for younger generations who cannot get on the property ladder, as well as the appeal of a high quality home without being

View

tied down by a mortgage or long lease.

Eliot believes the sector has been boosted by the pandemic, as many young professionals now want to live in a place that counters isolation. Aligning with this, Ian argues “there is no point loading these buildings with unaffordable services”, as the most appreciated factors are those that create a community feel, “such as homework clubs or making an occasion out of an England football game”.

While BTR developments are designed for more luxurious living, often with gyms and areas for socialising, Harry Hodell, director at debt advisory practice Pure Structured Finance, raises concerns that they are inaccessible to less affluent workers. Studies have shown that rents in some areas can be around 10% higher for BTR compared with BTL.

Image by Quintain Living

The misconceptions Peter contends that the government is overlooking the significant role that BTR could play in providing quality homes.

Indeed, the most common fallacies about this asset class is the perception of poor quality, inflexible tenures and expensive entry levels. Renting is often seen as a short term option when, actually, it can be long term, as seen in other parts of Europe.

In fact, Peter maintains that the idea that renting lacks security couldn’t be further from the truth. “Landlords want to encourage their customers to stay as long as possible, as the cost of finding new tenants and the loss of income during any hiatus is prohibitive.”

The perception of BTR has changed as it has become more established and, therefore, more trusted. “This has increased its popularity among investors, lenders and residents—nobody likes unscrupulous landlords,” Eliot remarks. Operators also have a vested interest in making sure they continue to perform at a high standard, offering a more reliable source of housing than some alternatives and making it attractive to policymakers, he adds.

Developers find it appealing There is a huge opportunity to use statistics to help BTR developers operate more efficiently, Eliot states. “Good quality operators have already adopted this approach. For instance, having access to ongoing data around rental demand and prices allows them to alter rents accordingly, whereas failing to incorporate market data is an obvious pitfall.”

A wide range of developers, housebuilders, construction contractors, and larger housing associations are now active in the sector, notes Ian, but adds that it’s a “constant task” to reach out to local authorities

Image by Quintain Living

25 July/Aug 2021

View

Image by Kilian O’Sullivan

Images by Chris Winter end, a solid financial business plan is needed, ensuring professional levels of management, maintenance and customer service, while “an ability to build income at letting breaks is a bonus”. Pitfalls, he cautions, include building too many homes for let at once and asking for too much rent from the start, making it difficult to reach income stability.

and planning committees. As BTR is relatively new, some may not comprehend it or know how to treat its planning application. “If they don’t understand the product, then sector supply is curtailed.”

Peter says each BTR developer approaches the design differently, but with flexibility in mind. Some homes, for instance, have equalsize bedrooms with en-suites, so sharers needn’t compromise. However, as building standards are typically higher than for homes built for sale, there is often a “greater initial capital outlay and a longer period before realising a return on capital”. Also, because BTR is a long-term development, wholelife costs must be considered, and more attention paid to management strength, material quality and communal space.

Peter describes the optimal goal for a BTR developer as a rapid stabilised income stream that shows a decent return after capital and management costs. Therefore, the driving force is how strong the rental will be. To this

Lenders are increasingly active According to Ian, finance providers were wary of BTR at first: “They like to work off data and precedent, which were scarce.” However, as the sector has started to become more established, they have got more comfortable with it and data has started to flow.

Eliot comments that it’s important to look at the quality of the sponsors and their professional team (chiefly the main contractors), but adds: “In reality, we’re funding a trading business, so it’s crucial for us to examine the rents these units can attract and their operating costs.”

Meanwhile, Tom Lee, director at Pure Structured Finance, points out that funding these schemes usually has a higher equity proportion than the buildto-sell model, which means that capital is tied up for considerably longer, “with profits not realised for a dozen years or more after they sell their holding”.

David Mill, director of real estate at Arbuthnot Latham, warns that low yields can cause issues with senior debt refinance if the 26

Bridging & Commercial

income is insufficient to meet debt service costs. The lack of available land, especially in London and the South East, drives up site prices, in addition to high build costs reflecting the quality needed of BTR properties, which can result in relatively low yields, making some schemes unviable.

Lenders should also look ahead to practical completion and ensure that the anticipated rental income is both realistic and sufficient to fund future costs, advises David. “Otherwise, there is a refinance risk from the outset.” As part of the analysis, financiers will typically deduct 25–30% from gross rents and focus on sinking funds and capital expenditure to ensure the product continues to remain attractive and modern with ongoing investment and maintenance, he expands.

Richard Fine, managing director at Brotherton Real Estate—which arranges finance for this sector—notes a strong and growing interest from the debt space.

He explains that BTR is seen as “recession proof ”. It is one of the few sectors that credit teams at UK clearing banks are comfortable with, while the wider debt finance market likes it because of the nervousness around office and retail.

“It’s a great time to be developing this from a lending perspective, and there’s a real dearth of supply.” Those with good stock can achieve decent debt terms and “the bigger, the better”, he claims.

Investors show their interest Some property income streams, such as retail, have struggled as shopping has shifted online, but that has created a space for BTR, Peter observes. Among investors and lenders, he sees more of an appetite for it because of its increasingly proven concept.

Moreover, most BTR investors will be able to claim capital allowances as long as the property is not within a pension fund, explains Nolan Masters, BTR director at Veritas Advisory. In the 2021 budget,

View

the government announced a number of temporary accelerated forms of capital allowance, which included providing up to 130% tax relief for expenditure on certain assets incurred before April 2023. Corporate taxes will increase to 25% from then, so the key message for investors is to use this opportunity to claim those ‘super’ capital allowances, as well as other tax reliefs, over the following two years, Nolan urges.

Peter believes the income streams from BTR will be increasingly capitalised, with pension funds looking for surety and quality. “BTR will be viewed as a longterm investment and we could see the sale of this asset class traded between pension funds.” Ultimately, this shouldn’t impact the customer, he continues, because these funds will have the same underlying objectives: to maintain a good reputation and relationship with their customers to remain fully let, so homes will continue to be invested in and the quality and lifestyle remain attractive.

Richard also sees a growing interest from institutional investors. While previously they would have looked for an office or retail space with a 15-year lease, retail is now “pretty toxic”, he asserts. Although tenants in the residential market, whether PRS, student accommodation or BTR, generally sign up for year-long leases, the long-term income once generated by other real estate assets can be replicated.

This is because if you build in the right place, they should always be full. “The real challenge facing developers is building schemes big enough to attract the interest of the big institutions,” he states.

Some clients look to forward fund deals, whereby they obtain planning, then seek an institution willing to buy the project and fund its development with a profit payment

at the end, Richard explains. And, because they are eliminating the developer’s risk, they look for a discount. Alternatively, they will build it with development finance and then find a buyer for the completed project.

BTR schemes tend to be valued on an income yield basis (ie investment value rather than aggregate market value, which can typically create a markdown of 10-15%).

“Recent transactions in the market suggest that some institutional investors consider this an ideal time to build up a portfolio,” David imparts, with higher prices (and hence lower yields) achieved. However, he warns that this growing interest potentially means that opportunities for lenders to provide investment funding may reduce as new schemes are bought by institutional investors; most schemes might eventually be owned by a few large operators, creating barriers of entry to new participants.

The outlook Ian believes BTR is transforming what it means to rent in the UK. Meanwhile, the sector itself is diversifying. “Around 10% of all completed BTR homes are now located in suburban areas, as opposed to the traditional model found in city centres,” he reports. “These homes tend to be lower rise with gardens, reflecting the increasing demand for more space, yet retain good access to urban centres.” Such homes are ideal for families, he comments.

“It’s exciting to see the sector grow, bringing different products to the market and providing more choice. Fundamentally, the only way to solve the UK’s housing crisis is to ensure every housing sector is firing on all cylinders. We need all forms of housing at all price points so everyone has somewhere to live that they can afford,”

Ian concludes. Research from BFS’s ‘Who lives in build-to-rent?’ report, found that BTR has comparable levels of affordability to the PRS, and is notably more affordable for couples and sharers. Local authorities could also use BTR to encourage sites to come forward quicker, as the faster absorption rates allow for quicker build out.

According to Ian, BTR provides discounted market rent, which is negotiated between local authorities and developers and typically involves offering rents at 20% below the local market average. However, this generally only makes up approximately 20% of the entire development.

Consequently, Harry feels there is still a question mark over whether BTR is the best way to deal with the lack of affordable housing. “Should BTR continue to be unattainable for key workers and the lower socioeconomic classes, it may look less favourable to policymakers,” he claims.

Therefore, expanding the role of this asset class in addressing the UK’s housing crisis—with a focus on a wide range of tenants and what they can afford—could offer huge opportunities for developers, lenders and investors, while also providing secure, long-term accommodation that is appropriate to people’s changing needs.

Image by Quintain Living

Image by DEXTERS

27 July/Aug 2021

The Platform for Development Finance and Bridging Lenders Aurius DF from Apak Group, a Sopra Banking Software Company, is the only platform targeted specifically at the UK Development Finance and Bridging Market.

Lending for Development Finance presents unique challenges: •

The flexibility demanded by the highly changeable nature of the projects being funded

•

The need to monitor complex deals to make sure they stay within their agreed parameters

•

The involvement of brokers and multiple third party professionals

•

The requirement for close management of the relationship with the developer

•

The difficulty of producing clear, consolidated business information in order to be able to manage risk and predict cash flow

Meeting these challenges is vital to a successful Development Finance lender in order to manage risk and increase efficiency. This helps control the cost of managing these complex loans which ultimately increases the margins available in this competitive and dynamic market.

Based on Apak’s Aurius platform, Aurius DF meets the business needs of Development Finance lenders by providing market specific functionality, including: •

Loan Schedule Modelling (both preapproved and in-Life)

•

Facility Limit, Advance Limit and Loan Tranche Management

•

Tracking of involved Brokers, Third Partied and Professionals

•

Guarantees and Security Monitoring (including tracking constantly moving LTVs)

•

Notes and Diary Management

On top of the Development Finance specific functionality, Aurius-DF clients benefit from access to all the underlying Aurius platform capabilities: •

Open API access through the Aurius connectivity suite

•

Configurable, embedded workflow and document management

•

Tried and tested accounting, payments and transaction handling

Delivered using a cloud-based Software as a Service model, unlike traditional software delivery models, lenders have a low cost of entry and pay based on the amount of business handled by the solution.

Want further info?

Continue the conversation and contact us at apak.info.team@soprabanking.com

FREE YOUR CLIENT FROM THE RESTRICTIONS OF ASTs We like to make superheroes out of our brokers. That’s why our approach to short-term lets isn’t just for the holiday let. We look at the overall picture, so if your client uses their property through booking sites for people on staycations, for contractors working at a nearby site, or for families needing a short-term base for a couple of months through a property licence we can take that into consideration to meet the ICR. With LENDING UP TO £15M AT UP TO 75%, it’s all about powering up affordability and improving returns.

Specialist BTL

Semi-commercial

Bridging T: 020 7862 6244 E: specialistmortgages@htb.co.uk

FOR INTERMEDIARY USE ONLY | © 2021 Hampshire Trust Bank Plc is authorised by the Prudential Regulation Authority and regulated by the Prudential Regulation Authority and the Financial Conduct Authority. Our FRN number is 204601. We are a company registered in England and Wales, registration number 01311315. Registered office: 55 Bishopsgate, London EC2N 3AS. Hampshire Trust Bank, HTB and

are registered trademarks of Hampshire Trust Bank Plc.

Talking shop Why deals are doing the rounds and what it really says about the specialist lending sector Words by

caron schreuder

A

Cover story

s with many of the subjects that pique our interest enough to warrant space in the magazine, the conversation that inspired this issue’s cover story was brought to light in one of our virtual roundtables. When I picked up the thread and ran it by a group of brokers, each excitedly shared similar tales and their enthusiasm to get involved in a wider discussion. The practice of specialist finance borrowers (and sometimes their advisers) ‘shopping’ deals around various brokers and lenders is a culmination of factors indicative of today’s market. Seemingly innocuous, it in fact highlights the need for education on every level because, left unchecked, this circulation of cases can ultimately put consumers at risk—and take the reputation of the market down with it Kim McGinley, founder and director at VIBE Finance, had spotted a prevalence of prospective borrowers approaching the brokerage, only to discover that it was one of a few that were being presented with the deal in each instance.

While the concept has been around for years, Kim believes it became more noticeable during lockdown, owing to people having more time on their hands and, often, social channels at their fingertips. As VIBE is not a firm that participates in the race to the bottom in terms of rate, Kim does enquire as to whether there are other brokers in the mix—although the truth is not always forthcoming. “Sometimes, it’s not until it gets to the lenders, and they’re like, ‘We’ve seen this three times now from different brokers,’” she shares.

Crucially, this can act against a loan applicant. This is somewhat ironic, in that the client believes that by going to multiple sources they are broadening their funding options and chances of getting approval. “I’ve come from a lending background,” Kim explains, “and I remember instances when I had four brokers submitting the same case to me. Underwriters would look at those cases and say, ‘This has been touted around too much. If other lenders aren’t doing it, we’re not going to touch it.’”

Jordan McBriar, managing director at Adapt Finance, and Alison Houghton-Corfield, national relationship director at Master Private Finance, have also observed the circulation of deals—primarily when the business is arriving direct, as opposed to through introducers.

Noting that customers have every right to get a second, third or even fourth opinion, Alison remarks that working with—and trusting—a broker can act as a “safety net”. A key theme in our conversation is the complexities that often arise during a bridging application, for example, that a client may not have the experience to handle. When it comes to rate, things are not always as they seem.

Will a borrower factor in all the other charges, fees and lender considerations that add up to it being the best deal for their circumstances? Moreover, will a lender execute the advice process necessary for an informed decision? We’re all aware that, from a regulatory standpoint, they are not required to do so, making the case for an experienced broker all the more convincing.

It transpires that a common mistake consumers could be making—and which leads them down the path of shopping around—is the false conflation of bridging and mainstream mortgage rates. “Mortgage rates are dropping here, there, and everywhere,” Alison comments. “You get a bridging rate at, say, 4.5% a year, and they see that as massive. But the question is: compared to what? It’s a different animal.”

32 Bridging & Commercial

“’HORRIBLE’ REDEMPTION POLICIES, FOR EXAMPLE, OPERATED

BY SOME PROVIDERS IS SOMETHING WHICH BORROWERS WON’T BE PRIVY TO WHEN CHASING THE LOWEST PRICE”

“A LOT OF BROKERS (AND CLIENTS) CAN’T SIFT OUT THE BULL, SO THEY TAKE THE MONEY AND PAY FOR THE VALUATION, BUT THE DEAL WAS NEVER GOING TO HAPPEN”

Cover story

The idea that the lowering of rates in the wider mortgage market will automatically filter into more specialised areas is one that Alison feels also warrants an educational focus. The influx of mortgage advisers and customers into bridging in recent years may also be compounding the view that both markets operate in a similar way. Furthermore, Claudine Reynolds, business development director at Blaise Commercial Finance, tells me that the coupling of inexperienced borrowers with underwriters who are new to specialist finance—part of the inflow of lender entrants—can be like “the blind leading the blind”.

Another angle to this debate (potentially also arising from more mainstream product areas) is that, in many respects, rate is still considered king.

Kim believes that the frequency of deals being shopped can be mitigated by guiding consumers—which comprise 90% of VIBE’s business—and making it clear that interest is but one aspect in a long line of considerations when it comes to specialist finance.

Claudine points out that plenty of consumers, brokers and lenders still “major” on this factor, perpetuating its importance in the grand scheme of obtaining a loan.

She presents the example of “horrible redemption policies” operated by some providers—something which borrowers won’t be privy to when chasing the lowest price, but which an experienced broker could help them avoid.

It’s conceivable that those in search of finance may also be under the impression that pitting brokers against one another will net them a more competitive deal—and some do indeed take the bait.

Although development proposals see fewer deals being issued to multiple providers, Chris Treadwell, structured finance broker at Mesa Financial, mentions that he has found himself having protracted conversations with developers about marginal differences in rates, while the bigger picture regarding the provision of funds on time, for example, is not being prioritised. As Jordan puts it, “deliverability is worth a lot more than point nought of nothing going from nowhere.”

Echoing Kim’s point about the impression a lender gets when a deal has done the rounds, Chris speaks of his experience when working as a development finance provider. “I would say, ‘Look, I’ll be straight with you, this is coming via four different brokers. What’s going on?’” he recounts, adding that his expectation was that it was a “bad” deal. As it turned out, these types of cases were not necessarily untouchable, just disadvantaged by being presented multiple times.

I was curious as to whether an enquiry that is ‘well travelled’ always carries the intention of yielding a better rate, or if it is also about trying to fund the unfundable. If you knock on enough doors, one is bound to open, right? Charlotte Stanford, senior associate at Sirius Property Finance, believes that it can be both, and that greed has the ability to play an insidious role. “A borrower may get one headline rate, then they start Googling and seeing other things that might be out there,” she says. “And they don’t know when to stop and trust you as a broker.”

The idea of trust is interesting in this context. Ostensibly, a borrower should completely rely on their broker to get them the best possible deal, perfectly suited to their circumstances. However, it is Chris’s take that some have had run-ins with inexperienced brokers, and this has resulted in them taking matters into their own hands, while also drawing on a broker’s knowledge and, as Simon Allen, property finance specialist at Searchlight Finance, says, using them as “sounding boards”.

“It’s the new brokers that are coming in,” claims Simon. “They can see how much money, in theory, they could make and think it’s less work as well. And some of them think there’s less compliance.”

“There’s no bar to entry; anyone can step in and become a broker,” Chris observes frustratedly. “When I speak to developers now, and they’re shopping around, the common denominator is they’ve been burnt in the past. They’ve paid a fee which hasn’t translated into good performance or advice. I’ve had developers say to me they wish they’d never had the broker involved. It’s just mind-blowing.”

35 July/Aug 2021

Cover story

Claudine is keen to distinguish between the intermediaries who take the time to understand the transaction and work with the lender to come up with the right resolution for the customer, from those who can be considered glorified “postboxes”—mere conduits for documentation and adding very little value.

Incidentally, to balance the amount of work it takes to be in receipt of credit-backed terms with those deals that do not convert, Claudine informs us that Blaise has restructured its fees, “to accommodate for those people that do shop around”, and improve retention. In charging 0.25%, the company does not lose out if and when the applicant takes those terms around the marketplace to try to get them cheaper.

The notion of a tiered broker fee system is floated, a sliding scale depending on how much involvement the introducing party had. Jordan fears that to access the higher proc fee, brokers would simply drive business to those less conscientious funders, furthering the polarisation of ‘good’ and ‘bad’ lending.

“We can sift out the bull,” Charlotte inputs, referencing the murky reliability of some lenders’ credit-backed terms. “But a lot of brokers (and clients) can’t, so they take the money and pay for the valuation, but the deal was never going to happen.”

She often hears her introducing brokers referring to “one or two” bridging or commercial lenders that they go to, making her question what kind of ‘offering’ that constitutes for a customer. After all the work that has gone into improving the standing of the bridging industry, if customers receive poor service from their broker representation, this will contribute to putting them off bridging for good.

Functioning whole of market, while considered best practice, is not a requirement in unregulated sections of the industry—another critical aspect of this discussion.

Kim recalls a work trip she took, after VIBE had expanded and received full FCA authorisation, during which she was laughed at by peers for following best practice principles throughout the company, and not just on regulated deals. “It’s a choice in how you run your business,” she stipulates.

Kim acknowledges that operating in an ethical way will set you apart—but it will also cost you. Unscrupulous brokers will do nowhere near the same amount of work and simply get an offer out and on the table as quickly as possible.

Chris takes his responsibility as an adviser, rather than a mere executor, very seriously. “It’s about sleeping at night and remembering that this is people’s livelihoods, their businesses. It’s really important—this isn’t just numbers.”

An equally hot topic, which complements this one, is the spotlight being placed on lenders with regard to their introducer onboarding processes—or lack thereof. Kim feels that finance providers have a responsibility to vet the brokers they are allowing to bring them business. Worryingly, I am made to understand that many lenders typically ‘do not care’ where their deals come from, with some continuing to work with firms that are known to have phoenixed after the appropriate time spent underground. With so much liquidity in the market, there is a sense of desperation to get money out the door and, once again, greed.

We inevitably move on to the concept of a specialist finance qualification—some sort of verification that an introducer’s knowledge and expertise are up to scratch to be operating in this relatively complex space. The group unfortunately agree that its chances of full implementation and buy-in from all stakeholders in an unregulated market are nigh on “futile”.

Simon introduces the idea that technology may be fuelling client autonomy and encouraging them to browse a variety of different offerings via sourcing systems.

Adapt owns Geqo.co.uk, one such platform that promises “instant finance quotes for property investors and developers”. Jordan is candid about the value of this type of resource, at least from his perspective. “A lot of them are just data carriers,” he reveals. “Realistically, these systems are impossible to maintain because lenders change their rates every 60 seconds.”

36 Bridging & Commercial

Cover story

Chris concurs that, when using sourcing tools, you ultimately end up dealing with a broker. Nonetheless, they are positioned in the market to provide commitmentfree pricing and information to potential borrowers—often ordered by rate. Jordan addresses this and divulges that, with Geqo, they randomised the search output to vary what appeared up top, an experiment to see whether people actually read through all of the results. “We noticed that the click through for the lowest rate rarely became the eventual product as there was a more pertinent driver for them,” he says, adding that the conversion rate increased when sorting by factors other than rate.

According to Simon, many lenders ‘dual price’ online, choosing to advertise their direct-to-market rates and fees, which differ if a broker gets involved—something that an introducer new to specialist finance may not know. “A lot of mortgage brokers, especially the new ones in the market, are very much used to sourcing systems. They shop around to try and justify to themselves that they’re getting the best deal,” he points out. “But the best deal isn’t best price.”

Kim is vehement about the place systems have in our parts of the lending market.

“The minute you throw specialist into the mix, there is no adequate sourcing system,” she states, adding that the over-simplification presented by these platforms skims over the variety of layers present in more complicated product types, “each of which could trip the client and broker up further down the line once fees are paid”.

They also have a tendency to discount certain cases, customer profiles and solutions, purely because they don’t recognise nuance. “A lot of what we do, as brokers, is push for exceptions on cases,” Kim explains. “It’s about knowing which lenders you can go to, and a sourcing system won’t tell you that.”

In this vein, Charlotte fails to see how clients can possibly navigate the everchanging criteria from lenders, when even seasoned professionals struggle to keep up. I ask whether brokers would prefer to have some sort of certainty around the fluctuation of rates and criteria. “Yes, definitely,” she answers. “Every lender comes in and says, ‘If you need it cheaper, we’ve got this new money, we’ll do it.’ It just never ends.”

I’ve recently become aware that some lenders will undercut themselves by adjusting their published rates and/or criteria (and sometimes those that they’ve already extended) in order to win business. If this is being offered direct, does this not suggest that shopping around and even circumventing brokers can work? Simon holds out hope that well-intentioned firms will vote with their feet. “People need choice, and we all know who the lenders out there are that do this kind of thing,” he asserts. “But the industry is big enough for us to choose where to take our business.”

As we’re wrapping up, Alison tells us about a scenario in which a borrower went direct to a lender and, 10 days in, discovered they were out of their depth and requested Master Private Finance’s help in getting back on track. This concerned me because I couldn’t understand why the lender engaged for so long without the presence of a broker when the client was so obviously ill-equipped to handle it themselves. In the interests of protecting clients and reducing risk, I ask: in an ideal world, should we insist on bridging being broker introduced? But, as outlined in this story, what if it is rogue brokers that they need protection from?

For her part, Alison feels that if it were mandatory for bridging deals to be intermediated, “a lot more would get the over the line—and quicker”.

Several recurring themes play into the shopping around conundrum, none of them new. Some might be happy to pop it under the banner of ‘growing pains’, but I would like to see some demonstrable accountability and recognition that the sector only truly works if every part of it functions properly. Here, we are faced with uninformed clients thinking they can take on a bridging loan direct; inexperienced brokers thinking they can advise on a bridging loan; and lenders willing to accept business from both. I think we all agree that, if we ignore this, it will inevitably short circuit the success of our sector. There are ways to raise standards and abide by best practice that don’t infringe on commercial opportunities—but everyone has to get on board.

37 July/Aug 2021

Stepped Rates: (All Products & LTVs) 0.39% pm for 6 months Prime flat rates: 0.64% at 65% LTV Resi 0.69% at 75% LTV Resi 0.74% at 75% LTV Light Dev 0.79% at 70% LTV Rapid Desktop Loans up to £10m Net Grab A Piece...

Of Our New Rates...

AWA R D S 2 0 1 8 SPECIALIST PRODUCT OF THE YEAR

WINNER

AWA R D S

Contact us: 0845 318 0001 enquiries@aspenbridging.co.uk

2 0 1 9 SPECIALIST PRODUCT OF THE YEAR

H I G H LY COMMENDED

MOVE YOUR

TO THE

The Finance Professional Show 2021: Fresh challenges, new alliances and unprecedented opportunities await Brand new hall for 2021 – West Level One Better lead generation via our new hybrid approach Exciting sponsorship opportunities available All-day conference programme – still the best in the business, with a diverse array of speakers, topics and formats Interested in booking a stand? Email info@thefpshow.co.uk or call 0845 004 3169 Find out more info and register to attend by visiting www.financeprofessionalshow.co.uk

Proudly supported by

Property receivership: It is imperative that lenders ‘take control’ of the situation A year on from CG&Co’s last conversation with Bridging & Commercial—in which partners Daniel Richardson and Edward Gee provided advice on how to navigate possession proceedings amid the pandemic—and the various stays and bans on evictions and court hearings have punctuated the world of property receivership.

Considering that commercial evictions are still on hold until March 2022, its impact is far from over.

Here, Daniel and Edward bring us up to speed on where lenders and borrowers stand when it comes to possessions and the best possible routes to ensuring relationships and stakeholder interests are protected

Feature

Were your predictions related to property receivership in 2020 and early 2021 realised?

How have lenders been managing loans?

How smoothly are court proceedings now running?

DR: By any stretch of the imagination, it has been an unprecedented year for property receivership. When asked for my thoughts a year ago, it was clear that both the ban on enforcement action and the state of the property market would be of pivotal importance—and this proved accurate.

Restriction dates were always going to be the main issue for receivers where vacant possession had not been obtained consensually. At CG&Co, we’ve ensured our knowledge of this ever-changing process has remained up to date by using both our in-house legal team and those external solicitors who assist on our cases.

Twelve months ago, none of us knew how the sector would evolve. While there were undoubtedly delays in being able to sell properties at various times throughout the pandemic, the lack of supply has directly resulted in a greater demand than usual.

This—combined with the stamp duty holiday—has enabled us to ride the property bubble and achieve some great outcomes for lenders and, ultimately, borrowers.

EG: We work closely with a host of finance providers of all sizes who have different policies—and attitudes—when it comes to managing their loans. Throughout the pandemic, appointing receivers was permitted, and we consistently progressed cases at the earliest opportunity, and as far as possible, despite the stays on possession proceedings. Once these cases could go ahead, everything was done to get them through the court system quickly and get an order—whether by consent or court. After various postponements to the enforcing of residential eviction orders, this was finally lifted in England on 31st May. The main request we’ve received from lenders has been to take up communication with borrowers, especially on those occasions when it had broken down. This has particularly been the case when the loan terms had expired and Covid had not necessarily had any impact on the exit.

We’ve achieved great success by reaching consensual agreements with borrowers on exits, which provides an agreed timeframe of repayment. But this does depend on the borrowers, or their brokers, engaging with us and being upfront on why there was previously a delay.

Of the providers we work with, around 50% have reached some form of assistance package with borrowers prior to our appointment, whether through payment holidays, extensions or new loans. This will have been largely on the basis of the underlying asset being good (certain post codes simply perform well, irrespective of outside influences) and the borrower engaging with the lender to provide the most accurate picture.

There’s now an increasing perception among many lenders that the appointment of receivers is akin to ‘treating customers in the fairest way possible’. It’s become clear that this can frequently be in the borrower’s best interests, as it will cost them less in terms of the ongoing interest and associated charges—such as legal fees and costs linked to proceedings and security etc—in the long run.

DR: The courts were finally able to progress all repossession and enforcement claims after the six-month stay was lifted on 20th September 2020—but far greater emphasis is now being placed on remote hearings.

Property receivers, of course, have to be prepared for the initial hearing where a judge reviews the possession claim and sets the next steps, which might be directions or a possession hearing. This extra layer of the process has undoubtedly added to the time that’s spent on working through each case.

Currently, the main issue is how long it’s taking from the issuing of a possession claim to the date on which a possession order is granted. This largely depends on the court in which proceedings are issued, with London facing the longest waits. The busiest courts are now taking 12—15 weeks longer to process claims.

At the end of May, as soon as the eviction ban was lifted, we had many possession orders in place and writs for enforcement were made and eviction dates granted.

Whenever possible, we have enforcement transferred up to the High Court at the time of obtaining the order, so High Court Enforcement Officers attend the process rather than county court bailiffs.

Consequently, we were able to recommence evictions as early as mid-June, which shows comprehensively that the approach CG&Co has adopted throughout the pandemic has been the right one.

There’s now an increasing perception among many lenders that the appointment of receivers is akin to ‘treating customers in the fairest way possible’ . . . as it will cost them less in terms of the ongoing interest and associated charges in the long run”

42 Bridging & Commercial

Feature

What impact is the continued ban on commercial evictions having on lenders?

What new challenges lie ahead for lenders and brokers as we slowly return to a normal environment?

EG: In short, the ban on commercial evictions is having far-reaching implications.

If this is lifted on 25th March 2022— and the date isn’t delayed again—it will mean that commercial tenants have benefited from two years’ protection since the beginning of the pandemic.

I’ve witnessed first-hand the understanding that lenders have shown to landlords and borrowers—but this was always bound to wane after such a long period. At this point, it’s essential for landlords to engage with lenders at the earliest opportunity so they can fully understand their current situation and that of their tenants.

It’s also critical for finance providers to ensure that the right processes and procedures are scrupulously followed if the only likely outcome is eviction. It could be up to two years since rent—and the mortgage—has been paid, making it imperative to take control of the situation. The immediate appointment of a receiver and solicitors will facilitate this.

We work in conjunction with borrowers when their assistance is forthcoming to ensure that everything is prepared for a swift resolution after the ban ends.

On balance, I don’t think we will see the same volume of commercial eviction claims compared with residential—but I assume the courts will experience another major surge once the stay is lifted.

The backlog of claims that will arise at this point and the inevitable delay in processing them will further frustrate landlords and, subsequently, lenders.

DR: To my mind, there are four key issues that lenders and brokers must be mindful of in the coming months:

The end of the furlough scheme This has been extended until 30th September, which will mean that some salaries have been subsidised for up to 18 months. This scheme should be used on a rapidly decreasing basis until then.

However, many companies and individuals have become reliant on these subsidies, and there will undoubtedly be business casualties ahead, along with rising unemployment.

Emerging issues surrounding rent and mortgage payments The conclusion of the furlough scheme combined with the end of the mortgage payment holiday is likely to impact both the ability of tenants to pay their rent and property owners to meet their mortgage payments. Consequently, arrears will accumulate. Those who do retain their employment, or indeed those who were fortunate not to require furlough, may very well have taken up the opportunity of a payment holiday just because it was available. My concern is that this has been habit forming and some borrowers might now struggle to recommence mortgage payments, particularly if they’ve subsequently taken on additional financial commitments.

Considerations surrounding landlords Landlords have been hamstrung since the outset of the pandemic, with many powerless to remedy their rental income stopping overnight. Negotiations with lenders will continue where BTL mortgage payments have been unable to recommence, but patience will probably be at a premium more than 15 months down the line. I expect this will be particularly resonant for short-term products when lenders will need to consider the equity position and their ability to recover in full when there’s an increasing debt figure on default rates.

The projected rise in both defaults and delayed exits Given the pervading economic uncertainty that exists, it’s inevitable that defaults will increase. This will manifest itself either through arrears on mortgage payments

or due to the expiry of the loan term.

While the appetite to lend remains high within the specialist finance market, LTVs may struggle to meet outstanding debt figures, with borrowers unable to raise the funds to cover shortfalls, preventing refinance exits from progressing.

Currently, lenders should be concerned about underperforming or default loans, especially those on which the term has expired and they want to allocate those funds to new deals. They should also be mindful of the speed with which these can be recovered. With the backlog of possession claims expected to increase for the foreseeable, lenders owe it to themselves to take the most proactive approach to ensuring that borrowers are consistently engaged and negotiated with at the earliest opportunity.

Currently, the main issue is how long it’s taking from the issuing of a possession claim to the date on which a possession order is granted. The busiest courts are now taking 12—15 weeks longer to process claims, with London facing the longest waits”

43 July/Aug 2021

Go on.

Make their day.

Our competitive range of regulated and unregulated Bridging loans have become renowned for their speed, ease and flexibility.

With thousands of them under our belts over the years, there’s practically nothing we haven’t seen before.

So whether your client’s been left in the lurch by another lender or just needs to move quickly on their next investment, we'll work with you and apply our common sense approach to make it happen.

Find out more

togethermoney.com/maketheirday For professional intermediary use only.

Real world bridging.

With rates starting from 0.65% pcm and LTVs up to 75%, talk to us about our range of UK-wide bridging solutions for SMEs • • • •

Standard residential bridging Auction finance Development exit Semi-commercial & commercial property bridging • Land with planning • Refurb bridging

Colin Mottram, Relationship Director: Bridging

Real world lending 0800 470 0430

bridging@assetzcapital.co.uk Assetz SME Capital Limited is a company registered in England and Wales with company number 08007287. Assetz SME Capital Ltd is authorised and regulated by the Financial Conduct Authority in respect of its peer-to-peer lending platform only. ’Assetz Capital’ is a trading name of Assetz SME Capital Ltd. Assetz SME Capital is registered with the Office of the Information Commissioner (Reg No: Z3338899) for data protection purposes.

Feature

‘BDMs are more engaged with bespoke transactions’

Adrian Moloney Towards the end of last year, InterBay Commercial—part of OSB Group—entered the commercial market with a fresh proposition for brokers and their customers, focused on suburban precincts and retail stores, industrial buildings and smaller office blocks.With the sector not yet seeing the same bounceback as its residential counterpart, we speak to group sales director, Adrian Moloney, to get his interpretation of how this asset class will evolve in and out of city centres and adapt to the changing needs of tenants and consumers What has the response to the re-launch of your commercial offering been?

What are the current product highlights and will you be enhancing them moving forward?

As a result of fewer high-street players in the commercial market, demand has been really good. We’ve seen a particularly keen interest in the semicommercial offering—people are recognising a commercial property with a residential investment above as an attractive opportunity.

What’s been very encouraging is the take-up of brokers using the proposition—it hasn’t just been the same old faces. Emily Machin [head of specialist finance] and her team have made a big effort to widen our reach so that more brokers understand what InterBay does. We’ve expanded by attracting new commercial brokers and growing our distribution through our network and club connections. Our focus has been on targeting those who’ve got clients that invest in BTL and have semi-commercial and commercial within their portfolio.

There’s news on that coming up, so watch this space... What we have done is clarify our product range. At the start of the year, we updated our broker website, which is now much easier to navigate and has a fresher look. We listened to our broker partners and now have a simpler offering that concentrates on two- and five-year fixed rates in the relevant product sets. The criteria section is much more user-friendly, particularly for brokers coming to us for the first time.

Some of our criteria have been amended, particularly in the BTL space, with regard to increasing the LTV and removing the maximum number of rooms within the HMO offering. We’ve also looked at some commercial assets that are strong, but perhaps don’t meet the black and white of our criteria. Our BDMs are a lot more engaged with those sorts of bespoke transactions. That’s what InterBay and

46 Bridging & Commercial

Feature

“As clarity increases about what’s happening when people return to offices, investors will be eyeing opportunity—they always do” other specialist lenders should be doing.

And we brought out holiday lets, which has got really good traction. Again, this has opened the door to more brokers because a lot of landlords are diversifying into that area, or they’ve already got them in their portfolio but want to put them in a limited company name, which the high street doesn’t cater for.

What makes a complicated deal?

The complex borrower tends to go to a lender like InterBay because they don’t fit in a box—there’s always something quirky about the deal. Often, you have a complication around the structure of the company name the property might be in. While the high street might only accommodate up to two borrowers, we can consider up to five investors sitting behind a company. In other cases, it’s an unusual property that we might not normally look at, but we assess the strengths. A really good asset we’ve got is our real estate team, who give us a wider picture of the liquidity of the market and where it’s going in terms of trends.

What are you noticing in terms of changing asset acquisition strategy that you might not have seen pre-pandemic?

It’s quite interesting. I think we’re seeing a more seasoned investor in the commercial and semi-commercial area, rather than someone who is speculative or completely new to it. Purchasers are almost looking to value engineer the property or asset manage it. This is where

active investors are improving acquisitions through lease and planning enhancements following changes to the Use Classes Order. These experienced investors are seeking to buy while the market is softer and, with a greater understanding of risk and return, have a longer-term outlook of the commercial sector with regard to rent and capital appreciation.

They know what they’re doing and they’re identifying a good opportunity.

How will the recent eviction ban extension impact commercial property landlords and your lending appetite?

That’s hard to answer, as our borrowers have performed well; we work with commercial investors who tend to have experience of the ups and downs of the market. What we’ve found with our commercial landlords is they’re tenantcentric—they’ve been working with them during the difficult period. While lenders aren’t always privy to the conversations between landlords and tenants, it’s fair to say from what I’m hearing from our broker partners that most landlords have been sympathetic to their tenants’ plights.

Obviously with new lending, you can make an informed decision because you’re seeing what the market’s like and how a business is trading; it’s a lot clearer than it was 12 months ago. We lend against the tertiary markets because they’ve performed well, continued to trade during the pandemic, and have become more attractive to both occupiers and investors. A prime example of what has thrived is the little parade of shops in a

48 Bridging & Commercial

Feature

small town. Local metro-type stores have also been very good investments. People have moved out of the cities, and those local shops, supermarkets, restaurants and takeaways have flourished. This has made the lending decisions easy.

A lot of businesses will offer flexible working—as many now do—and I think offices will introduce vibrant co-working spaces to entice workers.

Perhaps the office as we knew it will be a bit more of a social hub, where people are going into work on set days to have meetings and get together afterwards.

Do you expect demand for semicommercial and commercial property investment to come back in urban centres?

I’ve been in London a few times since the start of the pandemic. If I go to the West End, it’s a bit busier. In the city, however, it’s pretty quiet, because workers haven’t returned to the offices.

There are people about, but it’s not the hustle and bustle we’re used to.

It will come back, but it will be slightly different. For a number of years, we’ve known that high streets needed upgrading.

I find the town where I live is becoming more of a destination centre; there are a lot more outside areas where people want to congregate. I believe town centres will evolve and become more like social hubs.

However, people will return to the office—certainly the younger generation will want to be in the city. Businesses are expected to use outside space a bit more, and the high street is set to pick up. Travel to places like London will probably be made easier, too—flexible rail tickets have already been introduced.

After 16 months of the pandemic and working from home, most people are, in a lot of ways, looking forward to getting back and meeting colleagues.

Consequently, I expect there will be a sharp increase of people and traffic going into cities such as London and Manchester.

How do you anticipate commercial property will adapt?

As clarity increases about what’s happening when people return to offices, investors will be eyeing opportunity— they always do. I expect a growth in pubs and restaurants in suburban areas because of differing work patterns. I definitely notice the pubs in my town getting busier when I pass them on a Friday afternoon. Different types of stores may also appear. I think we’ll see a ‘live, work, play’ set-up as cities adapt to being more lifestyle focused.

Business are seeking more flexible leasing terms as a result of the pandemic. How will this change the way lenders assess deals?

Flexible leases have been a feature of the commercial sector for some time. As a result, I doubt we’ll observe any sizeable change when it comes to making lending decisions at present. Most lenders are still considering the core fundamentals: the asset class, tenant demand, location, sustainability of rental and capital values, and tenant and investor liquidity. When you add all that together, you’ve got quite a flexible approach. It’s going to be interesting as we come out of the pandemic; will we witness more changes, such as businesses using work hubs rather than continuing long leases?

However, the way commercial lending is assessed gives a robust perspective, and I don’t see lenders massively deviating from that in the short term.

How are you planning for when the government support schemes end?

As a prudent lender, we always look at the wider picture when making assessments, ie using our in-house real estate function in terms of the asset, and our experienced underwriting team when checking the borrower profile.

Hence, our criteria are well placed for lending to businesses that have been able to trade through the pandemic.

We have every single product line open across all three of our brands, which probably shows our confidence in those sectors. We thrive as a specialist lender that has manual underwriting and takes the broad view—whether of the property, applicant or asset class. I think that puts us, and specialist lending as a whole, in a strong position going forward, because the market has become more complex than it was 16 months ago.

49 July/Aug 2021

PAY MORE NOW—OR

PAY MUCH MORE LATER

Words by

BETH FISHER Illustration by

ali hunter

SME developers are at risk of reducing their profits to rubble if they forge ahead with solicitors that lack the appropriate experience in property development transactions

Zeitgeist

A

s is often warned to lenders looking to dabble in adjacent yet more complicated markets, development finance deals require an entirely different skillset from lawyers. This area is not a sister to the mortgage conveyancing market, but rather a distant cousin—at best.

With Covid-19, Brexit, labour shortages, and surging prices for land and materials in the ever-evolving construction sector, never has it been more important for property developers to keep their processes and costs lean to avoid squeezing their already tightening margins—and one source from where catastrophic pain can originate is legals.

THE LAWYER’S ROLE

When finance providers run due diligence on a development deal, it involves the third-party expertise of valuers, monitoring surveyors and lawyers. In the main, valuation and monitoring reports progress with little stress.

Legals, on the other hand, are often described as a bone of contention. “As a lender, you need to be fully involved every day to understand exactly where each document is to keep it moving,” says Emma Burke, deal origination at Maslow Capital. “If you don’t do that, a completion can easily [increase] from four weeks to 12.”

Lenders typically have three separate lawyers from the same firm that work on different sets of documents: banking (the financial metrics of the deal), real estate (property title, searches and indemnity insurance), and construction (building contracts, collateral warranties and professional appointments).

They will benefit from panel solicitors who are well versed in their requirements and have drawn up their standard template documents many times before.

“They know our credit appetite and what not to do,” states Emma.

Lenders will consider the lawyer’s workload, too, and opt to use another firm if they’re already dealing with multiple cases.

Experienced developers are also likely to have three sets of solicitors—sometimes from different firms, to access specialist knowledge. If you throw mezzanine finance into the capital stack, you’ve potentially got another three lawyers in the mix. With so

many firms working on any one transaction, stumbling blocks will be keenly felt.

When the finance provider appoints lawyers, it creates a legal scope—a sort of ‘to-do list’ split into the three areas and circulated to all parties. This ensures everyone is on the same page as to what needs to be actioned and the legal fee that’s been agreed (if it’s fixed). If anything goes beyond this (say, if something crops up that wasn’t fleshed out during credit), the fee goes up. Each set of lawyers will need to understand what they are mandated to do, so that tasks are covered only once and collateral warrantees are shared, if possible, to keep down costs.

THE PROBLEM

Unfortunately, not all developers are as good at the paperwork as they are at building.

According to Juliet Baboolal, partner at Seddons, in almost all cases, rookie builders or developers choose inexperienced solicitors to act for them in development finance transactions. “In 90% of cases involving

This seems to be prevalent at the mid to lower end of the market—developments with GDVs from £2m–20m—or where the borrower has used a high street firm to undertake the relatively straightforward conveyancing work of acquiring land.“When a lender delves into the development documents, or the loan flips into a development loan with the same or different lender, the skills gap causes issues,” details Alexander Pelopidas, partner at Rosling King.

Crystal Specialist Finance also sees this regularly. “When it comes to firsttime developers, they will typically use a solicitor they have used on maybe a residential or BTL transaction, and they tend to be less knowledgeable about the nuances of a development transaction,” says operations director, Kris Corns.

The misconception here is that all solicitors are made equal and that general mortgage conveyancers can simply step into the shoes of a development lawyer and achieve the same results. “Just because you’ve known a lawyer for five years and they have completed all your prior investment work, doesn’t mean it will work for your £5m development,” argues Tom Lee, director at Pure Structured Finance.

Harry gives an example of a borrower who owns a site and has obtained planning but has not yet managed to discharge a pre-commencement planning condition. “That’s normally a prerequisite for the initial tranche of the development funds to be released; the borrower is clearly not ready to start the development if this hasn’t been done,” he explains.

“An experienced development lawyer will know that, whereas the usual reply from a residential conveyancer will be along the lines of, ‘Not done as yet’. That immediately puts the deal behind schedule.”

I am told that it’s mainly the construction documents that less experienced lawyers fall down on. In recent years, more emphasis has been placed on this part of the process following a rise in contractors going belly up. “Previously, you could have used the borrower’s standard templates that they agreed with their contractor and design professionals; now, we have specific clauses for step-in

“WE HAVE ONE LIVE TRANSACTION WHICH SHOULD HAVE TAKEN SIX TO EIGHT WEEKS... IT’S STILL ONGOING EIGHT MONTHS LATER”

novice developers—especially on small- to medium-sized projects—the tendency is to appoint a conveyancing solicitor who may have acted on the property/land purchase or has previously acted for the developer in a different capacity,” she explains.

Harry Peradigou, partner at Brightstone Law, says that many of the developers it deals with are inexperienced, and estimates that up to 70% of them appoint inexpert solicitors, a role which he describes has been downgraded to a “postbox”.

52

Bridging & Commercial

Zeitgeist

rights to protect us and the borrower—and that’s sometimes missed,” Emma states.

It is also worth noting that it is unfair to expect solicitors to be familiar with every lender’s standard documentation—especially in the sub-£20m specialist lending market, which has become extremely competitive. “I think a developer should always have several lenders in their pocket to explore and help grow their business,” advises Emma. “It spreads the risk for them and for us. But that then means that their solicitor, having previously dealt with one lender—like a NatWest— for 10 years, is now dealing with three.”

WHY WOULD A DEVELOPER APPOINT INEXPERIENCED LAWYERS?

If a developer has worked well with a firm or a solicitor previously, they usually want to work with them again—but overlook the fact that complex property matters need appropriate guidance. “Developers that press ahead regardless are showing their inexperience,” arguesMartinSimons,directoratPilcherGroup.

“While we try to ensure the client appoints a solicitor with appropriate experience, the lawyer that’s chosen has clearly ‘sold’ the developer on the ‘fact’ that they are more than capable of acting,” asserts Keith Forster, owner of PF&D. What’s worrying is that some developers instruct a firm just out of habit, familiarity and/or practicality—the ease of being able to rock up at a solicitor’s office on your local high street may be convenient, but it’s not smart.

While these issues seem to be appearing on smaller schemes, they occasionally arise where the developer has outgrown the firm it used when it was starting out.

Richard Gilchrist, head of property finance at Brecher—a law firm that specialises in residential development deals ranging from £1m–50m—estimates this problem occurs on 5–10% of transactions. “The developer is most likely using a local conveyancing firm which would have been first appointed on singleplot developments, perhaps when finance was being obtained from a high-street bank,” he details. “When the developer gains a track record, grows, and starts to use specialist lenders to improve gearing and leverage, the solicitors may not be familiar with the market requirements for that product range.”

Good-value law firms that focus on a specific area—such as standard commercial mortgage conveyancing or some aspects of development or planning—are usually involved early on for the due diligence of a purchase before the finance has been considered in order to keep costs down if the case becomes abortive.“When the finance is then brought in, the contact at the firm either attempts to do that part of the law themselves or refers the work internally to a colleague who is either inexperienced

“WE’VE ALSO SEEN CIRCUMSTANCES WHERE A BORROWER IS UNDER THE BELIEF THAT, SINCE THEY HAVE TO PAY THE LENDER’S LEGAL COSTS, THEY MIGHT AS WELL TRY TO REDUCE THEIR OWN AND PUT THE WORK ONTO THE LENDER’S SOLICITORS”

53 July/Aug 2021

Zeitgeist

“THE CONCERN HERE IS THAT THE BORROWER WILL NOT HAVE RECEIVED ADEQUATE INDEPENDENT ADVICE ON ISSUES THAT COULD POTENTIALLY CAUSE PROBLEMS THROUGHOUT THE BUILD PROCESS”

or of low quality,” illustrates Niall Brown, managing director at Auxilium Real Estate.

Unfortunately, the scarcity of SME development finance lawyers and the offputting cost of appointing a larger firm with wider specialisms are amplifying the situation.

A solicitor not well versed in this area may also underestimate the work involved and under-price their services—catching the eye of a new developer looking to trim the fat.

Once the deal starts to progress, the developer may be reluctant to move to a better suited law firm to avoid going back through the onboarding process and reincurring costs.

“We’ve also seen circumstances where a borrower is under the belief that, since they have to pay the lender’s legal costs, they might as well try to reduce their own and put the work onto the lender’s solicitors,” says Niall.

“This is often a false economy, as it can lead to misunderstanding, miscommunication and delays—meaningfeeincreasesacrosstheboard.”

BUILDING A CIRCLE OF TRUST

SPF Private Clients rarely sees this issue, with its practised developer clients benefiting from an established team around them.

“Once a good developer is up and running, it’s hard to break into that circle of trust,” states director Amadeus Wilson. When the firm has seen this hitch, it has often arisen from first- or second-time developers who haven’t understood the significance of informed legal advice and the repercussions of cutting corners. “They may be trying to save money, but it will cost them in the long run.”

In some scenarios, developers can spend years negotiating the purchase of a site and getting the green light on planning. “By the time it comes to obtaining finance, they have usually already shelled out tens, if not hundreds of thousands of pounds—so to then skimp on what is a linchpin in the whole process is foolhardy,” he adds. “The old adage, ‘Go cheaply and end up paying more’ applies here.”

TIME IS MONEY

Solicitors who lack specialist knowledge may miss things that are uncovered later on. While these may be resolvable, mitigating the issue— such as getting title indemnity insurance or amending the purchase agreement— will affect the timeline of the transaction.

“They also may not know what to search for in the documentation, so could end up overlooking something really important that will need to be done later,” Kris explains.

Another concern is the solicitor acting on the original acquisition not thinking about the proposed development in terms of rights that are required, or restrictive covenants that may be breached by a new use.

When it comes to agreeing overage on a purchase, Christian Francis, a partner in the real estate finance team at Fieldfisher, states 54 Bridging & Commercial

Zeitgeist

it’s likely that a high-street conveyancer will present the first draft of the overage deed for signing, “whereas a firm experienced in the market strategy for approaching overage is likely to negotiate and secure a far more favourable outcome which delivers a saving in many multiples of their fees”.

The terms in acquisition documents—such as onerous overage, deferred consideration arrangements, or restrictions on the title which prevents a mortgagee enforcing without obtaining third-party consents—could make the property difficult to fund. “These issues will need to be resolved, usually by the lender’s lawyers, who will not have anticipated or costed for them—and the relationship between lender and developer and their respective lawyers becomes fractious,” Christian claims.

Lack of competence leads to a match of email tennis between the borrower’s and lender’s lawyers, with the former clarifying what are considered standard development requirements. They will also not have the knowledge that their specialist counterparts can provide (such as experience of bespoke indemnity policies, caps on liability, and PI insurance of the construction team) and are less likely to be able to draft and negotiate the building contract, professional appointments, and warranties as necessary.

“This usually results in the inexperienced lawyer taking a back seat and encouraging direct communication between the developer and lender’s solicitor,” says Juliet. “This will delay matters, but the concern here is that the borrower will not have received adequate independent advice on issues that could potentially cause problems throughout the build process.”

This can give rise to regulatory issues against the developer’s solicitor for failing to advise on all elements of the transaction, or for accepting instructions for a matter on which the firm has a shortage of experience.

She tells me that the Solicitors Regulation Authority (SRA) sets out specific core outcomes which require solicitors to act with independence and integrity; maintain proper standards of work; and act in the best interests of their clients. Therefore, if a solicitor accepts instructions but has no real experience of this

type of transaction, nor has any supervision from a solicitor with the requisite expertise, then this could amount to a breach. The borrower could report this to the SRA if they feel they have suffered a loss as a direct consequence. “From an ethical perspective, if at some stage of the transaction the lender’s lawyer believes that the borrower’s solicitor is not competent . . . then, in the first instance, they would notify the borrower’s lawyer of its concerns and the potential breach of the SRA’s code of conduct.” However, if they are not satisfied with the response received, then the lender’s solicitor remains under a conduct obligation to report the matter to the authority. “The SRA encourages responsible

taken six to eight weeks,” divulges Richard, “it’s still ongoing eight months later.”

And this doesn’t just involve solicitors that haven’t specialised in development—it can also be caused by those unaware of a lender’s way of thinking. The advice they initially gave to their clients may need to completely change when the lender’s solicitors get involved. “If a developer has invested large amounts in a scheme but then finds out it is un-fundable, then this could lead to serious losses for the developer,” Niall adds.

Some lawyers have been accused of failing to take proper instructions from the developer, and therefore not providing accurate information to the lender’s solicitor, resulting in a heavily caveated report on title which will require the finance provider to take a commercial view on crucial matters. “From a risk analysis perspective, if the lender feels that its position is compromised or there is too much exposure, then it could decide to abort the loan,” Juliet warns.

“FRANKLY, ONE OF THE BEST LITMUS TESTS IS FEES— ANY DEVELOPER SHOULD QUESTION A QUOTE THAT IS SIGNIFICANTLY UNDER THE COMPETITION” and lawful reports about misconduct and serious risks at the earliest possible stage, as this could be vital in protecting consumers and other members of the public from reckless or dishonest behaviour,” she explains.

Many of these problems cause transactional drag—by as much as several months— and delays to drawdown, leading to key deadlines being missed. “Any prolonged delay could ultimately result in the lender changing its heads of terms or, even worse, pulling the loan,” cautions Juliet.

These interruptions usually arise from boundary or covenant issues, or not obtaining up-to-date searches. “We have one live transaction which should have

SOARING COSTS

What at first sounds like a reasonable deal could run up a significant legal bill, especially if developers have to switch solicitors in order to progress the transaction. “The borrower may have a bridging loan for the land, which is generally more expensive than the development loan, and there is a knock-on cost if they get charged any kind of penalty interest for missing the completion dates after having been served notice,” expounds Amadeus.

Build costs are also likely to surge if the implementation deadline on the planning permission lapses before the loan completes. The developer will then face the additional expense of reapplying for planning permission.

“The effects of delay give rise to time and costs overrun and possible disputes between the developer and its construction team, which could altogether induce an abandonment of the project,” Juliet states.

The lender’s solicitor will undoubtedly revisit its initial fee estimate to account for time spent hand-holding the opposing lawyers.

“Ultimately, it means more work for the lender’s solicitors to ensure all requirements are met—and this is harder to do at a later stage of the procurement process than if the appropriate solicitors were advising the developer at the outset,” Alexander notes.

55 July/Aug 2021

Zeitgeist

“IT SEEMS TO ME THAT, ONCE A LAWYER HAS PASSED THEIR CONVEYANCING EXAMS, THEY CAN SEEMINGLY ACCEPT ALL TYPES OF CONVEYANCING WORK” Emma provides an extreme example where a case resulted in circa £25,000 of additional legal fees for a client whose solicitor lacked the ability to deal with construction.

“This leads to friction between the client, lender and broker, as the client’s lawyer will not admit their misgivings (or indeed even be aware of them) and instead blames the lender and its lawyer for asking what will be claimed ‘unnecessary’, ‘pedantic’, ‘over the top’ questions,” Keith contends.

As a consequence, the lender’s solicitor often ends up being cast by the developer as the root of the problem, Niall adds.

“Ultimately, lender-appointed solicitors walk a trodden path and are well aware of what is acceptable, so the knock-on effect is just frustration, cost increases and delays.”

In an uncertain housing market, residential development can be a marginal business, so any increase in legal spend is strongly resisted. Otherwise, the lender will start to ask questions about the return on equity, especially if profits are dropping before the project is even off the ground.

COULD A MINIMUM STANDARD BE THE SOLUTION?

I am told that most lenders require solicitors to be from a certain size of firm and approved by the SRA. However, some brokers have suggested that lenders should bring in a minimum standard or level of due diligence regarding what type of sector focus the partner/team at a law firm has in order to act for the developer. As Martin says, “This isn’t an area for the generalist.” But how this can be implemented is unclear.

“As a broker, I will try to assess the capability of the firm and offer recommendations for those that have the right experience and structure,” says Tom. “You are bound slightly by the client’s wishes when it comes to their team, but I would never want a conveyancer to work on a development scheme.” The company should be large enough that they have the relevant lawyers to cover all areas of the development legal process. “It’s key for us to assist our clients to not only make sure their funding is in place, but take an all-encompassing view on their scheme—which includes their professionals.”

Emma remarks that if they haven’t heard of the borrower’s lawyer(s), they will get feedback from their legal panel, which will then be passed on to the developer to set boundaries.

“When things get difficult, it removes the ability for them to come back and argue with you.”

To help, Juliet believes that lenders should streamline the process by creating a panel of borrowers’ solicitors in the same way that high-street banks have done. “This will prevent

56 Bridging & Commercial

gaps and delays and could only add value to clients and the lending process as a whole.”

However, developers must be able to choose their own legal team. Christian cites that a borrower who has successfully used a particular firm on many development transactions shouldn’t be discouraged from using them solely because a lender hasn’t heard of them before.

Instead, Alexander urges lenders to ask who the borrower is using on their deals and, without advising, comment on how that may impact costs.

While a lender’s warning to a developer may fall on deaf ears, Christian believes that the lender typically “becomes more concerned with maintaining a relationship with the developer it’s going to be working with for the next 18–24 months and relying on for updates and ultimate delivery of the scheme (which is mostly the only exit route of a development funder), rather than diverting developer equity to fund additional legal spend.” By and large, developers will need to pay the extra costs for out-of-scope work, but I am told that lender’s lawyers are sometimes encouraged to suffer the write-off.

Richard discloses that some finance providers consider a minimum set of standards periodically, but it’s difficult to decipher what the criteria should be. “Some insist the borrower’s solicitors have a minimum number of partners (three or four) and level of PI cover if funds are being sent to the firm’s client account but, in our experience, that’s the extent of it.”

Amadeus agrees that some kind of voluntary system would be beneficial. “If you are a builder, for example, you can elect to be included on the Federation of Master Builders’ approved list.There are certain minimum thresholds that a builder must meet in order to qualify, and the public know they can expect a certain standard if they deal with that builder. It would be good to have a comparable register for law firms.”

While he finds it an interesting concept, Niall feels minimum standards would be difficult to enforce. “Firstly, it would be challenging to determine what the right level for standards is, or whether it has been met,” he remarks. “Secondly, what a solicitor can demonstrate on paper is very different to how they are in practice. Frankly, one of the best litmus tests is fees—any developer should question a quote that is significantly under the competition. Also, solicitors are heavily regulated by the SRA, which can determine minimum standards. The solicitor regulatory environment in the UK is one of the strongest in the world—I say that with no exaggeration.”

He adds that having the lender determine minimum standards could lead to a situation where they can effectively dictate which solicitors a borrower can use, which could cause other, obvious problems.

Kris concurs that applying restrictions may lead to a lack of choice or an inference that

Zeitgeist

a certain solicitor be appointed, resulting in conflicts. “For me, it’s more about fact-finding that solicitor at the beginning, the same way a developer would with a contractor, to ensure they have the experience to handle the transaction and can process it in the timescales the developer wants to move to.”

Stephen Burns, director at Adapt Finance, suggests that lenders, or their lawyers, should issue brokers with a standard requirements pack to forward to the client’s solicitor, so that a reasonable judgement can be made on whether they can act for the developer.

Niall agrees that lenders could provide guides and questions that developers could use to assess their solicitors before legals formally start. “These should also stress that [developers] are not ‘tied’ to solicitors just because they did the initial work,” he proposes. “Having this softer approach would empower developers to make better decisions early on, rather than realising the mistake midway through the deal.”

FINDING A SECTORSPECIFIC LAWYER

It has also been recommended that a grading system for conveyancers would be helpful for borrowers to differentiate solicitors that specialise in unique areas, such as development and land acquisitions.

“It seems to me that, once a lawyer has passed their conveyancing exams, they can seemingly accept all types of conveyancing work,” observes Keith. “A financial adviser cannot act or advise a client on a specific product/investment without having passed all the necessary qualifications relevant to that specific advice. This does not seem to apply within the legal profession.”

Juliet thinks it would benefit everyone involved if there were a mandatory vetting process to determine the quality and competence of the lawyer being appointed by the borrower. She envisages it as a regularly updated hub which lists firms that are experienced in specific loan types and outlines the level of qualification of solicitors or firms, with those underperforming at risk of being removed. “After the competency level is chosen, the borrower could narrow their choice of lawyer depending on costs and location,” she proposes.

While we wait on the edge of our seats for something like this to be brought in (probably best suited through a professional body—we know FIBA has successfully done this in the bridging world), the borrower or broker can use the Law Society’s directory to review the expertise of a professional, along with The Legal 500.

“Certainly, if one has an additional qualification in construction and development finance, this would greatly assist in identifying those who are best able to perform the services the borrower requires,” says Anne

Wright, construction and development finance consultant at Lawrence Stephens.

“However, a specialist department in a law firm should be sufficient to give a borrower confidence that its appointment is suitable.”

Distinguishing between firms and people is also key. “There are some excellent and talented individuals at what some might perceive as

to demonstrate their depth of experience in the field (such as the number of developer clients they act for and similar transactions they carry out in each quarter), and whether they have worked on deals with the lender before.

Amadeus thinks it’s better for law firms to have divisions specialising in particular areas, rather than each member of the firm being less knowledgeable about a wider range of sectors.

“We believe no one should dabble,” he says.

Christian concludes that, unfortunately, the lawyers involved on a development are

“IF THE DEVELOPER APPOINTS THE RIGHT TEAM FROM THE OUTSET, THE LENDER’S LAWYERS WILL HAVE VERY LITTLE TO COMMENT ON, AND THE DEAL WILL BE CHEAPER AND LIKELY TO RUN MORE EFFICIENTLY WITHOUT TEMPERS FLARING”

mediocre firms, and some mediocre talent at some of the best firms,” Christian remarks.

Marc Champ, managing director at Wharf Financial Services, shares this opinion, emphasising that it’s the individual solicitor rather than the firm that conducts the transaction and makes a difference.

Richard urges borrowers and brokers to do their homework on solicitors and to ask them

often seen as a “necessary evil”. “However, if the developer appoints the right team from the outset, the lender’s lawyers will have very little to comment on, and the deal will be cheaper and likely to run more efficiently without tempers flaring.”

Clearly, it’s an integral part of the transaction that developers shouldn’t skimp on and the value of which should be harnessed. In Christian’s words, lawyers should be sought out for their talent and not just regarded as a box to be ticked.

57 July/Aug 2021

THE FASTER SOLUTION Regulated bridging rates from 0.49% Borrow from £50,000 2nd charge & heavy refurb available FOR INTERMEDIARIES ONLY

0203 051 2331 homeloans@mt-finance.com

MTF (NH) Limited is registered in England & Wales Co. No. 12089238. Data Protection No. ZA548571.

MTF (NH) Limited is authorised and regulated by the Financial Conduct Authority (FRN: 925115).

Your property is at risk if you fail to make payments on a regulated mortgage contract. Regulated lending involves entering into a mortgage contract secured against your residential property. Your property may be repossessed if you do not keep up repayments on your mortgage.

Nick Baker, managing director of intermediaries, Allica Bank Steve Cox, chief commercial officer, Fleet Mortgages

We are seeing tenancy demand rise again; there is no social housing, and therefore people have to live somewhere and probably will probably end up in the private rental sector. Overlay that with the a low interest rate environment, and the five-year maturities coming up for BTL customers, and the opportunities are endless for lenders and advisers.

ON THE OUTLOOK FOR LANDLORDS

Emma Cox, sales director of property finance, Shawbrook Bank

The competition from non-bank lenders opens up the market and causes us to think outside the box. Challenger banks have had to adapt quickly and be disruptive in the first instance, then go through a regulatory phase, and now we’re starting to enter another stage during which we’re looking at new markets and emerging trends. The benefit is that we have the scalability and funding to make it more economical to get behind the sectors we choose.

Joshua Elash, director, MT Finance

Richard Deacon, sales director, Masthaven Bank

We are seeing mainly chain-break and the downsize situation—the purchase and sale of a main residence. The mainstream market very rarely allows a mortgage on a property that needs work doing to it. For cases of that type, you will often need a bridge to take that out. We’re also getting a lot of re-bridges at the moment. Over the last year, the 12-month term has become a bit of an issue, relating to Covid. Customers—still intending to sell the property—are needing another six to 12 months to get out of the initial bridge.

ON CURRENT BRIDGING TRENDS

at Brightstar’s Specialist Lending Virtual Expo

One day

It isn’t something we see more than in any other space, but what can drive ‘downvaluations’ is valuer confidence. If a RICS-qualified valuer looks at a retail unit with the intention of putting a market rent and yield on there, a) what do they think personally about high-street confidence, and b) what are the re-let prospects? In this market, valuations are driven by cashflow—either market rent and yield in commercial investment or profit multiples in owner-occupied businesses.

We are seeing more comparable information available in the market and that’s resulting in more confidence from valuers.

ON ‘DOWNVALUATIONS’ IN THE COMMERCIAL SECTOR

A lot of non-bank bridging finance companies have become incredibly price competitive over the last few years, attracting more liquidity and institutional investment. We’ve been able to marry that with very good levels of service and a slickness that comes with being a smaller institution. Do we all aspire to be banks? No. Why would you want to jump into an already full market? At our end, there is a different focus: concentrating on what we do well and doing as much of it as we can, rather than morphing into something we’re not and probably wouldn’t be very good at.

ON NON-BANK LENDERS GIVING CHALLENGER BANKS A RUN FOR THEIR MONEY

Nick Baker

About 20-25% of our book is in licensed leisure hospitality, and we are now starting to see the true impact of lockdown on accounts that have been filed. Essentially, what we are doing is looking at management information, such as forward bookings and recent MI, to get comfortable at a sensible LTV. If there is an ‘edge’ case, we strive to understand where the business has been, what challenges it has had, where it is going, and how it has adapted—giving us a real indication of the quality of the borrower behind the business which is who we’re seeking to support.

ON UNDERWRITING CHANGES FOR HOSPITALITY AND LEISURE APPLICATIONS

Caroline Mirakian, head of national accounts, Pepper Money UK

In our latest research, it was revealed that 6.2 million people iin the UK have adverse credit and 36% have been impacted as a result of Covid. Some 880,000 are looking for a mortgage. In the short, medium and long term, there is an opportunity [for specialist lenders], and it’s going to largely be down to brokers not shying away from specialist advice.

ON THE SHORTTERM IMPACT OF THE PANDEMIC ON CONSUMERS

Steve Cox

Why are they so difficult for non-bank lenders? Well, it’s a symptom of capital markets. When funders do securitisations, they sell loans off to investors who want a return on capital over two or five years, and their assumption is that the loans will redeem and they’ll get their money back to reinvest elsewhere. That presents a mismatch between what we would want, as a nonbank lender, and want advisers an customers want.

We are most of the way down the road to finding a way around those tricky financial mechanics and offer product transfers. There will be product transfers coming out this year from Fleet—but it won’t be exactly as you know it from the high street, due to these restrictions.

ON PRODUCT TRANSFERS IN SPECIALIST LENDING

Buster Tolfree, director of mortgages, United Trust Bank

I’d say £150m-200m per month would be a realistic figure over two to three years; it was £115m pre-Covid. The reason for this shortfall was, and it’s a bit controversial, but advisers tend to go for the ‘weapon of choice’ which is a two-year fix and then remortgage, as opposed to considering a second charge.

ON WHAT A FUNCTIONING SECONDS MARKET LOOKS LIKE

Emma Cox

You can expect to see instant processes and decision making based on insightful data that can talk to the specialist markets in which we lend. The balance will be struck between the appropriateness of tech, serving the customer through broker-led channels, and allowing it to create the capacity for people to do the thinking part of the job.

Caroline Mirakian

Specialist is the new mainstream—its future is very bright. Tech will continue to dominate, but I think there will be more aggregators to do quick lending that doesn’t hit the sides.

ON WHAT THE MARKET WILL LOOK LIKE IN FIVE YEARS’ TIME

On 1st July, Brightstar held an online exhibition for the specialist finance industry, showcasing providers in the bridging, BTL, second-charge and commercial sectors, comprising what the distributor’s CEO Rob Jupp called “the ultimate sustainable mortgage market”. As the official media partner for the event, we combed through the keynotes, panel debate and Q&A sessions to distil what we learned on the day

23 RLDAU NC AU H GU ES ST

The future of lending continues Introducing our third in a series of new products, a bespoke Bridging loan for Scotland.

Contact us to find out more

2021

WI N N E R

0161 710 2006 hello@mintpf.co.uk

mintpropertyfinance.co.uk Bridging & Commercial

2020

WI N N E R

2019

WI N N E R

62

FUNDING 365 BRIDGING & DEVELOPMENT CRIB SHEET Exceptional products

PRODUCT

INTEREST RATE

LTV

From 0.59% per month

Up to 60%

From 0.69% per month

Up to 75%

MAX LOAN SIZE

MAX LOAN TERM

STANDARD CHARGES

£10million

24 months

2% arrangement fee + valuation and legal fees at market rate

Up to 75%

£5million

18 months

2% arrangement fee + valuation and legal fees at market rate

£10million

24 months

2% arrangement fee + valuation and legal fees at market rate

£5million

24 months

2% arrangement fee + valuation and legal fees at market rate

Highly competitive products.

Bespoke and transparent terms.

RESIDENTIAL BRIDGE

No admin fees, exit fees or ERCs. Properties accepted across England & Wales.

STEPPED RATE BRIDGE

Outstanding service One contact from enquiry to completion.

Speak directly to friendly, dedicated underwriters who aim to provide credit backed terms within just 1 hour.

Commission from 1.5%, paid within 24 hours from loan completion. *Works funded in arrears. Max gross LTGDV of 70%. Ŧ No ground up development.

Unregulated first charge deals only. Products are subject to change.

Visit www.funding-365.com for up-to-date guides.

0.59% pm for 6 months 1.2% pm from month 7

COMMERCIAL BRIDGE

From 0.69% per month

Up to 75%

UPDATED

From 0.64% per month

Up to 65% (day one)

LIGHT DEVELOPMENT From 0.69% per month LOAN Ŧ

Up to 75% (day one) +100% cost of works*

All of our products can be compared on our website funding-365.com Email your enquiry to our underwriters underwriting@funding-365.com Speak to a decision maker today on 0800 689 0650 Funding 365 Limited is registered in England & Wales.

Company Registration Number: 08488034. Company Registered Address: 20 - 22 Wenlock Road, London N1 7GU.

July/Aug 2021

Series

“WE HOPE VALUERS KNOW THEY CAN REACH OUT AND LEAN ON US WITH THEIR CONCERNS; WE COULDN’T BE WITHOUT THEM—THEY’RE A LINCHPIN OF THE BRIDGING INDUSTRY”

64 Bridging & Commercial

Series

The PII Saga: Part Two

save our surveyors Words by

BETH FISHER 65 July/Aug 2021

Series

The hardening state of the professional indemnity insurance (PII) market is bound to slap the bridging community sooner or later—but do lenders care enough?

I

n March, Bridging & Commercial uncovered how 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. While surveyors themselves are intensely impacted right now, this could rapidly be felt in other areas of the lending market, upsetting service and speed—hallmarks of the bridging sector.

Always in favour of putting a little pressure on industry stakeholders to address difficulties for the greater good, I reached out to 23 bridging lenders to get their perspective on the issue and what can be done to support our valuers.

Interestingly—and what may be indicative of how much importance finance providers place on this problem and where they think responsibility lies—the number of them that responded to my questions was limited.

A CATASTROPHIC LOSS In part one of this series, we revealed that 70% of valuer firms were reconsidering whether to continue working in the shortterm lending sector. Colin Sanders, CEO at Tuscan Capital—who is seeing the impact of this on a “daily basis”—reports that a number of valuers have withdrawn from bridging over the past two years due to professional negligence claims or increased PI premiums. “This trend will inevitably create stress on turnaround times and the cost of valuations,” he remarks.

Michael Stratton, founder and managing director at MS Lending Group, believes the crisis will “detrimentally” influence the market. For example, one of the USPs for bridging finance is offering speed to borrowers. “If the capacity of a valuer delays this, it affects the business model—not just for us, but for most lenders,” he argues.

With timescales for valuations currently cited at five days at best, a dwindling number of businesses servicing the market will see them get even slower. “If many become time-strapped due to high demand, the quality of reports could drop, which has

the potential to create a knock-on effect in compromising the lender’s exposure,” posits Henry Manley-Cooper, head of credit analysis at Avamore Capital.

A strong point made by Alternative Bridging Corporation’s director, James Bloom, is that the service a customer receives is only as good as the slowest part of the process. “As a lender, we are always looking at ways we can enhance our offering for brokers—this means optimising our own service, but also investigating how we can expedite other processes such as valuations and legals.”

What’s more, the increasingly protracted valuations are frustrating clients. “We do a lot of business in the auction sector, and many valuers are now stating their lead times to visit the properties are up to three weeks but, with a 28-day turnaround to complete, it simply kills the deal,” Michael contends. “We’ve had to take a view on whether we always need a valuation on certain properties, so that not only can we help customers who are now being vastly underserved, but also steal a march on our competitors.” However, this can heighten risk for lenders.

The dynamic of the lender/valuer relationship is also shifting. “Historically, valuers have been keen to remain on the front foot in order to offer good service and maintain business,” details Henry. “Now, we’re seeing the credit analysis team spending more of their time chasing up reports and being forced to manage expectations on the broker and developer sides.” Partnerships will continue to weaken if valuers start to fall away, and those that stay will become progressively stretched in their capacity.

Richard Showman, head of lending at Mint Property Finance, agrees that service is in for a tough time if this predicament results in a smaller pool of valuation companies. In the first half of this year, the bridging lender has enjoyed significant growth. “Should our industry counterparts be experiencing similar levels, you can’t squeeze more valuation instructions into an ever-shrinking 66

Bridging & Commercial

Series

“WITH ALL LENDERS HAVING TO SELECT FROM THE SAME SMALL POOL OF VALUERS, WE COULD SEE THE EMERGENCE OF ARTIFICIAL VALUATIONS, WHICH COULD EITHER INFLATE OR DEPRECIATE TRUE VALUES IN MICROLOCATIONS” 67

July/Aug 2021

Series

“YOU CAN’T SQUEEZE MORE VALUATION INSTRUCTIONS INTO AN EVERSHRINKING POT”

68 Bridging & Commercial

Series

pot,” he explains. “The sad result of the PII crisis will be poorer service and higher costs to borrowers, inferior quality of valuations to the lender, and potentially higher claims to insurance companies.”

Together has also felt the brunt of valuers unable to renew their cover.

Lending director Rob Goodall, says that, in certain situations, he is finding that firms are “cherry picking” the jobs they want to accept, and almost pricing themselves out of the market.

Something which may be exacerbating the problem, and presenting itself as a risk to lenders, is the practice of firms waiting until the last day to renew. “We could have a situation whereby one month a firm has £20m cover on a per-claim basis, and the next can only secure cover of £1m in aggregate at renewal,” he remarks. “Clearly this represents a risk to our business as we are suddenly underinsured in the event of a claim. We have no control over firms’ renewal processes, but we can react immediately by amending the levels of valuation they are approved for—or suspending or removing them immediately.”

SAY GOODBYE TO SMALLER SURVEYOR FIRMS While they may not do the bulk of bridging business, small surveyor firms are hugely depended on. “They are the eyes and ears on the ground,” Michael affirms, describing their local knowledge as indispensable. “The industry as a whole would be greatly affected without it.”

Richard thinks that smaller companies— whose existence is borne out of their location-specific expertise—are likely to disappear, leaving the industry at the mercy of the bigger national valuers. “This will see the loss of those with specific local knowledge, which are invaluable to the specialist finance sector.” He expects their absence could result in so-called ‘over or undervaluations’. “If there’s overvaluation, PII claims go up. If there’s undervaluation, you stand to look foolish to the client and their broker,” he expands.

Over the past year, Avamore has extended its geographical boundaries and has become increasingly dependent on local professionals to give an accurate reflection of the strength of a scheme in a particular area. Without them, the business’s ability to grow into new regions at scale would be hampered. “Operationally, we cannot validate every single report, but if there are fewer businesses to choose from, we will likely have to take further steps to

be confident in valuations we receive, particularly in less familiar locations,” states Henry. “Furthermore, with all lenders having to select from the same small pool of valuers, we could see the emergence of artificial valuations, which could either inflate or depreciate true values in micro-locations.” He suggests that lenders may start to employ former valuers to validate estimates without them bearing the personal risk and liability.

Adding to this sentiment, Michael concurs that valuers should be forward thinking and look at ways they can benefit lenders that may not rely on their PII cover. For example, MS Lending launched with a product that doesn’t require a valuation on residential purchases up to £500,000.

It was created after the business identified the pressure on valuers and soaring prices, mitigating its risk by distinguishing the types of business it feels content not having a full valuation for. “We often lean on the knowledge of local valuers’ opinion, knowing this isn’t covered by PII but still giving us a high level of comfort,” he says.

“This is a direction I can see more lenders going in—should their funding lines allow.”

If small firms struggle to survive, expertise might not necessarily be lost if they were snapped up by larger firms.

“They would still be working in that area, but within a bigger company,” explains Nick Jones, sales director of bridging at West One. With a lack of new blood coming into this profession, he believes that demand will always outstrip supply, and strong valuers will be sought after.

Colin agrees that those with the right qualifications and experience will probably find themselves working under a larger firm’s umbrella. “As with all industries, economics change and business models evolve; I expect some valuation firms to view the market challenges as an opportunity.” Accordingly, he anticipates some medium-sized firms to expand, and individuals with the skills and experience will be part of that growth story.

RISING OR UNDERCUTTING FEES For a while, bridging lenders have been racing to the bottom on rates to gain a competitive edge and amass a larger slice of the market. If valuers start upping their own rates to compensate for intensified work and higher insurance premiums, it would likely come as a shock to borrowers. “It’s hard for us to explain to them the current issues around PII,” Michael expounds. “What ends up happening is lenders will have to find

ways of presenting more attractive terms to clients on rates and fees to offset a valuer’s [revised] speed and cost.” He deems that while many lenders understand and appreciate the difficult situation currently affecting surveyors, for the end borrower, it’s a results-driven business.

Consequently, valuers may undercut the market with loss-leading quotes to secure more business from bridging lenders— especially if they need to recoup a shortfall from last year—which Michael describes as a “vicious circle”. “All that happens is valuers charge a smaller fee to win the business and then rush the report,” he divulges. “The valuation may not be up to scratch, a lender then gets caught out and claims on that valuation, and the cost of PII increases for valuers—so there will be fewer of them.” Nobody in the industry will benefit from this and, in fact, it creates further barriers to entry.

This is often the case with any price war.

Cheapest is not always best, particularly if options are limited in the first place.

“With fewer valuers having a greater share of business, dropping prices to win more will probably do little else than overwhelm firms, which naturally creates a drop-off in the quality of work,” Henry asserts. This could lead to trust tumbling throughout the sector and lenders being forced to choose whatever firms are left. “A partnership through default is unlikely to be the right one for either side of the relationship, and therefore we need to make a conscious effort to steer our customers away from picking the cheapest.” Thus lenders will need to do some of the work of selling those better quality valuers for longer-term benefit.

THE INFAMOUS ‘DOWNVALUATION’ Valuations are frequently cited as the cause of bridging transactions falling through, with the words ‘downvalued’, ‘more expensive’ and ‘slow’ often verbalised among brokers and lenders.

Valuers are frequently accused of ‘downvaluing’ by the borrower, mainly due to the property not being priced at their expected (overconfident) figure. “The knock-on effect is that the lender is blamed for instructing their valuer to downvalue,” notes Richard. This can jeopardise the relationship between the lender and broker, especially with new intermediary partners where trust hasn’t yet been built.

“Valuers aren’t members of the lender’s staff. They’re independent, which is why lenders can sue them,” Richard stipulates.

69 July/Aug 2021

Series

“The challenge is that we want all parties to be realistic—borrowers with their assessment of value and valuers with theirs.”

Colin feels that brokers and borrowers will always complain about valuers ‘downvaluing’ and charging too much for the privilege. “What we have seen is, quite understandably, valuers taking more time to do their comparable research before deciding on a valuation,” he says.

“And who can blame them?” He proffers that the PII claims experience across the industry has come about due to some poor valuations which were too optimistic or made incorrect assumptions. “I think the valuer firms that will survive this will be the ones that price correctly and do a thorough job to deliver a realistic and fair value,” he expresses. “Unfortunately, this may disappoint some brokers but, without this approach, valuers won’t have a sustainable business model—and, without valuers, neither will we!”

Henry is of the opinion that demands on today’s valuers aren’t unreasonable, but that words doing the rounds in the market can play into blame culture. “For any lender, the facts have to stack up in a case—to this end, we need valuers as much as they need us, and criticising approaches does very little to make processes better.”

He recognises that as finance providers have a high level of accountability for their service providers, they view them as being part of their team and hold them to the same standard as an internal colleague. “If they are not performing to that bar, however high, that doesn’t mean that the demands are unreasonable; it’s simply looking at the service provided in the context of what the lender does for their borrower and broker partners.”

LENDERS RESPOND TO CONFETTI CLAIM ALLEGATIONS A worrying aspect of the PII problem is ‘confetti claims’ from bridging lenders— particularly by smaller, inexperienced firms—which must be reported to insurers, even if they are not ultimately valid and paid out. A firm must immediately notify its insurers—even if it’s just a written or verbal threat—of a circumstance in which a valuer has reason to believe may result in a claim, or any complaint notified via its official procedure. This is causing premiums to skyrocket.

In addition, all RICS-regulated firms must have run-off cover if they cease valuation activities, the practice shuts down, or the valuer retires. However, there is a risk to lenders, especially if

the firm is in a distressed position and cannot afford this type of cover.

Richard tells me that confetti claims aren’t new. “From a lender’s standpoint, because many valuers don’t have, or there is no requirement for run-off cover, we will put the valuer’s insurer on notice of a potential claim if there’s an inkling of doubt regarding a valuation, prior to any loss being formally crystallised,” he states. This means that even if the insurer does not continue to provide that firm with insurance in the future, it will be accountable if there is a loss.

“It’s a regrettable side effect that such a practice may lead to increased PII costs and exacerbate the demise of smaller firms, but this is something the valuers and PII industry could address,” says Richard.

For example, lenders could be precluded from sending a letter to put the insurer on notice until an actual loss is proven.

“It’s correct that some, if not the majority, of these ‘on notice’ letters go nowhere but, as lenders, we have to do what’s prudent given all the circumstances to protect our money.” He suggests that if run-off cover becomes mandatory, then lenders might not feel pressured into writing the letter in the first place.

Colin has “no doubt” that some PII claims from lenders partly reflect the failure of the borrower’s scheme or strategy as much as the negligence of the valuer. “I also think that lenders too could often do more to challenge or corroborate the valuation before lending,” he advocates. “However, making a claim on a PII policy is frequently the only viable strategy to recover a loss when everything goes wrong, so I can see how the confetti claims have accumulated.”

Ultimately, it is pertinent that lenders carry out stringent due diligence on an asset before lending on it and take responsibility when their exposure gets too high. “I appreciate that some lenders feel the need to get their foot in the door by being more aggressive when it comes to LTVs and asset types, but that onus is on us as lenders and we must take responsibility for bad lending decisions,” Michael argues.

“Confetti claims clog the system and again, all parties end up losing out.”

SUPPORTING VALUERS The specialist lending community will need to play its part in assisting the valuation market through this quandary.

Finance providers that are regularly in contact with their valuers and understand how they can support them will help improve collaboration. “We hope valuers 70

Bridging & Commercial

know they can reach out and lean on us with their concerns; we couldn’t be without them—they’re a linchpin of the bridging industry,” declares Michael.

James asserts that while everyone knows about the situation and the shortage of surveyors, being aware isn’t enough.

“We need to increase communication between lenders, brokers and surveyors and look for ways to work together to overcome these challenges.”

For instance, Tuscan ensures its instructions are clear and valuation fees are fair to reflect the level of service. “We also conduct an asset manager visit and report for our loans, providing an opportunity for us to challenge or disagree with the valuer’s report before the loan is made,” details Colin, which helps avoid tribulations and PII claims later on.

Furthermore, Nick thinks lenders need to cooperate with valuer firms to educate the brokers that arrange their PI cover about the bridging market who, in turn, will inform insurers.

Are valuers helping themselves?

Unfortunately, no one likes to admit there are areas of their business which may be struggling. Richard believes that valuers aren’t openly talking about the issue at hand. “It’s only become apparent to us as we have actively sought to increase our panel of surveying firms in line with increased demand,” he admits. “It’s important that the industry engages in open and transparent communication around PII so that we can work together to navigate the challenges and drive positive change.”

Henry also reveals that Avamore hasn’t been approached by its valuer partners about the problem. “It’s not widely discussed and doesn’t appear as though the market has been educated on the potential changes,” he observes. As a consequence, many lenders could have the “rug pulled from beneath them”—particularly if they are reliant on a very small panels where a number of them could drop out.

“Any impact on one specific area will naturally have a knock-on effect on most others. Therefore, it will be a collective effort to identify ways to protect each other’s interests and move forward.”

Series

“IT’S NOT WIDELY DISCUSSED AND DOESN’T APPEAR AS THOUGH THE MARKET HAS BEEN EDUCATED ON THE POTENTIAL CHANGES”

71 July/Aug 2021

Does Open Banking have a future in bridging

Words by

CHLOE FYFE

Explained

I

“HAVING SWIFT ACCESS TO ASPECTS OF A BORROWER’S APPLICATION THAT CAN MAKE OR BREAK A DEAL AT THE OUTSET WILL BE OF BENEFIT TO BROKERS FOR WHOM A QUICK ‘NO’ IS GENERALLY AS VALUABLE AS CONFIRMATION OF THE GO-AHEAD”

n the past several years, the financial services industry has undergone significant technology-led changes driven by the so-called ‘fintech revolution’.Among the innovations is Open Banking, a system designed to provide customers with competitive rates, novel solutions and more convenient services.

Launched as a competition remedy, Open Banking aimed to rebalance the market for financial services away from the big banks and towards consumers and SMEs. Since 2018,it has enabled these users to securely share their banking data with third-party providers, which then offer services tailored to the client’s particular circumstances.

According to the Open Banking Implementation Entity (OBIE), almost four million consumers and small businesses now use it to help manage their money and benefit from more affordable credit.

Open Banking has admittedly been seen up until now as a somewhat slow burner, says Jack Tenwick, head of sales UK ay Yolt Technology Services (YTS). “But the pandemic has proven to be a real accelerator for the industry, as sectors begin to see the real benefits of the technology.The very foundation of Account Information Services (AIS) is making financial data easily and securely shareable using APIs. With this technology, bank transactions and data can be viewed in real time, making financial data sharing a lot easier and faster.”

The collaboration between fintech providers and banks also offers opportunities for product innovation and development, which in turn creates new revenue sources. Third-party services can be offered to the bank’s customers at very little cost, in return for commission or a recurring fee.

But while the popularity of Open Banking among consumers and tech firms is gaining momentum, those in the specialist lending markets, such as bridging, appear less keen.

Sam O’Neil, senior finance broker at Clifton Private Finance, tells me that the company does not currently work with lenders who use Open Banking, and estimates that only 1% of specialist loan providers make use of it, industry wide. While acknowledging that financial transparency and quicker 74

Bridging & Commercial

corroboration of information are beneficial, he remains dubious about its role. “The vast majority of bridges are pretty heavily asset focused,” he explains. “In 99% of bridging loans, you’re not paying anything monthly, so broadly speaking, lenders are not too concerned about the client unless they are remortgaging.”

He feels it may be more suitable for private banks, as they tend to be more concentrated on the customer, as opposed to the property or real estate in question.

Although these institutions would still secure on the asset, it is likely that they would also need the client to have a certain minimum income. In that respect, he suggests, Open Banking could save the rigmarole of obtaining this information from clients.

Lorraine Hart, head of credit operations at Roma, confirms it is one of the few bridging lenders that uses Open Banking, claiming it is a valuable addition to paper and online bank statements. When asked about the positives of using this technology, she tells me that the lender relies on both the asset and borrower background and that this information goes ‘hand-in-hand’.

Open Banking provides indepth financial profiling, making it possible to detect patterns of spending, she expands. “It will tell us about a client’s changing circumstances, missed payments, high-level gambling transactions, and whether benefits payments have started to come in.” If the lender sees gambling transactions, for example, it will investigate that first, as it might be enough to refuse a loan without looking at anything else. Having swift access to aspects of a borrower’s application that can make or break a deal at the outset will be of benefit to brokers for whom a quick ‘no’ is generally as valuable as confirmation of the go-ahead. In today’s fast evolving economic environment that must now contend with furlough, mortgage payment holidays and various other support schemes, more categories have been created into which customers might fall.

Consequently, a lender may need a broader overview of its prospective borrowers’ circumstances and this could be afforded via Open Banking.

Lorraine appreciates the

Explained

efficiency and time-saving aspects of Open Banking, and that it could also open up opportunities to extend more suitable products or ones that attract more favourable terms. “For some lenders, if there’s a change of circumstances in an upward direction—a higher salary, potentially a change of employment—it might mean they could be offered a different type of product or a better facility that they may not have qualified for before.”

Jatin Ondhia, co-founder and CEO of Shojin Property Partners, offers another angle: Open Banking could improve the lender’s engagement with its investor base. “When there are funds sitting in their bank account that could be deployed into loans, we could inform them and set up a process for them to move the funds across more easily.This could be a great synergy and help people to optimise their investments and use of spare funds,” he says.

Shojin Property Partners, which doesn’t use the system, sees some of the merits. “Our lending is done against assets and developments and never as an individual loan. Having access to the banking data would be useful, but would only form a tiny part of the overall due diligence process,” says Jatin. “It sounds great to have Open Banking,” he adds, “but we have not considered the cost and hassle of incorporating it to be worth doing at this stage.”

Lenders seeking to adopt Open Banking have the option to either build or buy. If opting to build internally, an FCA licence must be obtained.After that, a lender would need to plug into every bank—all of which may have different API specifications—to pull customer data. Post set up, firms then have to ensure that these connections are monitored 24/7. All of this adds up to a costly exercise.

Buying through a third-party provider like YTS, however, could reduce some of that financial burden. “Outsourcing all of this to YTS means customers can benefit from our economies of scale, expertise, and support while focusing on their core proposition,” Jack details. “This means that businesses can immediately harness the power of Open Banking through readymade APIs with little investment

and without dedicated resource from within the business itself.”

Using the automated platform, customers can complete loan applications and receive an answer within minutes. While bypassing the human element typically makes the process quicker—a significant factor, especially for cashstrapped businesses recovering from lockdowns—problems can occur as these platforms take a generalised approach to both small and large businesses, which often disadvantages SMEs and is therefore not 100% reliable. Given that bridging cases are notably individualistic, a check-box model may not see it being as effective as in more mainstream product areas.

Jack argues that while “some lending decisions must be made via a bespoke approach, there are additional checks that can be sped up to streamline the process and take care of the manual processes which can be time-consuming.” He goes on to say that Open Banking is “as tailored as it can get”, and that lenders have the ability to adapt the solution to complement complex transactions by specifying the set of data required, rather than relying on traditional credit information.

Matt Hardman, director at The Buy-to-Let Broker, believes the lack of specialist financiers using Open Banking “may be a result of lenders’ systems not yet integrating with APIs, due to the current manual approach and human underwriting; or the fact that lenders prefer brokers to view bank statements and apply their due diligence first”.

Matt points out that, for brokers, there may be compliance concerns.

“As responsible brokers, we need to apply accurately with lenders, therefore we prefer to have sight of the bank statements provided by our clients prior to application submission. On a basic level, we use them to verify primary income and account conduct, ascertain rental income, and marry up the correct data to our applications—this could be across several bank accounts.”

The statements are also needed to prove a legitimate deposit in purchase cases, he explains.

“Since Open Banking bypasses the adviser, there is a risk to the broker of misadvising a client, increasing declination rates, or

AVAILABLE TO PROPERTY INVESTORS AND DEVELOPERS FOR ASSET IMPROVEMENT AND REFURBISHMENT Loan to cost 70% Reduced rate following practical completion Option to extend loan

Loans f

rom

£350,0 00 to £3M

Get in touch today

020 8349 5190

alternativebridging.co.uk

75 July/Aug 2021

coming up short on loan amounts, by not having accurate data to hand on spending habits and confirmed credit commitments.”

According to Lorraine, underwriters used to working from paper statements may find it difficult to fully rely on an automated system that feeds them this information. However, an upside to Open Banking is that it sends alerts that report on changes to a customer’s data, saving those in the credit department time spent trawling through bank documents.

Chris Whitney, head of specialist lending at Enness Global, also notes pros and cons. “Open Banking has helped speed up some processes, but it has taken quite a bit of explaining to borrowers in terms of what it is and how it works, especially from a security point of view.”

As with any sensitive information, vulnerability to cybercrime is a major concern—even more so during the pandemic, which saw cases rise up to 15-fold. Under current UK legislation, Open Banking providers are required to carry out transaction monitoring and KYC checks, on top of the checks they already conduct.

This additional due diligence provides greater security but, given how quickly this technology is developing, it is thought that only the latest in advanced data science is able to detect fraud— adding to the hefty investment required by those utilising it.

On this issue, the OBIE states that although the increased use of APIs will “certainly attract the attention of threat actors”, Open Banking has not introduced any new mechanisms for them to target. “While fraudsters are very clever at piecing together disparate information to try to commit fraud, Open Banking does not require individuals to share their banking security information with third parties, so a cascade impact is unlikely,” it claims.

There are issues associated with third-party providers, too.

For example, if their APIs do not meet security requirements, there is a risk of data breaches.

Weaknesses in a third-party company’s website or app could open doors for hackers to enter and engage in fraudulent activity,

such as requesting fake payments or posing as an individual user.

The OBIE emphasises that Open Banking has been designed with security at its core, using rigorously tested software and security systems. Only apps and websites regulated by the FCA, or European equivalent, can enrol in the Open Banking Directory.

Furthermore, customers must explicitly grant permission for third parties to access their data, and must reconfirm that they are happy with this authorisation every 90 days. Under proposed changes, however, the re-authentication of permissions may be scrapped.

Should there be a breach, the OBIE assures that customers are safeguarded by data-protection laws and the Financial Ombudsman Service. Despite this, many customers remain wary, struggling to understand the mechanisms that are in place to protect them.

“The issue for bridging is that there are a lot of folks who aren’t tech-savvy,such as older people who are downsizing,” Sam says. Lorraine adds that, from a customer’s perspective, not everyone believes that it is more secure for them.

Although there is scepticism surrounding Open Banking, this is not to say that it won’t find its place in bridging. Chris asserts that where certain information is required, it is quicker and easier for all parties, and more secure than some other formats, but that the information it gives access to is not required by many lenders in the specialist lending arena. “I think right now its strengths sit more in the retail lending space,” he suggests.

Looking ahead, Lorraine predicts that Open Banking will become the norm to a certain degree, as more and more firms start to use it. Matt is also confident of its potential, if it is well adopted and more inclusive to advisers. “There is still that level of trepidation from clients. The Open Banking reputation needs to grow through the mechanics of being more well understood by clients and time served.”

The idea that we are left with is that, currently, its use in bridging is limited. But we know, particularly in our sector, that the wheels of digital innovation can be slow to turn—but when they do, it’s very much a case of adopt or die.

76

Bridging & Commercial

“OPEN BANKING HAS HELPED SPEED UP SOME PROCESSES . . . BUT IT HAS TAKEN QUITE A BIT OF EXPLAINING TO BORROWERS IN TERMS OF WHAT IT IS AND HOW IT WORKS, ESPECIALLY FROM A SECURITY POINT OF VIEW”

Flexible, fast-tracked finance Our Bridging Finance and Auction Finance products guarantee delivery of timescales. Bridging Finance can also span stages through a property project, unlock capital from an asset or fund a moderate level of works.

The speed, ease and certainty of finance we offer enables the property developers we work with to secure better deals and progressing more sites – thereby growing their property businesses quicker

Apply in just 5 minutes for an initial decision in 24 hours www.crowdproperty.com/apply