ISSUE 20 MAR/APR 2022
THE MARKET POSITION
We exclusively reveal the state of the UK bridging sector with the latest annual stats
+ MFS approaches £500m of BTL enquiries p20
BRIDGING FINANCE
THE SPECIALIST EFFECT P U R C H A S E | C A P I TA L R A I S E | C O N V E R S I O N & R E F U R B I S H M E N T | D E V E L O P E R E X I T
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U T B A N K . C O. U K
Acknowledgments Editor-in-chief Beth Fisher Creative direction Beth Fisher Caron Schreuder Sub editor Andrea Johnson Senior reporter Andreea Dulgheru Contributor Craig Rickman Illustration Valf Photography Alex Chai Sales and marketing Beth Fisher beth@medianett.co.uk Special thanks Phil Gray, Watts Commercial Finance Tom Lee, Pure Structured Finance Mike Cook, Market Financial Solutions Ray Cohen, Jackson Cohen Associates Printing The Magazine Printing Company Design and image editing Russ Thirkettle, Carbide Finger Ltd Bridging & Commercial Magazine is published by Medianett Publishing Ltd Managing director Caron Schreuder caron@medianett.co.uk Publishing director Beth Fisher beth@medianett.co.uk 3rd Floor, 71 Gloucester Place London W1U 8JW 0203 818 0160 Follow us: Twitter @BandCNews | Instagram @BridgingCommercialMagazine
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very time I sit down to write this letter, I try to keep it upbeat. Unfortunately, with what’s going on in the world right now, that has become an almost impossible task. Russia’s invasion of Ukraine has shocked the world, resulting in a series of sweeping sanctions from the West in a bid to starve Putin’s war machine. Some of these include significant changes to UK economic crime legislation—something that could leave bridging lenders ‘holding the baby’ if they fund borrowers with Russian links—which B&C recently spoke about at length with Ray Cohen, owner of Jackson Cohen Associates. We want to thank everyone who kindly donated at our annual Directors’ Lunch in March [p8] to help those affected by the horrific humanitarian crisis in Ukraine. We have seen numerous efforts and initiatives from businesses and individuals across the sector to help raise money for the cause. It goes without saying that our industry is a generous one. The conflict is also expected to push global prices up further, eroding the living standards of millions of people in the UK. On 10th April, many households across the country turned off their power in protest of soaring energy bills. The Big Power Switch Off—a 10-minute boycott that aimed to stronghold private energy companies to revise their prices—capped off a day when, earlier, the self-proclaimed Money Saving Expert, Martin Lewis, stated that we could start to risk “civil unrest” if people cannot afford to eat or stay warm. Putting the dire situation of the cost-of-living squeeze into context, the Resolution Foundation recently reported that a lack of support for low-income families will see 1.3 million people pushed into poverty. Considering affordability is a huge aspect of the mortgage market, specialist finance providers and brokers will need to be extra careful about assessing whether the loans they are arranging have viable exits in the months that follow. Other vital things to consider include what brokers and businesses need to know as we enter a fixed-rate commercial mortgage era [p32], and whether SMEs can cope with the latest succession of hits to their balance sheets. We also gather four solicitors and one regulatory consultant around a table to discuss the red flags that lenders and brokers need to be conscious of [p40] and, yes, regulated deals being passed of as unregulated is still an issue. Later, we look at what is making the BTL sector so vibrant right now [p52], and unveil part three of our PII saga series—this time, we focus on brokers, and they had a lot to say [p78]. And, finally, we exclusively reveal the fifth annual UK Bridging Market Survey, in partnership with EY [p58], to provide you with a better grasp of what the landscape looks like and what you should be preparing for in the near to long-term future. I was shocked to discover that 70% of bridging businesses experienced an increase in profitability in 2021 compared to pre-pandemic levels, despite all the obvious headwinds. But what really matters is what you think—I look forward to your calls and emails.
Beth Fisher Editor-in-chief
3 Mar/Apr 2022
Diversification is going to be key for a lot of landlords. As financial advisers always say, don’t put all your eggs in one basket” p20 4 Bridging & Commercial
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In March, we held our annual Directors’ Lunch, in partnership with JMW Solicitors. We had 70 of the industry’s most influential people join us for a jazzed-up afternoon of food and wine, in the very best company. Attendees raised a phenomenal £1,700 for those affected by the Ukranian war, and we would like to thank you all for being so generous. During the event, Medianett Publishing unveiled its glow up, including its brand new website, and discussed how it will be further elevating its news publications this year.Thankful to be back at in-person events, there was an undeniable buzz of excitement for the prospects of 2023.
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Turning
30
WORDS BY ANDREEA DULGHERU On 10th March this year, Alternative Bridging Corporation celebrated three decades in business—a feat few specialist finance companies have achieved. So, what better way to commemorate the occasion than to reminisce about its triumphs with those who’ve been there from the start? Directors Stephen Meller and Jonathan Rubins sit down with me to discuss where it all began, how the company has evolved, and what’s in its sights for the coming years
News
There aren’t many specialist lenders who can brag about having operated in the industry for 30 years—but Alternative Bridging Corporation is now one of them. From an interesting start in 1992 to the powerhouse it has become, it has definitely been a journey full of adventures, challenges and achievements. Those who have joined the specialist finance field fairly recently (myself included), might be surprised to learn that the company started out as a broker, known as Fast-Track Finance. It was a faltering transaction that put it on its path to lending, when Jonathan was working on a deal with a mainstream bank which was unable to release funds on time. This forced it to use bridging finance to help the client—something that Jonathan didn’t know much about at the time. Afterwards, the company saw the demand for this type of finance grow— and that is when Jonathan, Stephen and executive chairman Brian Rubins realised the potential of the company providing its own bridging loans. In 1992, they opened a lending arm alongside the brokerage to offer both services in a market that, according to the directors, was very much lacking alternative financiers. It operated this hybrid model until the beginning of 2009. At the height of the financial crisis, the relatively large transactions the brokerage was structuring came to a grinding halt. That, coupled with the demand for bridging finance—which had remained a niche offering until then— was the catalyst to focus solely on lending. “We had a very large number of clients who wanted to borrow money; they were determined they weren’t going to go out of business and would continue to buy and
2013
The acquisition of Cheval Commercial Finance
sell property,” Stephen relates. “We also had a huge client base looking for smaller transactions, which the banks weren’t doing, so it became apparent to us that concentrating on a business that could service those borrowers was the way forward.” Thus, Alternative Bridging Corporation was born. While listening to Jonathan and Stephen detail these turbulent times, I couldn’t help but wonder: how did they have the confidence to take such a leap of faith when so many banks were suffering? “The market during 2009 was dominated by residentialdriven lenders—regulated finance providers that then moved to residential investments, BTL and so on. Our difference was that we came from a commercial background, so we’d always been involved in transactions for shops, offices, industrial premises and others,” Jonathan replies. “We decided not to compete in what others were doing— and we weren’t regulated anyway—but to concentrate on the world we came from, which is where there was the biggest gap.” It wasn’t just senior management that put its trust in the lender’s success—the funders did as well. While the company had secured two institutional funding lines, it was actually its loyal base of private investors that gave it the confidence to proceed. “Despite the credit crunch and everything else that was going on, we had a core of investors that were prepared to support us through that period and into the growth stage,” Stephen says. With a new look established in 2009, a clear target to fill an inadequately serviced area, and substantial financial support, the business did what it did best: provide bridging and commercial finance to a variety of underserved clients, with projects ranging from commercial and mixed portfolios to small office developments. It 14
Bridging & Commercial
Company transitions to solely being a lender— Alternative Bridging Corporation is born
2009
Fast-Track Finance launches its bridging lending arm
1992
The milestones
News
Hits £140m annual lending mark
2021
grew steadily—so much so, that it acquired former regulated bridging lender, Cheval Commercial Finance, in 2013. “We wanted to expand our residential side, which was the raison d’être for buying Cheval, as that gave us an in to the regulated market,” explains Stephen. The lender also continued to receive backing from more investors, culminating in signing its most significant funding line with an undisclosed bank in 2014. What’s more, a year later it hit another landmark: gaining its accreditation as an alternative investment fund manager. “Gaining this authorisation gives our investors added comfort that funds are properly managed,” Jonathan affirms. Every year, Alternative Bridging became a bigger force in the specialist lending space, with annual lending figures rising from £25m in 2009 to £140m in 2021, its team expanding from a dozen to more than 30 across offices in London and Manchester, and its product range increasing. Today, it offers bridging loans of up to £10m for residential and commercial properties and light refurbishments up to 70% LTV on terms between three and 24 months. Its proposition includes development finance options, such as the brand new ‘Development 90’ product which provides loans between £500,000 and £3.5m at up to 90% LTC and 75% LTGDV, with rates starting at 0.90% per month. There’s also an ‘Alternative Overdraft’ loan, offering multiple drawdowns on demand for experienced investors, with interest charged on the balance outstanding, either serviced or accrued. Some may wonder: what’s the secret behind the long-term success of the business? “We are property experts lending to property people. We always seek to understand our clients and their requirements,” states
Turns 30
2022
Accredited as an alternative investment fund manager
2015
2014
Alternative Bridging secures its most significant funding line
Jonathan, highlighting that the team’s decades of collective experience—thus the ability to recognise and take on quality deals and lend responsibly—is what set it on this prosperous path. Another contributing factor is its customer-centric approach and desire to satisfy market demand, rather than focus on competing with other lenders. “The one thing that we don’t do is always look over our shoulders. You’ve got to keep abreast of what the competition is doing, but that doesn’t mean you have to replicate it,” says Stephen, who believes that the constant race to the bottom on rates and rising LTVs between lenders is unsustainable. “We relish competition, but what concerns us is that it can be so aggressive that it will inevitably lead to casualties, which could have a ripple effect and undermine degrees of confidence in the market. While we’re not necessarily conservative, we think that prudence is what’s best long term.” With this in mind, the finance provider is set on doing exactly what it’s done for the past 30 years—albeit with an eye on other ventures and further growth. Jonathan tells me that the team is working on a couple of new offerings, including a BTL proposition, but with a different spin: “We don’t want [our products] to be copies,” he emphasises. It’s also looking to expand its geographical reach by reopening its Birmingham office and potentially adding one in Bristol. All of this is in a bid to achieve its goal of hitting £200m of lending by the end of the year. As for the future, the team plans to carry on lending responsibly and sustainably to help the industry grow. And while Jonathan and Stephen joke about watching Alternative Bridging’s continued success from the sidelines during their retirement, the pride and joy in their eyes show they have no doubt that the company will reach new heights. 15 Mar/Apr 2022
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News
THE VALUE IN GETTING THE FULL PICTURE Experts in the specialist finance market are urging brokers to fully understand lenders’ covenants when it comes to valuations before recommending a finance provider
T
he valuation process is vital in every lending decision, particularly in the specialist finance market. However, when the figures don’t come back as expected, fingers tend to get pointed and misunderstandings surface. Consequently, valuations are frequently cited as the cause of transactions collapsing, with bridging brokers and lenders often complaining of ‘downvaluations’ and how expensive and slow reporting can be. While the concerns are genuine and will ultimately impact borrowers, are they fair? In a recent issue of Bridging & Commercial, we reported that there was an 8% gap between expected and actual commercial property valuations. Thus, it seems more can be done by all involved to set borrower expectations and protect clients’ deals and valuers’ reputations. We’ve also been witnessing the hardening state of PII for valuers, which has led some 70% of these firms to consider whether to continue working in short-term lending. On top of this is an ageing workforce. Specialist lenders see the impact of these issues on a daily basis, and the stress they inevitably create on turnaround times and costs. After all, the service a customer receives is only as good as the slowest part of the process. During a live roundtable we held in February in partnership with VAS
We welcomed VAS Group’s CCO and co-founder Stephen Todd, and VAS Audit’s managing director Daniel Owen-Parr, with Phil Gray, managing director at Watts Commercial Finance; Adele Turton, managing director at Blanc Property Finance; Elise Taylor, finance broker at Aureum Finance; and Colin Anderson, executive director at LDNfinance, making up the rest of the panel. On the topic of frequent misconceptions, Colin emphasised the importance of understanding what the valuation remit is for each finance provider: “It’s not one-valuation-fits-all.” He gave an example of a case where a client using another broker was looking to release equity from a semi-commercial asset, and the valuation came back lower than expected. When Colin studied the report, he noticed this was due to it being based on a 90-day valuation. “The broker hadn’t made the client aware of the difference between open market and 90-day,” he explained, stating that this ended up being a very expensive valuation for a lender that wasn’t suitable. “As brokers, it’s important that if we’re going to recommend a lender, we need to understand their covenants and what they work towards to fully grasp the type of valuations available for a particular client.” It was highlighted that finance providers
100% of attendees believe brokers could be doing more to manage client expectations in terms of valuations
Words by
BETH FISHER
Group—which attracted circa 60 viewers—we looked at what steps brokers can take before the valuation starts, and the reasoning behind certain costs and outcomes. The point of the discussion was not to generate blame, but to raise awareness of how each party in a lending transaction can have more influence in the process, and how they can best make it more streamlined. 20
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can change these criteria, too, which Adele said happened often during Covid. Stephen illustrated that a shop let for £10,000 could be worth £100,000 but, on a restricted sales period of 180 days, might be priced at £90,000 and, on a 90-day, at £80,000. Assuming vacant possession (VP), it could then be £90,000, with a 90-day at £70,000. “You’ve got a 30% swing from VP
News
90-day to market value,” he noted. Phil added that, as an industry, we could do a better job of educating clients on aspects like this and ensuring that, before hitting the button on the valuation, all parties are “singing from the same hymn sheet” and brokers know where clients are getting their figures from. “There’s nothing worse than spending the client’s money on a valuation only for it to be fruitless.” Turning to the much discussed concept of ‘downvaluations’ Elise stated she was noticing lots of over-inflated land and property values from sellers in the market, which was eating into developers’ margins and affecting their ability to secure finance. “I’ve had instances where we’ve sent out terms and clients have had offers accepted and are looking to purchase then, all of a sudden, the landowner decided it’s worth an extra £0.5m, and they’re not going to transact unless they get that.” According to Daniel, due to a lack of stock on the market, prices have gone through the roof in some locations, and landowners have been increasing prices— some higher than pre-pandemic levels. Adele argued that valuations that come back lower than expected should not always be considered negatively, especially given the possibility of a downturn in the future. “If something is coming and you’re trying to refinance in two years, but you’ve over-leveraged now, you’re going to get stuck.” Instead, she urged developers to take it as a warning. “You’ve got to appreciate that surveyors have seen things come and go over the past however many years they’ve been in business, and most of them would have been through that horrendous time that none of us talk about any more,” she added. “It was surveyors that got hit severely . . . they were hung out to dry.” Daniel confirmed that he had never come across a valuer who had deliberately reduced a valuation, emphasising that it was all about providing accurate market values at a given point in time, and quality reports with relevant evidence. “We’re in a position now where it could go either way with inflation and everything else, and prices in some sectors could fall. It’s the valuer’s job to use their experience and market knowledge to provide accurate values, protecting their lender client. Ultimately, they don’t want their customers to be buying something that’s overpriced either.”
STEPHEN ANSWERS QUESTIONS FROM THE AUDIENCE How realistic do you think the new approach is from RICS, basing investment valuations on discounted cash flow (DCF) rather than traditional income capitalisation, when most buyers still use the latter? Income capitalisation is still one of the five methods of valuation and should be used where appropriate. DCF is being encouraged more for larger multi-let assets, such as shopping centres. This should not affect the secondary/tertiary property market space, just larger prime assets. What is the valuation approach where private sales occur? Are these accounted for in comparables or discounted as agent details are not accessible? The definition of market value is for a property to be openly marketed and at an arm’s-length transaction, so it depends on the nature of the private sale. If it’s to a family member at under/over value, or a special purchaser wanting to buy a property to add value to a neighbouring one (marriage value), for example, this sale should be discounted accordingly. It needs to be based on the property being openly market and tested.
How do valuers look at different lease terms that might impact demand, and how are leasehold details accessed? With occupational leases, valuers will principally take a view on the unexpired lease term, rent review pattern and tenant profile/covenant strength. They will also ensure that there are no onerous or restrictive arrangements that can impact on the investment value. They will then apply a yield (multiplier) to the annual rental income to arrive at the market price. The yield selection will depend on the perceived covenant strength of the tenant and will be based on comparable investment sales. Commercial leases are registered at the Land Registry and lenders/brokers often provide them to the valuers at instruction stage. What steps can the industry take to promote greater energy efficiency in the UK’s housing stock? A major challenge in the construction sector is building and refurbing properties with greater energy efficiency. It requires full cooperation through the entire supply chain. Reducing greenhouse gas emissions starts at the planning stage. We have set up our own sustainability group, chaired by David Hughes, to look for ways to make our business the best it can be. We can then consider how we can support the market as we improve.
21 Mar/Apr 2022
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MFS approaches £500m of BTL enquiries MFS started 2022 with a bang by launching its BTL offering to the wider market at the end of January. Curious to know what drove the specialist lender to join this increasingly competitive market, I spoke to its chief mortgage officer and head of BTL business, Mike Cook, to learn more about how the proposition has been received so far and whether longer-term loans are on the horizon
Words by
andreea dulgheru
25 Mar/Apr 2022
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fter many years of operating in the bridging finance sector, MFS decided to take things further and step into the BTL ring. I am told that its CEO, Paresh Raja, had been toying with the idea of launching the offering for about a year, during which the company did extensive research to analyse the state of the BTL market, find out where the demand is, and identify funding gaps. Mike—who has almost 20 years’ experience in senior product development and management roles at Kensington Group, Lehman Brothers, ING Direct, Bank of Ireland and, most recently, Vida Homeloans—was brought in to lead the new division. In Mike’s view, entering the BTL sector was a natural progression for MFS and presented a great opportunity for the business to grow. “Bridging loans are for typically less than one year, so you have to keep working hard to grow your loan book, whereas BTL is more stable and gives you a longer-term portfolio that complements your bridging business,” he explains. But it was also a chance to cater to more complex cases—often left behind by mainstream lenders—that sparked the lender’s desire to venture into the space. “Many specialist lenders have become quite similar, funded by the same institutions—thus, they have a small tranche-approach to certain criteria areas. Funding is one of our strengths, so we are happy to look at more complex cases and larger loans.” From the start, the finance provider’s aim was not to create a cookie-cutter product range. This is why it took things slowly and opened its initial offering up to just a few broker partners in October last year. “I’d rather go out there with a small group to learn and receive feedback than launch something that’s not quite right,” Mike asserts. After the pilot, the company spent Q4 making revisions—which included simplifying the ICR, increasing maximum loan sizes and adding a digital calculator to aid brokers. “Previously, we had a minimum ICR varying by tier and taxpayer status; now, it’s simply 120% across any loan, but we look at rent income and interest owed over the full two- or three-year term, not just a single month,” Mike explains. “We can then reduce the interest owed by rolling up months or deferring some (a bridging approach), or even top-slicing income or wealth, which can mean MFS can provide a larger loan size than most lenders.”
Exclusive
To remain flexible, the company’s BTL range features four levels, designed to suit as many borrowers as possible. The first two cover straightforward cases, while the third deals with more complex clients or properties, including large structures, expats, foreign nationals and overseas companies. The fourth is a bespoke offering for complicated transactions— such as very large HMOs, multi-blocks of up to 30 units, borrowers with recent or serious credit blips (including bankruptcy or IVA), or a flat above a less desirable commercial—which are reviewed by experienced underwriters on the merits of each deal and the wider picture. To make things effortless for both borrowers and brokers, MFS decided to keep some criteria constant across all tiers: loans between £150,000 and £3m at up to 75% LTV on terms between 24 and 36 months. This straightforward approach seems to be paying off, as Mike tells me the lender is approaching £500m of enquiries so far. “And there are still a lot of people that haven’t heard of or used us,” says Mike, who adds that promoting the offering across a wide range of brokers to grow its network is one of its priorities. To ensure the business is on top of handling all enquiries, it has rapidly expanded its BTL underwriting team—which currently consists of six underwriters and two managers—and will continue to do so. When it comes to the types of deals encountered so far, Mike reports a significant demand for HMO finance from home and abroad, as universities go back to in-person teaching and foreign students return to the UK. According to Mike, there is still room for professional landlords to cater to this area, despite the number of private PBSA schemes out there. In addition, the lender has seen numerous enquiries in the centres of large cities, particularly London, Manchester and Birmingham, where landlords want to maximise the loan size based on rents. But possibly the most interesting trend is the rise in landlords diversifying their portfolios, which often now consist of a mix of residential, semi-commercial, student accommodation and holiday lets. Rather than opting for one type of BTL property, this gives them back-up investment options in case some areas don’t perform as well due to challenges in the market. “I think diversification is going to be key for a lot of landlords. As financial advisers always say, don’t put all your eggs in one basket.” Mike is confident that the company’s 26
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lending figures will be in the hundreds of millions by the end of this year, but the company has no intentions of resting on its laurels. On the contrary, Mike and his team analyse every deal they receive to get a grasp of where the demand lies and how they can better the offering. “I’m always interested in getting good data in order to look at referrals and see whether we can make things clearer in our literature so we don’t waste people’s time and cash,” he states. “I want to get us into a discipline of being able to set specific changes and targets for each quarter to achieve a better conversion.” Following borrower and broker feedback, there are two other improvements that MFS is looking to implement, one of which is incorporating additional fintech into its existing deal process to facilitate lending for all. This interest in tech is based on a desire to make the proposition accessible for all brokers and offer them different ways to submit cases, depending on their preferences, Mike expands. “Service, ease and speed are our core values— whatever we do cannot diminish this. Even with tech, we still want to be able to take instructions over the phone or email and not force brokers to use online journeys if they don’t want to—but there are many firms that like to key in online, get instant decisions, or send enquiries via their CRM or sourcing systems. We are constantly looking at solutions. Our aim is to make more decisions without losing quality or integrity to benefit all involved.” Secondly, MFS is looking at introducing longer-term facilities to its existing BTL range. Mike claims that a significant number of clients have shown interest in such products, as it is cheaper and more convenient than remortgaging or moving to another facility elsewhere. He also hinted that the finance provider is considering adding variable rate extension options for clients nearing the end of their fixed-rate terms, to take the pressure off borrowers having to refinance or sell a property in two or three years’ time. “From a proposition perspective, there are many things we want to go into, but we can’t do everything at once— you have to walk before you run.” While MFS is currently focused on residential BTL lending, it is always open to considering and delving into other opportunities in the market, Mike shares. “If it makes sense for us and there’s demand, then we’ll never say never.”
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Paul Munford
T
he past two years have been difficult for lenders, but strong growth at Century Capital cements CEO Paul Munford’s status as a true industry powerhouse. The finance provider not only survived the pandemic, but flourished when others floundered. Having recently secured a new £100m funding line from a US credit fund, Century Capital’s continued record of fast, efficient financing is set to continue, and major growth is now on the cards. 2022 is off to a strong start with the lender now enjoying significant growth. So, what does Paul attribute this success to? First and foremost, sticking to the company’s founding principles, maintaining faith in the market, listening to client needs, and investing in people. “I firmly believe in the future of London real estate, particularly at the prime end of the market. The appetite of private banks that have traditionally served this market has become increasingly stifled, while the demand for liquidity among HNW individuals and entrepreneurs,
who tend to own these types of assets, has never been greater, often with extremely short timeframes.” When it comes to bridging loans, Paul explains that borrowers want easy, quick access to capital and certainty of timely funding from a lender they can rely on. “Having provided bridging loans in the prime market since 2012, Century Capital has found success by focussing on a few key values: completing and offering funds in just four to five days; being flexible and willing to work out solutions for complex needs; and, more overarchingly, committing to complete with a flair for getting it done right and on time.” The finance provider recently lent £2.2m for the purchase of a Hampstead Village property—a deal introduced by a strong broker partner in the lender’s close network. Just three days before completion, the borrower was let down by another funder and, with an aggressive vendor unwilling to extend the completion deadline, they approached Century Capital, already resigned to 30
Bridging & Commercial
losing their £350,000 deposit. Working tirelessly and meticulously to complete underwriting and due diligence in the space of one day, the team closed the deal two hours before the strict completion deadline. As an insight into the company’s expertise and dedication, this was just one of three loans totalling £9m closed by the business over a period of three days. GROWING A DYNAMIC TEAM Paul co-founded Omni Capital alongside the Candy brothers back in 2009, and therefore it’s no surprise that he has a watertight network. Now, with all the right people in the right places, including four new senior hires, the company is ready to realise the next stage of its potential by expanding its capabilities and bandwidth in the prime bridging market. New appointments include chairman Ian Axe, who brings 25 years of capital markets experience working in investment banking, wealth, asset management and market infrastructure, including senior executive positions, such as
Advertorial
Ian Axe
Chairman
century capital
‘From fast flexible finance to complex structures—it’s what Century does best’
Matt Rogers
Business development manager
CEO Paul Munford talks lending through challenging times, securing new funding, and an era of significant growth for Mayfair-based Century Capital Oliver Foskett
Head of operations and loan management
group CEO at Panmure Gordon, group CEO at LCH, EMEA COO at Barclays Capital, and COO at Absa CIB. Another new addition with an extensive network and a passion for getting deals across the line, is BDM Matt Rogers. Matt began his financial services career as a junior banker in the City of London. As a founding member of a brokerage business offering mortgage, insurance, and investment products, coupled with experience in Dubai and a wellknown UK-based mortgage lender, he became one of the first to join the Omni Capital Partners’ team in 2011, where he successfully specialised in courting family offices and UHNW property investors. Matt is well known in in the property finance space and has a vast network across the industry. Also joining the business as head of operations and loan management is Oliver Foskett. Having started his career in stockbroking, he has proved his expertise within financial services operations over the past decade, playing a key part in
ensuring all necessary systems and controls are in place, while taking the initiative to identify new areas for business growth. READY TO FUND With new funding lines recently secured from a multi-billion-dollar US credit fund, and a new facility from a UK challenger bank, growth is top of the company’s agenda. The finance provider has access to significant capital and the capacity to lend a further £250m in the short-term finance space over the next two years. Having obtained this new institutional funding, the specialist lender has added three new products to its shortterm finance suite to enhance its fundamental offering, each available on terms between three and 24 months, with the option to extend. Pricing for the new products include: » bridging
loans from £1m-10m for prime single assets at up to 70% LTV, priced at 0.75% per month. Available for purchases, refinance,
equity release, business purposes and light refurbishment » development
exit facilities of up to £2m from 0.85% per month, up to 75% LTV
» equitable
charge finance up to £3m for HNW borrowers, with rates starting from 1.1% per month at up to 65% LTV, with no maximum property value
A FRESH TAKE Century Capital has recently undergone a full rebrand designed to acknowledge the transition from being a small business to a major player in the bridging lending market, with a sleek new look and website to boot. “This is a business that has grown and matured at an impressive rate over the past decade, becoming the go-to provider of prime short-term finance in London and the Home Counties. We have developed and enhanced our offering at every step. It’s not magic, but it is dedication. Prime property finance—it’s what we do.”
31 Mar/Apr 2022
ENTER THE FIXEDRATE ERA Words by
caron schreuder
Zeitgeist
ince the end of 2008, the UK has operated in an extremely low interest rate environment. In recent months, however, the surging CPI has led the Bank of England to up its base rate three times, with the latest announcement on 17th March taking it to 0.75%. It is widely forecast to exceed 1% by the close of the year, and could climb to 2% by the end of 2023. Interest rates are increased to curb inflation by encouraging people to spend less and save more. But what about existing borrowers, specifically those with commercial mortgages? These loans are typically taken out on a variable basis which, in the current climate, means the cost of servicing the debt goes up, too. After two years of Covid-induced chaos for businesses, can they cope with this latest succession of hits to their balance sheets? For many working in the sector, this will be the first time they are seeing demand for fixed-rate commercial products—and not all banks are geared up to offer them. Mark Grant, senior commercial broker at Fiducia Group (who is hot off a call with a highstreet lender to get it to honour the terms of a five-year fix issued before the BoE’s latest bombshell), explains that, in a low rate environment, the dangers attached to shifting commercial mortgage interest rates are “not really on the agenda”, hence the now evident dearth of fixed offerings available. Mark believes that while the vast majority of commercial mortgage lending is conducted by the big banks, the specialist sector is now firmly in the frame. “Specialist lenders can currently win business over banks with their potentially higher LTV appetite and differing underwriting process and criteria,” he expands. In addition, he says that the high street reacted quickest in hiking up pricing for fixed-term borrowing, because of changes in forward swap rates affecting that market. “Combined with the banks’ remaining lack of appetite for commercial investment deals, this has created a more even playing field between types of lenders than we’ve seen for some time.” But are challenger banks ready for this? A handful of those that were established when 34 Bridging & Commercial
it wasn’t necessary to offer a fixed option are now “scrambling” to get a suitable proposition live so as not to miss out on market share. “[Several] challenger banks just don’t have fixed-rate products and are aware that specialists do, and they’re about to get completely locked out of the market if they don’t start offering them,” Mark reveals. Both Charlotte Stanford, senior associate at Sirius Property Finance, and Imogen Sporle, senior private broker at Finanze, have clients wanting to explore fixed facilities amid this most recent period of— you guessed it—uncertainty. They report that borrowers are “concerned” about escalating rates and want to act fast before further increases are given the go-ahead. While fixed-rate loans are traditionally pricier than their variable counterparts (plus they attract ERCs in many cases), the base rate rise means there can now be very little difference between the two as banks adjust their margins to keep up. Imogen states that she is witnessing a move towards what may initially be more expensive, but which provides the security of a cap on rates and what it will ultimately cost the business. Shawbrook—which announced reductions to its fixed pricing in mid-March— commented that it “is dedicated to providing lower margin alternatives to customers in recognition of the strong relationships” it has with key broker partners. “Both our threeand five-year fixed-rate offerings continue to be well received by brokers and customers alike,” says Darryl Walker, head of sales at Shawbrook. “Our product offering has seen little change in recent months other than some positive rate changes across both the commercial and semi-commercial range.” Colin Barratt, group mortgage proposition director at OSB Group, advises that the business is keeping a keen eye on the situation and that “there could be movement in the cost of fixed rates” depending on how things unfold. “As a group, we monitor our rates continuously and, while we haven’t felt the need to make changes yet, if the base rate continues to increase, it will inevitably lead to pressure on our products. In the current climate, fixed rates remain a popular choice with customers as they offer some stability, although they do remain more expensive than comparable tracker products.” It is possible, though, that things could stabilise mid-term for some of these borrowers, which means they may pay more
Zeitgeist
“SEVERAL CHALLENGER BANKS JUST DON’T HAVE FIXED-RATE PRODUCTS AND ARE AWARE THAT SPECIALISTS DO, AND THEY’RE ABOUT TO GET COMPLETELY LOCKED OUT OF THE MARKET IF THEY DON’T START OFFERING THEM” 35 Mar/Apr 2022
Zeitgeist
“GIVEN THE LITANY OF SETBACKS BUSINESSES ARE CURRENTLY FACING, SEEKING TO REFINANCE ONTO A FIXED PRODUCT IS A WAY TO GET A HANDLE ON AT LEAST ONE ASPECT OF EXPENDITURE” for their mortgage over the length of the term, or face ERCs that nullify any savings made in comparison to the variable facility. A primary consideration is whether a move is on the cards. If a business expects to outgrow its premises or relocate for one reason or another, getting out of that fixed product may prove costly. “Clients with a short-term time horizon are happy to consider the variable rates if they allow flexibility and an exit if required without ERCs,” Mark comments. “But, for anyone intending to stay put for two to five years-plus, I don’t find any resistance when I propose a fixed rate, if they are eligible.” Plenty of his recent cases are coming in at a variance of 0.25–0.5% between the two options, making a five-year fix far more palatable. Some challenger banks have reduced their rates in order to capitalise on this period of product and (potential) customer migration, especially from existing providers that may not be able to facilitate a suitable refinancing option—or one at the right price. YBS Commercial Mortgages has made several updates to its commercial range, including its corporate BTL five-year fix, which has come down from 3.20% to 3.05% since January. Its commercial investment products remain base rate-tracked, however. 36 Bridging & Commercial
Although the healthy appetite shown by specialists and challengers is playing a role in creating a competitive atmosphere which may prompt high-street banks to respond by keeping pricing low or reducing their margins, Mark warns that these lesser-resourced lenders are currently overwhelmed: “They are either at or beyond capacity,” he claims. “They can’t deal with the volume they’re getting because their rates are good.” It is important to note that it isn’t just about margin, but the types of businesses that banks want on their books. Now could be an opportune time to recalibrate the make-up of their portfolios, but threatens leaving already disenfranchised parts of the commercial sector stranded altogether. Mark is adamant that ‘sector bias’ prevails, despite the rhetoric put forward by banks and the media. Appetite to fund those operating in hospitality, for example, or indeed any enterprise that still can’t evidence two years’ worth of normal, uninterrupted trading, remains hard to come by. The latest gauntlet these businesses must take up when approaching their bank to refinance onto a fixed alternative is the possibility of being told that not only is it unavailable to them, but that their facility will not be renewed at all. “If you are on a guaranteed term in a vulnerable sector, some might be better
Zeitgeist
to stay on as they would not get through underwriting to refinance,” Mark advises. To plug the gap in accounts needed to secure finance with favourable terms, commercial bridging is on the rise. This is ideal for tiding a business over until it can build its trading history up—and it also has the added benefit of illustrating that, if it can service a bridging loan, it is very likely to pass affordability for the term debt, possibly smoothing the application thereof. Another emerging trend is the requirement for interest-only options, according to Mark. This model, or indeed a hybrid of interest and capital repayments, can allow a business to be flexible with its cost of debt monthto-month in times when it is needed. It is, however, riskier for lenders and therefore typically capped at a 10-year term. Given the litany of setbacks businesses are currently facing—including, but not limited to, materials and stock delays, labour shortages, and spiralling fuel and energy costs—seeking to refinance onto a fixed product is a way to get a handle on at least one aspect of expenditure. “CPI at 5 or 6% doesn’t scratch the surface of the price inflation that our trading business clients
experts in property finance www.maffinancegroup.co.uk
are seeing, where it is common to hear of 50% or higher price rises in materials or services they have to pay for,” Mark shares. In response to what he expects to unfold more generally in the strained commercial sector, Mark anticipates a reversal in the supply-demand balance and that cost pressures will end up stifling the latter. It’s possible that businesses that have stockpiled raw materials may find people are no longer willing to pay the hefty price, resulting in discounting and competition to offload the now ‘expensive’ goods. He adds that however welcome the unwinding of the surge in demand will be, given how sharply things have spiraled upwards, it’s unlikely to be an “orderly” path to normality. The pandemic has forced us all to be adaptable—and this filters into finance options, too. Although experienced investors tend to be risk aware and more used to riding out storms—and may therefore be less panicked by the soaring base rates— there are plenty of owner-occupier SMEs that require support from brokers and lenders in order to make it through this current series of obstacles and beyond.
types of property finance we cover...
01162019789
Commercial Mortgages Commercial Buy-to-Let Property Development Property Investment Bridging Loans
info@maffinancegroup.co.uk
Midlands Asset Finance Limited t/as MAF Finance Group is authorised and regulated by the Financial Conduct Authority (FRN: 734580) and is registered in England and Wales under company number 06995483. The registered office is 22 Maisies Way, The Village, South Normanton, Derbyshire, DE55 2DS. MAF Finance Group work with an extensive panel of funders in order to give customers a wide choice of financial solutions. We are a credit broker and not a lender. We are remunerated by way of an introductory payment payable by the funder. The nature of this payment and the effect on the interest rate you might pay will vary from funder to funder and is dependent upon a number of factors including (but not exclusive to) asset type, product chosen and customer circumstances. MAF239
Bridging & Commercial Advert Mock-Up.indd 1
18/03/2022 11:47:45
37 Mar/Apr 2022
…SHOULD THAT LOAN
HAVE BEEN
REGULATED? Four solicitors and one regulatory consultant discuss the red flags that lenders and brokers need to be conscious of Words by
BETH FISHER
A
lawyer’s perspective is fundamental in ascertaining an accurate picture of the bridging market’s overall health. After all, they are the ones acting on behalf of the borrowers and lenders and, consequently, observe the best and worst practices in the sector. I gather a group of experts who are well-versed in the specialist finance market—Juliet Baboolal, partner at Seddons; Jonathan Newman, senior partner at Brightstone Law; Ray Cohen, director at Jackson Cohen Associates; Felicity Marsden, partner at Taylor Rose MW; and Jack Medlicott, partner at MSB Solicitors—to discuss the growing instances of dispute over regulation and what lenders and brokers should be doing to safeguard themselves. Arguably directly linked to this problem, the topic of increasing competition is where our conversation starts…
Interview
Ray Cohen: It’s surprising that a lot of lenders still come into this market thinking it’s easy to lend money and don’t understand all the risks. I personally think the money is too cheap. That’s the biggest thing: lenders have stopped pricing for risk. But bridging is risky. The industry has been benign for a long time but, for those of us who’ve been around a while, it’s a cycle and, at some stage, lenders will lose money. They won’t be able to recover due to a combination of the low interest rates and higher LTVs that are being offered. Once this happens, some investors will run for the hills. I think a number of lenders are going to go pop with some of the lending they’ve done. I could be proved wrong, but that cycle seems to repeat. Do you agree, Jonathan? Jonathan Newman: Yes, I do. But it’s also important not to just look at the past 12 months on its own, because that’s ignoring the impact of Covid—a period of forbearance by many lenders, who are sitting with a lot of overdue loans on their books. Many of the issues that would normally have appeared 12– 18 months ago are only now beginning to come out. The forbearance has gone. RC: And the interest rate increase and possible job losses could lead to more foreclosures and a drop in house prices. Demand is still there, but people may not be able to afford them. Once you start getting that blend, risk rises. Lenders haven’t had a problem as they’ve had enough liquidity and time to get out, even by foreclosure. But the wait to get to court must be quite long now, and I doubt it’s going to reduce particularly quickly. The longer that takes, the more your equity erodes. Losses will start to occur. JN: A new trend we’ve definitely seen is a significant increase in professional negligence action against surveyors. Lenders only sue valuers when they have trouble recovering the property. And that only happens if the property market isn’t functioning as well as some people would have us believe. Juliet Baboolal: One thing I’ve spotted is that valuers have changed their letter of instruction. Normally, the lender would send a very generic letter. Valuers are now redacting clauses to reduce their exposure, and I think that’s
due to the level of claims coming their way in the past couple of months. Their PI insurers are saying, “Look, we’ve got to vet these retainer letters before you agree to them, otherwise you may not be fully covered”. Lots of valuers are erring on the side of caution and not wanting to give letters of reliance like they did in the past. They’re actually saying, “No”.
our developer clients, not specifically seeking out new sites, but looking at where others have gone wrong. Lenders are a bit more open to that situation then they may have been previously.
RC: Lenders start issuing claims because they’ve got a problem getting their money back. That’s a good indication that there’s a disparity between where they sit and what they’ve lent.
BF: What problems have been emerging in the market that you’ve had to assist with, and what advice have you been giving lenders?
Beth Fisher: It’s definitely a good guage, especially when you look at how the loans have been underwritten in the first place. Jack Medlicott: One change we’ve noticed is flexibility in what the lenders have taken as security. Historically, it was your straightforward legal charge, debenture, personal guarantee… Now, if directors have other companies they’re involved in, as long as you can satisfy that there’s corporate benefit, finance providers are willing to take third-party charges over other assets from those companies to solidify their position. This year, I’ve seen a huge increase in this. Felicity Marsden: I’ve seen that as well. RC: That’s normally to make the deal work, rather than for comfort. FM: And the lender is going to try to claw back any money they can due to the moratorium they’ve had on repossessions. Returning to the surveyor issue, they need to see where they can get money from. So that’s probably only going to increase. JM: Finance providers are also becoming more receptive to lending against distressed schemes and working with receivers or administrators and borrowers in order to go in and complete a project. They are seeing the value in finishing off these sites. BF: Is that a consequence of the sheer amount of competition in the market at present? JM: I think so. It’s just something we’ve observed this year in terms of
RC: It’s because they can find a niche to operate in which isn’t quite so competitive.
JM: One challenge I’ve had is where a borrower has a portfolio of, let’s say, four commercial units with residential properties above them, and the underwriting is based on the yield. So the lender might say, “Let’s look at these four leases. If they all turn £20,000 per year, then that’s enough to service our loan”. You’re then provided with four brand new commercial leases, all entered into a week or two before the loan was underwritten. Neither the borrower nor their tenant was represented, and there’s no evidence that any rents have ever passed between the parties. You’re being asked to report on the terms of the leases but, really, what is the strength of these? What is the strength of the financial covenant given by the tenants? Where does the responsibility lie? If you were a landlord granting a lease to a tenant, you’d do some sort of financial due diligence on them. Are the lenders looking at that as well, or are they not concerned whether the rent is passed for a period of 12 or 24 months? I’m not getting any evidence that that’s being asked. And then there’s a concern about whether these leases have been put in place just to service requirements. FM: In that instance, we’ll go back to the surveyors. Is that a fair rent? What’s the appetite in the market for those tenants that fell by the wayside? JM: Absolutely, and the surveyor can tell you if the rents agreed under those leases are fair for that market. But it’s about whether they’re genuine tenants on genuine leases. Have we got a new AST that’s been put in place because it allows the borrower to meet a certain level of criteria and an extra £20,000 to be lent? Where does the responsibility lie there,
43 Mar/Apr 2022
Interview
and whose job is it to ascertain if these are genuine occupational documents?
valuers to take stock of exactly who’s at the property, what does and doesn’t appear to be tenanted, and what the property looks like inside. It feeds into what Ray said: you’ve got to price for risk. You’ve got to make sure that all your valuers and solicitors, with all their PI exposure and so on, can devote enough time to an individual loan to give you the best possible service.
Jack Medlicott
JN: I’d say that lies with your letter of engagement. But, generally, and my clients certainly, if they’re professional, competent and experienced, they’d definitely be looking at that internally. They wouldn’t expect it of me. And it’d be obvious whether they should be relying on a covenant in terms of a lease that’s only existed for a week or two. We’ve all learned from experience how unreliable that can be. But your retainer is limited to the terms of your engagement and what you report on the title. If lenders aren’t looking at loans with that degree of due diligence, then they’re not being particularly savvy. They’re going to end up with problems in other areas.
RC: If you’re not pricing for risk, you can’t afford to take it. You have to make sure your I’s are dotted and your T’s are crossed. Lenders don’t necessarily help if they don’t publish how long somebody has got to be in occupation for the lease, because, for a lot of them, it’s just individual underwriting; it’s not a published term. So the broker may not go down that route to question it. But when the valuer goes in, you often see comments coming back about its supposed unoccupied status, with evidence that there’s a tenant, or the owner is in it, even though they say they’re not. It’s good to see the valuers do actually pick it up. Most lenders, I’d like to think, ask them to comment to cover that off.
RC: Absolutely. JB: Agreed. Also, for the bridge, the exit would be questionable. I mean, what other lender is going to come in and take out that existing loan? BF: So, who’s responsible in these sorts of scenarios? Is it in the broker community, or in the sales and underwriting divisions?
BF: This neatly brings me on to my next question... Regulated deals being passed off as unregulated in the bridging market is a historic issue. But is it rearing its head again?
RC: Well, the broker has a duty to understand the deal when they package it up and put it in place. Certainly, if you’re using a specialist broker, you’d expect them to ask the right questions. But, for information about tenancy and how long the tenant has been in place, they’re probably unlikely to ask for that; they’ll think it’s a lender’s job to check. If the borrower said they’ve got a tenant and the figures stack up, why would the broker go to all the work to check that when the lender is going to do it? It may or may not be right, and there will be some brokers who would make sure that it’s absolutely accurate before they put it in, but I don’t think it’s common in the market.
JB: In terms of the regulation, I’m always calling Ray, or my clients are, for advice. As for fact checking, sometimes we get a loan that’s packaged as unregulated, but then get lots of inconsistent replies to things… It’s very difficult where we stand, as we’re only exposed to the paperwork to ascertain whether this has just been presented in a way for it to proceed. There are situations where, for example, you’ve got a director living in a house, and the loan is to a limited company, so the argument is that it’s unregulated because it’s to a limited company. But then, in transacting, you find out that the company is holding the property on trust for the director, which makes it regulated. Being a detective can be quite challenging, especially when you discover things towards the end of the loan!
JN: I’d say it’s incumbent on all the stakeholders to provide a competent service. Intermediaries need to give you accurate information and have the relevant, experienced people dealing with it. I believe it’s on the solicitors to investigate and carry out due diligence in accordance with what their client requires; and that it’s obligatory for the
BF: The inconsistent replies—are they from the borrower or broker? 44
Bridging & Commercial
Interview
JB: Sometimes with the application form, the broker will package it, and our lender will issue heads of terms based on those details, but then the information that comes in from the borrower’s solicitor is at odds with the underwriting. Whether it’s come directly from the borrower or their broker—it could be either—the underwriter hasn’t had the full picture. BF: Is anyone else experiencing the same scenario? JM: 100%. Time and time again. It’s more about a real failure of understanding the frameworks for regulated and unregulated. That example of, “Oh, because it’s owned in the limited company name, then clearly it’s fine”, and trying to articulate your argument to your client, whether that’s the borrower, or indeed the bank, can be quite difficult. JN: If you’re cynical, you might say it’s a symptom of the sales pressure against the underwriting responsibility. What’s actually happening on the ground floor is that the sales arm of the particular business is under increased pressure for volume and to make a deal out of something which the underwriters might never even wish to consider, nor should they. There’s quite a lot of that and it’s spinning out much later in the process. And that’s why the recovery piece is becoming much more complicated. Some of these underlying issues are present in many transactions. RC: A lot of stuff suddenly gets referred to me at the last minute because somebody’s a bit concerned, and often that concern is valid. It’s interesting, because you’re asked whether it is or isn’t regulated based on the information you’ve been provided. But when you find out that it wasn’t a limited company, but actually a trust, that’s a completely different story. There was a case not long ago where the judge said that, in his opinion, a loan to a limited company was not a genuine commercial arrangement. The reason for the loan was for the benefit of the three individual directors’ personal BTLs, which were nothing to do with the company. He did say he thought it would probably be regulated and could be heard on that basis—but it was an injunction case, and it was upheld for something else. It’s very
It’s about educating— not just your underwriting teams, but also your sales teams—about regulation. They need to know the consequences of getting these things wrong and manufacturing deals where, really, they don’t exist
45 Mar/Apr 2022
Interview
clear, though: not all loans to limited companies are genuine. The law is not as straightforward as it could be. There are lots of things that can trip people up, so it can get quite complicated to get to the bottom of things. In some cases, there is a failure by solicitors that don’t ask the right questions.
Juliet Baboolal
it together. Now, if we’re lending to an individual, we get them to sign a declaration. It’s not just the business exempt declaration, but a confirmation of certain details. To some extent, it buffers the fall, should the loan transpire to be regulated. We had our fingers bitten the other day. Someone pretended not to live in the property; they created an AST, got their bills sent to another address etc. When redemption came, we went to court because they couldn’t redeem, and they said the lender knew it was regulated. They’d signed all the declarations. And the judge decided that it was regulated, and the lender would not get their interest back.
FM: We’ve seen it a few times where the brokers coming in aren’t as experienced in bridging. Or a client has asked the introducer to look into it, and they don’t want to lose them to another broker. Untangling that web when it comes to us is often the problem, especially when you’ve got developers who haven’t gone down the bridging route before, but the pressure of the market is making them want to explore every avenue. A slightly naive intermediary who’s attempting to do it can lead to an absolute nightmare.
BF: [shocked] Despite there being a declaration with the borrower? JB: They said the lender was fully aware. I mean, the valuer went on site and these people exited the property, they had an AST for another… All the evidence proved they weren’t necessarily living there. But they managed to convince the judge that the lender or the broker knew, and it was a regulated loan. So, because it was packaged as an unregulated case, it’s now void.
JN: It’s comforting that Ray is being consulted by prudent lenders prior to loans being completed, and not afterwards. That’s a really good sign. But there’s a relatively easy solution: apart from consulting Jackson Cohen Associates in advance of completing the loan, it’s about educating—not just your underwriting teams, but also your sales teams—about regulation. They need to know the consequences of getting these things wrong and manufacturing deals where, really, they don’t exist. Regulation isn’t clear—I accept that— but it’s pretty well established now, with [enough] experience and precedents around. So we have a much better idea as to how these things might end up.
BF: Wow. JN: Juliet, was the borrower independently represented in that case? JB: Yes. That’s the problem. The firm of solicitors representing was notorious in saying anything to get stuff through. This firm was actually intervened by the SRA. They basically told us a bunch of lies. It’s now a tossup between going after their PI, if that’s possible, or the SRA indemnity fund. Our charge is potentially going to be removed from the Land Registry, so we might be able to claim on the Land Registry Fund. It becomes very difficult when your lenders, that lent with clean hands, are being punished.
RC: I don’t believe all brokers are as innocent as you think. Certainly, some just don’t understand it. But some of them, they’ve been knocked back somewhere else, so they change the words a bit when they put it through next time to make sure that it looks okay. Sometimes it will go through, and sometimes it won’t. JN: That’s not education, Ray. That’s integrity.
JN: I think Ray will back me up on this, and Juliet’s experience certainly suggests it, that the instances of dispute over regulation are growing.
JB: People are getting cleverer with how they package things. They’ve probably been rejected in the past, and they know exactly how to make it look as though it’s unregulated. In some cases, when things come to us, it feels almost as if we’re a forensic scientist piecing
JM: I’ve seen a similar situation, where the property that was borrowed against was to be demolished and redeveloped into apartments. Six months down the line, the borrower defaulted. It 46
Bridging & Commercial
47
Jonathan Newman Mar/Apr 2022
Interview
turned out he hadn’t demolished the property, but actually moved into it and then claimed it was regulated because the lender was aware that he was living there. The craftiness of the borrower that Juliet refers to is creating more and more cases like that.
Ray Cohen
don’t even get your capital back. In one case, six years after the borrower repaid the loan, they went to court to claim that it was unenforceable, because it was regulated. It came about after another bridging lender had taken them out, it had gone pear-shaped and, when it finally went to court, they found out that it was a regulated loan. The percentage of the property occupied was more than 40%, and they’d just made a mistake. The judge found against them, and it cost them a lot of money. Then the solicitor thought, “Hang on, the borrower redeemed another loan. Let’s go back.” So, lenders that think it will be fine because the borrower won’t occupy during the course of their loan could be in danger—and that doesn’t disappear for quite some time after you get redeemed. I don’t think lenders fully understand the risks they take when they’re prepared to turn a blind eye on what is regulated.
JN: But, while the level of dispute is becoming more common—and we’ve seen the scenario Juliet’s just described many times—thankfully, it hasn’t succeeded on any of those occasions at our firm. But it’s very worrying that a judge might find in those circumstances. FM: We’ve had a couple of instances where we’ve been able to catch it beforehand. But you have to be so careful nowadays and not take anything on face value. It’s definitely becoming harder in all walks of conveyancing. RC: There’s undoubtedly been an increase in the number of people claiming the loan should have been regulated when it goes wrong, and in people willing to. Lawyers are getting much smarter. A few years ago, some wouldn’t have understood what a regulated loan was or even thought to challenge on that basis. But now, it’s almost the first thing that crops up, and they start to look for it. There isn’t a lot of precedent, as it’s heard in lower court, and most lenders aren’t going to challenge it because they don’t want to set precedent which could impact their whole book. I’m not sure, but it sounds like the case Juliet’s referring to, I might actually know about…
BF: With Juliet’s case, obviously the lender did all the checks, and so did their solicitors. What else can lenders do to ensure they don’t get into a position like that? JB: You’ve got to deal with this on a case-by-case basis. It’s really important not to take shortcuts. The other key is to have these borrowers represented by a firm that has integrity. But, in our case, I’m not sure the judge got it right. What I’ve found is that, sometimes, you’ve got a family judge who sits on a civil matter because it’s the same court, and they don’t quite understand regulation. It may be that this judge took pity on these people and thought, “If I grant a possession order, they are going to be homeless.” For whatever reason, I don’t necessarily think it was the correct decision. The declarations, information and the paper trail were there to evidence that they didn’t live there. Whether the lender decides to appeal or not…
JB: Yes, you took it. RC: But it’s not alone! There have been quite a few where the judge has taken the view that the loan is regulated. The borrower has probably committed a fraud but, actually, it doesn’t matter. In reality, your lender got off relatively lightly compared to some others, as they’re not all getting their capital back by any means. They got a small amount of interest, didn’t they?
RC: Appealing a decision can be a very unattractive scenario, because if you lose, suddenly your whole loan book is opened up to challenge. It’s quite costly; it’s always a balance. I agree with Juliet. I’ve seen one or two cases where the judge is totally outrageous in what they say. I think where lenders get more exposed is when, somewhere along the line, there has been some
JB: Yes. RC: Some lenders are told to rescind the loan and put the borrower back in a particular position. So all interest, charges and fees knocked off, plus their costs… by the time you do that, you 48 Bridging & Commercial
Interview
information that indicates it could be regulated, then they are given a slightly different answer to avoid it. That worries me—they’re changing the information. It leaves you open to the claim, yes, but the lender always knew. The borrower could accuse the lender of telling them to do this in order to get the loan. BF: Surely that’s the biggest red flag— changing information like that? RC: Once you know something, you can’t unknow it. BF: Do you all think that transparency in the bridging market, in terms of proc and broker fees, is still a problem? And what impact could this have on lenders and brokers down the road, if a case regarding fees goes to court? FM: Over the past few years, I’d say it’s probably getting a bit better, but it does still pose a problem. JN: It seems that secret commissions are the lenders’ new PPI, to a certain extent. There are people looking for secret commission cases because they can offer significant returns to debtors and solicitors acting on their behalf, if they can uncover it. There are also occasions where money passes between lenders and introducers outside the deal, but linked in some way to it; for example, being paid out of so-called facility fees, or in terms of the amount of volume a lender might receive from a particular introducer. They are all types of commission. The courts don’t like it, and they are making some significant decisions in this area. Transparency is very easy to achieve. You just have to make sure that the borrower is fully aware of every penny that’s passing between the introducer and lender linked to the loan, whether it be outof-the-loan monies or otherwise.
according to how much business has come in—but only for future deals. Anything that’s already in gets the rate that was there. On an unregulated loan, there are people that will do it. It’s virtually impossible to declare. It’s very difficult to be precise about it, which makes it harder to meet the obligation to be transparent and let the customer know where their risk lies. Personally, I’m very much against that type of deal arrangement. I don’t feel it sits comfortably with doing right for people, because the temptation is too great to place a deal somewhere to get that extra bit of commission. I think that solicitors have a duty to ensure their customers understand brokers should declare where all the money is going, but I don’t think everyone gets that clear-cut advice. I get sent loan documents to review every now and then, and the amount of commission being paid isn’t mentioned. Some solicitors still draft documents that don’t cover that off, which is disappointing. JN: In all the years I’ve been specialising in this area, I’m still learning. Things are constantly evolving, so it’s really important for lenders to be in touch with people that are specialists and have wide-ranging experience. Having their finger on the pulse is probably the most useful thing they can do.
I don’t think lenders fully understand the risks they take when they’re prepared to turn a blind eye on what is regulated
BF: Regarding volume equalling a better commission rate, that would be a result of introducing a number of loans, not just one. Would that not be declared on the terms for each borrower? That makes it very murky... How would the borrow know? RC: You can’t do it on a regulated loan. The FCA bans it. Basically, you have to agree a rate that you’re paid for new business, then you can up or lower this 49 Mar/Apr 2022
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Are landlords the most catered-for borrower? The number of BTL products has swelled to more than 3,500, with new offerings expected to hit the market throughout 2022. We look at what is making this sector so vibrant—and whether it will continue
A
n abundance of choice is generally seen as a good thing. Received wisdom suggests the widest selection should offer the best chance of finding the most suitable solution. Other arguments, however, counter this theory. A behavioural principle called ‘choice overload’—also known as ‘the paradox of choice’— asserts that too many options can prove overwhelming, subsequently hampering decision-making. Somewhere between the two must lie a happy medium, a place where there is enough to meet everyone’s needs, but not so much that the selection process becomes dizzying. An area of the property sector trying to strike this balance is BTL mortgages. But whether it’s hitting the mark is a matter of some debate. What we do know is that the number of products
is swelling. Data compiled by Moneyfacts shows a total of 3,528 are currently available to landlords—the highest count on the marketplace for almost 15 years. So, are the offerings spiralling out of control, or are changing borrower requirements making room for more? “We don’t need more of the same,” claims Melanie Spencer, head of payment and mortgage services at Finova, who believes that any future launches should focus on plugging holes in the market. Imogen Sporle, senior private broker at Finanze, agrees, adding that these gaps are starting to close. “There is still space to fill in the bridge-to-exit area where, once the need for the bridging finance has ended, customers can switch straight onto that same lender’s BTL term loan,” she says. 53 Mar/Apr 2022
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What is driving growth? The most eye-catching evolution within BTL can be found in the specialist space. “Many lenders are fighting over the most vanilla applications, which leaves lots of customers without access to funding, hence the need for specialist lenders,” explains Matt Kelly, senior commercial product manager at Together. “From the outbreak of the pandemic, many more mainstream lenders have restricted their criteria, which has created a growth in this market.” A further reason for the escalation is outlined by Simon Knight, managing director at Lendco. “We are at that stage in the credit cycle where people are hunting for margin, and there is a belief that specialist BTL can deliver that in volume. It provides excellent cashflow and, if underwritten well, is a high-performing asset class.” It’s not just the number of new options, but also the frequency—and the direction of travel here is showing little sign of abating. Some 222 new products entered the sector during December 2021—the eighth consecutive monthon-month increase. Matt points out that “the competitiveness of the market and frequent new entrants mean that lenders have to improve their offering to stay ahead of the game”. Imogen has seen an uptick in specialist first-time buyer and landlord products in the past 12 months. “Because house prices are so high now, it’s difficult for people to get on the property ladder with a residential mortgage, so they are opting to start a BTL portfolio
BTL finance is far from a one-size-fits-all approach. There are several distinct types to serve borrowers of various stripes. Here’s a selection of them
as they have the ability to borrow more as the mortgage is leveraged on the rental income,” she notes.
Reconsiderations Changes to the tax system that occurred six years ago are forcing landlords to rethink the most tax-efficient way to structure a BTL property portfolio. Last year, around half of new BTL mortgages were taken out by a company rather than in someone’s name, according to Hamptons. In addition, some 40% of these purchases went into a business less than a year old. The appeal of owning properties via this set-up is clear: limited liability if things go wrong, and a more attractive tax structure. In the 2016 Budget, then-chancellor George Osborne announced capital gains tax rates would be slashed from 28% to 20% for higher-rate taxpayers, and from 18% to 10% in the basic-rate band. However, a notable absentee from the rate slash was residential property, much to the dismay of landlords. This has led to an increasing number of landlords arranging their portfolios through a limited company. Gains are therefore subject to corporation tax instead of CGT on property sales, which at a flat rate of 19% is preferential. Recent figures support this activity: a total of 47,400 BTL property companies were set up last year, a 14% rise from 2020, Hamptons reports. Richard Tugwell, director of mortgage distribution at Vida Homeloans, feels this goes some way to explaining the
Rental rise Recent rental data indicates that the market is in rude health. Research by Zoopla conducted in November 2021 found that private sector rents witnessed a 4.6% boost on the previous 12 months, its strongest level of growth in 13 years. Some areas recorded particularly high surges, none more so than Purbeck in Dorset where rents rose by 16.2%, with the ‘race for space’ supercharging prices and rents in rural areas. And while this has negatively affected many urban landlords, the influence of the pandemic is beginning to fade, with renewed interest in moving back to cities already in train. This has begun to nudge up rents in some of the UK’s largest metropolitan areas, and further increases are likely as workers return to offices and seek shorter commutes. If interest rates continue on their current trajectory, rents could climb even higher. The Bank of England has already hiked the base rate twice this year—most recently to 0.75% in March. To avoid thinning their margins, BTL property owners on variable rates are likely to pass rising mortgage payments on to occupants by charging them more. With this potential shift in mind, will nascent offerings continue flooding the space, not only for the rest of 2022,
Semi-commercial
Limited company BTL
A semi-commercial mortgage is used to purchase a property that combines residential and commercial use; it is often referred to as a ‘mixeduse mortgage’. An example is a pub that provides self-contained living accommodation. It’s important to note that the split is irrelevant: if the property is 95% commercial and 5% residential, the buyer will still need a semi-commercial mortgage.
This is a way of taking out a mortgage, or multiple mortgages, through a private limited company, rather than in someone’s name. There are two big upshots. The first is that there are significant tax benefits—profits are subject to corporation tax instead of income tax. The second is that the limited company and owners are deemed separate entities, which means personal assets will not be seized if things were to go wrong.
54 Bridging & Commercial
upswing in new products. With an increase in special purpose vehicles, trading and limited companies, you need more of a specialist lender, he asserts.
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but for many years to come? Simon believes this is inevitable. “The overall market is becoming more crowded, but brokers will increasingly seek lenders that really understand property risk and can underwrite manually, looking at each case on its own merits,” he claims. In addition, there are, surprisingly, still gaps that need to be filled, says Matt. “We know some brokers struggle to place customers with an element of adverse credit, or who are firsttime landlords, first-time buyers, or those with properties different from the typical two-up two-down.”
Going green Addressing environmental, social and governance (ESG) issues is racing up the agenda for industries of all types, and the BTL sector is no exception. The government’s ‘green homes target’ proposes that, from 2025, all new rental properties must have an EPC rating of C or above. While this means landlords still have three years to get their properties up to scratch, the current situation prompts concern. Government data indicates that 19 million homes across the UK are rated D or worse. Experts anticipate this shift in environmental qualities to further stimulate BTL demand, leading to innovation and more specialist offerings. “ESG is increasingly being talked about in lender boardrooms and investor meetings,” highlights Richard. “Sooner or later, the lenders will have to react and develop products to encourage the right behaviours from their borrowers.”
The upcoming EPC changes have already started to figure in many landlords’ plans, with a potential investment opportunity set to emerge. Recent research from Landbay found 53% of large portfolio landlords would consider buying property with an EPC rating of D, with a view to upgrade. This compares to 32% of smaller portfolio landlords who would do the same. Only 20% of non-portfolio landlords would choose to buy and improve. These same landlords have already begun to mull over how they would finance such acquisitions, with many aware of the benefits of using a green mortgage—or one designed to reflect and support ESG needs— for this. Of those surveyed, 84% admitted they liked the incentive of a discounted interest rate. However, there are concerns that the availability of ESG BTL products is not yet ready to satisfy this demand. Melanie describes some of the existing offerings as quite basic, adding: “There’s a lot more work to do around what a green mortgage looks like.”
BTL, there are different tenant types at play. “It’s not just landlords—it’s the tenants that are changing what they need from a property as well.” This stems from landlords playing a crucial role in the ongoing development of the UK housing market, Jamie continues. Much of the talk about the stream of offerings focuses on the needs of property investors—after all, they are the customers. Experts argue it is important that the challenges brokers face are not overlooked as a result. As Richard comments, intermediaries are tasked with getting their “advice heads” around the swelling number of propositions to ensure borrowers are furnished with the right solutions for their individual needs. “Landlords are more [provided for] than they were previously, and better served than first-time buyer residentials, which are stretched on affordability,” he says, but believes there are yet more to come .
Still room to innovate The landlord space is becoming more fragmented, underscoring why more BTL products are needed. Some landlords have specific needs that were not met by the offerings of previous years and, according to Jamie Pritchard, director of sales at Glenhawk, ESG is the part of the market requiring the greatest improvement. He also notes that, with
Portfolio landlords
First-time landlords
Student accommodation
Portfolio landlords, as the name suggests, are those that own several BTL properties, usually defined as four or more. These can be owned jointly or solely and include holiday lets.
While many may believe that BTL mortgages are reserved for those with years of experience in the sector, everyone must start somewhere. BTL mortgages are even possible for firsttime buyers, but the lending criteria is often significantly more stringent.
This is a loan used to purchase a property to let out to students. Landlords taking this approach tend to want to grow their portfolios. It offers the chance for better yields due to the potentially high number of occupants within a single property.
55 Mar/Apr 2022
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Atelier Capital Partners Limited is supervised for anti-money laundering purposes by the Financial Conduct Authority, under reference number 910090. You can confirm our registration on the FCA’s website at www.fca.org.uk or by calling the FCA on 0800 111 6768. Atelier Capital Partners Limited is incorporated in England and Wales with registered number 11888767 and its registered office is at 3-5 Rathbone Place, London W1T 1HJ.
Delivered to a higher standard • At Atelier, we’re aiming to set new standards for the industry. We’re a Gold Leaf member of the GBC and ISO 9001 certified. • To help brokers close even the most challenging deal, we offer you an experienced team of real estate experts and direct access to decision-makers. • Rather than fitting your needs into ‘set’ products, we structure loans around the unique circumstances of developers. • Our solutions are customised, yet priced competitively. And have been designed in collaboration with developers.
To explore our rates across our full range of property finance solutions, call our specialist team – or visit acp.co.uk Martin Gilsenan M 07376 660884 E martin.gilsenan@acp.co.uk
Simon Joseph M 07947 559592 E simon.joseph@acp.co.uk
THE MARKET POSITION
We exclusively reveal the state of the UK bridging sector with the latest annual stats
Cover Story
Bridging & Commercial Words by has collaborated with EY BETH FISHER to exclusively reveal its Illustration by VALF fifth annual UK Bridging Finance Market Survey, providing the latest market trends and challenges the industry faces. As we recover from the pandemic— and, for many it seems, become more profitable than pre Covid-19—the bridging finance sector is hit with yet more headwinds from the UK’s cost of living crisis and record inflation figures. We hope the insights from this report will provide you with a better grasp of what the current bridging landscape looks like and what you should be preparing for in the near to long-term future
59 Mar/Apr 2022
Cover story
Who took part?
The survey had 47 participants—42 lenders, three brokers, and two third-party professional companies The majority (51%) are based in London, while 19% are in the South and the North, respectively, 9% in the Midlands, and 2% platform-based Most of the businesses surveyed (34%) currently employ between one and 10 people, with 21% employing a team of over 50 Some 44% of the lenders that took part provide more than £100m of bridging loans per year.
What the bridging market looked like in 2021 AVERAGE MONTHLY INTEREST RATE 1.25% or more
2%
50%
0.5% to <0.75%
1% to <1.25%
2%
44%
0.75% to <1%
2%
<0.5%
AVERAGE LOAN S IZ E
AV E R AG E LOAN T E R M
£100k to <£200k
15 months to <18 months
£200k to <£300k
12 months to <15 months
£300k to <£400k
9 months to <12 months
£400k to <£500k
6 months to <9 months
£500k to <£600k £600k to <£700k 0
5
10
15
£700k to <£800k
25 %
20
0
£800k or mote
10
20
AV E R AGE LT V
30
40
40% to <50% 50% to <60% 60% to <70% 70% to <80%
0
10
20
30
40
50
60
60 Bridging & Commercial
70
80 %
50
60 %
Cover story
R EG ULAT ED LOA N S A S % OF TOTAL LOANS <10% 5%
10% to <30%
7%
23% 30% to <50% 27%
AV E R AGE MO NTH LY CO ST O F ORIGINAT ION
50% to <70% 70% to <90%
<1% 6%
39%
1% to <1.5%
26%
1.5% to <2%
41%
EST IM AT ED SI ZE OF U K B R I DG I N G MAR K E T
2% or more
26%
<£1bn 4% 22%
2%
£1bn to <£3bn 18% £3bn to <£5bn £5bn to <£7bn
AV E R AG E DAYS TO COM P L ETE
£7bn or more
<35
53%
21%
35 to <40
17%
40 to <45 45 or more 32% 30%
agreed that competition increased and 85% expect this to continue or get even more heated
factor contributing to bridging finance delays is a protracted legal process
felt that institutional funding grew, with 60% expecting it to rise further
of businesses loosened their underwriting criteria since Covid 19 restrictions were eased 61 Mar/Apr 2022
70% OF BUSINESSES INCREASED THE SIZE OF THEIR TEAM LAST YEAR. HOWEVER, LIMITED ACCESS TO TALENT AND HUMAN CAPITAL IS PREDICTED TO BE ONE OF THE TOP THREE BIGGEST CHALLENGES IN 2022
62 Bridging & Commercial
Cover story
Current state of the market
Independent brokers (48%) and master brokers (27%) cited as the most important primary channels for bridging loan originations, while 20% said direct-to-customer business is their top route Speed of execution was deemed the most important quality to a customer or broker when choosing a bridging lender (61%) and for remaining successful in the bridging market (59%) Refurbishment is highlighted as the most popular reason to obtain a bridging loan, while auction purchase is the least
think Covid-19 had a moderately positive impact on the market PROFITABILITY OF YOUR BUSINESS COMPARED TO PRE-PANDEMIC LEVELS Significantly down
2%
26%
Significantly up
Down
4%
44%
Up
24%
The same Stuart Mogg, associate partner in the EY Corporate Finance team “The past two years have seen significant growth in the sector. This has been aided by a strong UK property market and access to cheaper, more flexible funding. Access to talent is an ongoing issue, not only in the bridging market, but for all businesses, with human capital flagged as one of the key constant challenges. Access to top talent is fundamental and, if not achieved, the knock-on impacts could include issues for firms in terms of their ability to grow and their quality of service. The market competition for top talent remains as firms look for people with the right skills” 63 Mar/Apr 2022
Cover story
The ability to use AVMs, automate the underwriting process, and provide high LTVs (75% or more) are thought of as the least important capabilities to remain successful in the bridging finance market
HOW LENDE RS A RE FUNDE D Capital markets 6%
Forward flow arrangements
15% 3%
HNW, private and family office money 12% P2P
32%
6%
Principally funded
14%
3%
Retail deposits
9%
Senior and mezzanine Other types of institutional funding Other, or a combination of above
“Fundamentally, businesses that don’t have a defined strategy around things such as ESG will eventually be left behind compared to competitors that do, especially when it comes to funding and M&A conversations”
64 Bridging & Commercial
Cover story
60% ARE LOOKING TO IMPLEMENT AN ESG STRATEGY, WITH PRODUCT DIVERSIFICATION AND GREEN/SUSTAINABLE FINANCE THE MOST POPULAR AREAS BUSINESSES ARE CONSIDERING OVER THE NEXT 12 MONTHS
65 Mar/Apr 2022
Cover story
66 Bridging & Commercial
MACROECONOMIC UNCERTAINTY, HIGHER INTEREST RATES, COMPETITION AND INFLATIONARY PRESSURE ARE THE BIGGEST CHALLENGES IMPACTING THE UK BRIDGING MARKET IN 2022
Cover story
Over the next 12 months predict foreclosing on properties to surge
B I GGEST C H ALLEN GES I M PACT ING T HE U K B R I D GI N G M AR K ET Inflationary pressure
do not intend to use AVMs
Competition Change in regulatory rules
think the cost of origination will increase
Change in tax rules Higher interest rates Increase in defaults
are looking to diversify their product offering, while 43% are considering regional expansion
Significant decrease in property values Macroeconomic uncertainty Pandemic aftermath 0
are looking to sell their business, while 40% are considering M&A activity
10
20
30
40
50
60
70
80 %
Most significant challenge Second most significant challenge Third most significant challenge
aim to raise or refinance debt capital
are currently using or intend to use electronic signatures for legal documents
expect market growth (based on annual origination volume) to rise
“The challenges facing the sector will mean a more difficult market for both borrowers and originators. However, firms that are well prepared and capitalised will become stronger and larger as a result. In addition, M&A market activity in both the bridging and wider property finance space continues on a positive trajectory. This follows an uptick last year, helped by the vaccine and booster roll-out and a quicker-than-expected economic recovery. We expect many deals to go through this year as M&A activity is increasingly buoyant, and predict that firms will consolidate as one of the answers to business model, growth and cost challenges”
67 Mar/Apr 2022
Better property finance. Across a wide range of needs. From bridging that preserved an Edwardian treasure in Hampstead... Providing a senior bridge facility allowed our client to refine and finalise planning for the development of a stunning period property in Hampstead, London. Originally a beautiful Edwardian period property that was being used as a care home, our bridging solution enabled our clients to finalise planning for its conversion to 30 premium apartments. Each of these was finished to the highest standards, in keeping with their surroundings, combining modernity with tradition. Almax director Natalie Maslaw said, “This is a landmark site requiring complex planning and development management. Atelier provided a facility to acquire the site and enable the professional team to work up detailed proposals. Access to decision-makers and very competitive terms made Atelier stand out when seeking a finance partner.”
Gross Loan
£11.5m
Term
8m
LTV
54%
Atelier Capital Partners Limited is supervised for anti-money laundering purposes by the Financial Conduct Authority, under reference number 910090. You can confirm our registration on the Atelier Capital Partners Limited is incorporated in England and Wales with registered number 11888767 and its registered office is at 3-5 Rathbone Place, London W1T 1HJ.
At Atelier, we believe in customised, competitively priced property finance solutions as standard; spanning ground-up, permitted development, refurbishment and more. Here are just two recent examples of how we’ve supported brokers close more deals across the country.
… to funding 24 energy-efficient apartments in Denmark Hill We funded the demolition and ground up redevelopment of a civic building, which had reached the end of its operational life, into a development of energy-efficient and competitively priced one, two and three bed apartments. The deal, brokered by SPF Private Clients for The Edition Group, means that the 23,639 sq ft four-storey scheme in Denmark Hill, which was originally given planning permission in 2016, will now become a reality. John Smart, The Edition Group Director, said, “Atelier’s record of supporting sustainable developments and structuring bespoke lending solutions made them the perfect fit for Denmark Hill. This is a carefully considered scheme which will appeal to design-focused Londoners, and we look forward to beginning work in the very near future.”
Gross Loan
£11.1m
Term
22m
LTGDV
70%
To explore our rates across our full range of property finance solutions, call our specialist team – or visit acp.co.uk
e FCA’s website at www.fca.org.uk or by calling the FCA on 0800 111 6768.
Keeping all parties protected
J3 Advisory If there’s anything the past two years have taught us, it’s that the unexpected can happen—and you can never be too prepared.To find out why insurance should never be considered an afterthought, I speak to Jack Bristow, James Mole and Johnny Leadsom—the trio behind new brokerage J3 Advisory
(L-R): Johnny Leadsom, Jack Bristow, James Mole Bridging & Commercial
70
Feature
Words by
Andreea Dulgheru
A
fter working at London Belgravia Brokers for several years—Jack as commercial director, James as director of the specialist finance division, and Johnny as a senior broker—negotiating a broad range of residential and commercial finance and executing on insurance contracts on behalf of clients, the three experts decided to fuse funding and insurance in their own company. In addition to arranging bridging loans, development funding, PBSA lending and care and nursing home finance, J3 can advise on new-build warranty insurance, commercial latent defects, and social housing, retrospective, receivership, self-build and conversion warranties.
71 Mar/Apr 2022
Feature
“The feedback has been complimentary, particularly about our content and positioning. The developers who have enquired have been the more experienced one”
Why did you choose to launch a firm that combines insurance and financial advice? Jack Bristow: Insurance and funding are two distinct disciplines, executed by two different sets of professionals. Often there is a miscommunication—or none at all— that leaves the developer in a position where the left hand isn’t doing the simple task of talking to the right one. The finance broker doesn’t care too much for the insurance broker’s opinion or policy, and the insurance broker has the same take on the funding piece. As we’re able to handle and knit the two together, clients benefit from one point of contact for both needs. This results in peace of mind and a smooth process for developers, while enabling them to swiftly get on site, having saved days’ worth of time by receiving connected and accurate advice. James Mole: For us, it kind of happened by accident, but when you see how well the two offerings work together, combining them was a no-brainer. For developers, it makes sense to understand what everything, including insurance and professional services, is going to cost early on, so this can be factored into the financial appraisals. What are some common pitfalls developers face when looking at insurance? Johnny Leadsom: Insurance clients are often advised to take a certain policy based on how much cheaper it is than others. While price is undoubtedly a key factor, it’s crucial to deal with the reality of what will happen if the client has to call on that insurance. There have been many instances of property professionals not getting the best advice on vital items, such as building warranties. All too often it comes to light that not enough due diligence was carried out during the pre-construction phase with regard to warranties. The points that are repeatedly missed centre around the choice of insurer and their ability to deliver appropriate access to the lending market for potential purchasers of newly constructed units, and confirming that the contract is for the full sum insured. We sometimes see developers working with firms that are supported by unrated, offshore underwriters, and ignoring indicators that suggest an underwriter is lightly capitalised. Our non-negotiables with insurers mean we will only deal with those that have A-rated capacity, are accepted by most lenders, and deliver full-value insurance. By receiving the right advice from the outset, our clients have peace of mind that the warranty on their scheme is adequate and fit for purpose. What are the benefits of insurance for developers and lenders? JL: Insurance has always been vital. The property market seems to have become more attuned to the necessity of having a first-party insurance policy backed by A-rated providers. Property investors are starting to see how the right warranty helps protect them, their lender and the consumer; it allows everyone in the cycle to realise their own objectives—be it sale or refinance for the developer, recouping funding for the lender, or enabling the consumer to buy their dream home. JB: Once the developer secures a warranty that the lender 72
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is satisfied with, they can draw down on the first tranche of funding and get on with the build. From the lender’s perspective, the structural warranty confirms that the developer has undertaken the due diligence to arrange cover from a suitable provider, which gives them comfort to release funding. It also enables them to get money back through the door when the project reaches practical completion and the remaining units are sold. Meanwhile for the purchaser, the warranty certificate is the final piece of the mortgage jigsaw at practical completion. When their mortgage provider accepts the warranty, it means they can buy the property. Should they wish to sell it in the first 10 years, it will facilitate the sales process for them. So it keeps all parties protected while they work towards their goals.
Making property finance a piece of cake since 1992
Have you seen a growing need for insurance in the development finance market? JL: It’s not a growing need, but the pandemic brought the importance of it into sharp focus. While the property sector is still very positive, we are seeing well-documented constrictions and challenges across the construction and insurance markets, with the latter having hardened quite dramatically over the past 24 months. If immovable elements, like the rising costs of materials and labour, sustain or continue to rise beyond the current level, it stands to reason developers will become more sensitive to how that could impact them.
years young
JB: One of the biggest lines of enquiries we have at the moment, which feeds that school of thought, is around performance bonds, which protect developers from the downside of contractors not being able to fulfil their obligations. These are used in the manufacturing and construction arenas to ensure delivery of items for completion of works or the overall build, and effectively guarantee a contractor’s satisfactory completion of a project. Often, the investor or owner will ask for a performance bond to guarantee that the value of the work won’t be lost, should anything unforeseen happen. What has the response been like to J3’s proposition since the firm launched? JL: The feedback has been complimentary, particularly about our content and positioning. The developers who have enquired have been more experienced—those that are looking for either the right money from the right lending partner (rather than just the cheapest rate) or a policy that delivers on all of their warranty checklist objectives. I think the most positive uptake has come from our lending contacts interested in hearing more about what they need to look out for regarding proposed warranty providers on schemes they are funding. I’d say those relationships present the most interesting potential over the mid to long term.
Bridging Loans
JB: We’ve been really pleased with the comments from our own networks and the people that we haven’t spoken to before. I was surprised by how many reached out to us after reading articles about our launch and who had specific questions and challenges that they didn’t realise they had or were just putting up with, such as securing performance bonds and dealing with the ever-changing face of the EWS1 requirement. We’ve been really happy with the initial reaction.
Development Finance
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020 8349 5190 alternativebridging.co.uk 73
17098 ABC - February 2022 - 30th Birthday - B&C Ad - Portrait 98x262.indd 1
Mar/Apr 2022
23/02/2022 14:21
GET YOUR VOTES IN Which specialist finance company or professional has stood out over the past 12 months? Let us know by visiting the online voting page on Bridging & Commercial and nominating who you believe deserves to take home a golden 'B' on 15th September.
P ro u dly su p p orte d b y Main event sponsor
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For all enquiries, please contact Caron Schreuder on 0203 818 0162 or caron@medianett.co.uk
What is an LDS Sales Guarantee? LDS Sales Guarantees unlock access to development finance by guaranteeing to acquire any unsold homes on an SME housebuilder site and releasing 10% deposit on exchange into development cashflow.
Benefits Lenders
Development lenders benefit from a guaranteed exit from sites, which improves their risk profile and allows them to lend more to both new and existing SME clients.
Housebuilders
Better access to lending, plus the LDS cash deposit release allows SMEs to spread their upfront equity further, bringing forward more new projects and new homes than would have otherwise been possible.
Brokers
To find out how LDS Sales Guarantees transform the financial viability of development sites visit www.LDSyoursite.com
Brokers can increase conversion rates and increase fees by presenting their SME clients with a more competitive, lower risk, and smoothly executed finance package, that combines development finance with an LDS Sales Guarantee.
Prime. Property. Finance. It’s what Century do. New Funding Line With a new funding line in place, Century Capital has the capacity to lend a further £250 million. As part of this strategy, Century has added three new products to their short term lending offer.
New Products Prime Location Single Assets
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• £1-10 million loan size
• Multi-unit blocks
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• Rates from 0.75% per month
• LTVs up 75%
• Prime London & Country
• Loans up to £2 million
• Expansion of our current equitable charge offerings
• Single assets up to 70% LTV
• Developer Exits
• Foreign nationals & off-shore structures
• Experienced borrowers & developers
• Prime London assets • Experienced borrowers with PG required
Contact our Century team John Wheeler
Matt Rogers
General Enquiries
M: 07961 244 458 E: john@centurycapital.co.uk
M: 07748 985 181 E: matt@centurycapital.co.uk
M: 020 7495 9191 E: enquiries@centurycapital.co.uk
Recent Case Studies
Prime Asset: Central London • • • •
£6.5 million loan LTV: 50% First Legal Charge Large freehold house in Knightsbridge • BVI ownership structure
Equity Release: Chelsea • • • • • •
£2.1 million loan LTV: 65% Second Legal Charge Large lateral Chelsea apartment Wealthy foreign businessman Deal Term: 18 months
Residential Loan: Surrey • • • •
£3.1 million loan LTV: 70% First Legal Charge Surrey family house with development potential • Deal Term: 12 months
Development Loan: Cotswolds
Refinance: South Kensington
Bridging Loan: Mayfair
• • • • •
• • • • •
• • • • •
£5.5 million loan LTGDV: 70% First Legal Charge Major Cotswolds estate Century stepped in half-way through the development
£7.5 million loan LTV: 65% First Legal Charge Unique victorian townhouse Deal closed in two weeks
£4 million loan LTV of 68% First Legal Charge Grand duplex apartment Completed in six days
Development Exit: Cotswolds
Equity Release: Sussex
Refurbisment: Belgravia
• • • •
• • • • •
• • • • •
£3.5 million loan LTV: 60% First Legal Charge Newbuild development around existing barn conversions • Owned by an Offshore Trust
£2.5 million loan LTV: 50% First Legal Charge Large family house in Sussex Owned by an English Aristocrat
£9 million loan LTV: 45% First Legal Charge Imposing Belgravia townhouse Owned by a Foreign National
10 Albemarle Street, Mayfair, London, W1S 4HH centurycapital.co.uk Century Capital Partners Limited is registered and trademarked in England and Wales, company registration number 7696967. The Registered Address is 37 Warren Street, London W1T 4AD.
century capital
Series
SURVEYORS AND LENDERS HAVE HAD THEIR SAY WHEN IT COMES TO THE IMPACT OF RISING PROFESSIONAL INDEMNITY INSURANCE (PII) PREMIUMS ON VALUERS IN THE SPECIALIST FINANCE MARKET. NOW IT’S TIME TO GET THE PERSPECTIVE FROM THE MIDDLE
78 Bridging & Commercial
Series
The PII Saga: Part Three
save our surveyors brokers Words by
BETH FISHER 79 Mar/Apr 2022
L
ast year, Bridging & Commercial revealed that 70% of valuer firms were reconsidering whether to continue working in the short-term lending sector owing to the hardening state of the PII market, putting a key part of assessing risk under serious threat. The main takeaways were less choice, slower transaction times and a hike in valuer fees. I speak to a selection of specialist finance brokers to better understand how the situation has affected them directly, and why it’s not just valuers in the firing line. IMPACT FELT BY BROKERS For some intermediaries, there is little to no sense of fallout from the PII crisis. Phil Gray, managing director at Watts Commercial Finance, tells me that, as of 22nd February, the brokerage had written 73 new deals for £26.8m, with none of its managers reporting any major valuation issues over and above the norm. A rise in lenders using valuation panel managers, as opposed to working directly with individual companies, could be the reason for this shot in the arm. “The benefit is that the intermediary panel providers are then responsible for ensuring the valuers they work with have the appropriate PII cover,” says Jason Dempsey, new business manager at Developer Money Market. For others, however, one of the setbacks I hear of most often is around protracted turnarounds. “We have seen some good names (surveyors) exit the lending market, which is a shame, but the PII costs just don’t warrant them wanting to stay. In turn, this has led to slower times to get a survey completed and often a lack of local surveyors,” explains Tom Clark, director at NapeX Finance. Meir Peer, founder and managing director of Redi Finance, shares that, on a case where the valuation was paid for a week ago, he is still waiting just to get a date secured for it. Nevertheless, delays are often found to be triggered by borrowers not paying the valuation fee swiftly. “Ensuring clients understand their obligations is vital,” urges Luke
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O’Sullivan, head of bridging and commercial at The Loans Engine. The complex nature of bridging means that, more often than not, a physical valuation is required. “In the current environment, with a dearth of available surveyors, this can cause delays in an application,” comments Michelle Westley, head of marketing at Brightstar Financial. Furthermore, the price of valuations is going up; one broker tells me that some vanilla deals are doubling in cost. The uptick is said to be particularly problematic at the lower end of the market (sub-£200,000), where minimum fees equate to a significant sum as a percentage of the loan. Some intermediaries believe this can contribute to borrowers deciding that the all-in cost is either unattractive or not commercially viable. One even claimed that some firms deliberately price themselves out of the process in instances where the property location or type is “out of the ordinary”. “We noticed a steady rise in valuation costs throughout the lockdown period, mainly due to a higher demand than supply,” highlights Harry Hodell, director at Pure Structured Finance. Moreover, less significant deals are carrying cumbersome price tags. “We have a lot of commercial valuers that have a minimum limit, so smaller schemes may cost as much as something twice their size, simply due to the time it takes to complete the reports,” he notes. However, insurance headaches can’t be solely to blame for this. “There were already problems in the market before the PII issues, with valuers consistently commenting on the difficulty in recruiting, and a lack of newly qualified valuers coming through the system. This has led to increases in salaries, which will also have impacted the cost of valuations,” remarks Tom Frank, director at Ice Cubed Property Finance. Luke anticipates the biggest hurdle this year and beyond to be the considerable leap in the need for commercial property valuations. “There is pent80
Bridging & Commercial
up demand following 18–24 months of limited lending capacity/appetite, but that has truly been unlocked since early 2022.” He predicts a 10fold rise in lending in this space, which he feels will further stretch the shallow pool of specialist surveyors. I am told, too, that there are fewer valuers to choose from for high-scale bridging transactions. Colin Anderson, executive director at LDNfinance, relays how one client required a loan for nine luxury apartments in a niche part of south-east England. “There was a lack of available comparables, and we therefore wished to use a local valuer who fully understood the area and desirability… but none of them had an acceptable level of PII in the eyes of the lenders. We subsequently engaged one of the large national firms, which wasn’t familiar with the area and used wholly inappropriate comparables, resulting in a lowerthan-expected valuation figure.” FUELLING THE FIRE It is also argued that the size of a lender’s valuation panel can exacerbate the situation; if it is small, it offers fewer options, especially if firms are funding outside their geographical remit. However, Harry maintains that most decent lenders in the industry—especially those working on standard bridging transactions— will have a sound grasp of the property values within a given area. “It would be fair to assume that the more complex the security type, the further the lender leans on the valuer to provide them with a more well-rounded understanding of the collateral provided.” One cause of frustration for brokers is the sheer number of valuation figures lenders request, which can be challenging from a risk, timing and logic perspective. “The traditional valuation report is becoming outdated,” claims Frank. He details the many approaches (180-day, 90-day, 180-day VP, 90-day VP, VP, full MV etc) that are used as shortcuts to assess the liquidity of an asset, but is adamant that decisions need to be qualitative rather than quantitative. “With average completions taking four months in the residential market, what is the
Series
purpose of a 90-day? Let’s call it what it is: an auction or distressed value.” Haydn Thomas, chief commercial officer at Cornerstone Finance Group, agrees that the varying versions and “lack of uniformity” among lenders is the biggest problem. “Valuers probably face criticism from clients when it is the lender that has used a figure that has no real bearing on the transaction in some cases. If the industry stuck to OMV and adjusted LTVs accordingly to their risk appetite frameworks, we’d have a far more transparent process.” LACK OF AWARENESS From conversations I have had in the industry, it seems that brokers aren’t hugely alert to the PII problem. “I don’t think a lot of brokers know about the crisis, mainly because any difficulties with finding suitable valuers is often dealt with by the lenders and panel providers. Brokers are, to a degree, protected from this,” Jason explains. Callum Taylor, director at Portway Finance, concurs: “Most brokers aren’t aware of what goes on in the background, and I don’t think many have particularly strong relationships with valuers, either, which tends to mean they wouldn’t necessarily notice.” On the other hand, Luke believes that brokers that do “occasional bridging deals” are more likely to be taken by surprise and less prepared. MANAGING EXPECTATIONS With valuers frequently accused of ‘downvaluing’ by borrowers and brokers alike, it begs the question: should intermediaries be more disappointed by the value or the possibility that they haven’t gained the true picture? Callum discusses the elephant in the room: “Ultimately, valuers and brokers are very different; one gets paid upfront, and the other doesn’t.” However, he acknowledges that neither can function without the other, stressing that some clients can be “miles out” on their expectations, so both parties should work together as the voice of reason. “I think the difference between a good broker— one who understands the market and has decent product knowledge—and
“WITH AVERAGE COMPLETIONS TAKING FOUR MONTHS IN THE RESIDENTIAL MARKET, WHAT IS THE PURPOSE OF A 90-DAY? LET’S CALL IT WHAT IT IS: AN AUCTION OR DISTRESSED VALUE” 81 Mar/Apr 2022
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“WE’RE AWARE THAT, RIGHT NOW, SOME SPECIALIST DISTRIBUTORS DON’T CARRY FULL PII TO COVER REGULATED REFERRAL BUSINESS AND, IN THE UNLIKELY INSTANCE THAT THERE ARE ISSUES WITH THE CASE DOWN THE LINE, THIS COULD PROVE A VERY COSTLY OVERSIGHT FOR A BROKER” 82 Bridging & Commercial
a really good broker, is the latter has relationships with valuers where they can pick up the phone and get a steer on all the issues… I’m not a valuer, but I can imagine they are often between a rock and a hard place.” Intensifying the problem are landowners determining the value of their sites using outdated prices. “We have seen a significant rise in the cost of both labour and materials which doesn’t seem to have filtered down to landowners, resulting in sites being marketed at higher prices than perhaps their true value,” Jason suggests. “Interestingly, you never hear the phrase ‘upvalue’,” Colin remarks— and he has a point. While valuers struggled to analyse risk at the start of the first lockdown, I am told they are now relatively consistent without any arbitrary ‘downvaluing’. Meir—who has, on occasion, been “in genuine shock” by how way off a borrower has been with their expected valuation—relates that if he can see the numbers don’t add up, he will need to have a talk with them. “When clients are using a property they own as the security, they tend to have this love affair with it. They bought it in a bad state and invested X amount… It’s their baby, right? So they will often value it at the higher end of the spectrum. It can be an uncomfortable conversation when you tell a potential client, ‘I think X is a bit high for this’. They may be offended or think you have no idea what you’re talking about, then take it to someone else that will promise them the numbers will stack up on a valuation.” Borrowers also habitually think they can reissue an existing valuation to save on costs. In reality, each lender has its own set of trusted valuers and will only accept their reports. “An interesting point to note is lenders requiring different PI levels often means that, despite them being on the lender’s panel, they can’t offer a re-type,” underlines Clark. “Another misconception is that all lenders interpret valuations the same, but this is not the case,” adds Jason. “Lenders work to different valuation models. If not managed carefully, this
Series
can cause confusion with clients and also increase the risk of a valuation not meeting their expectations.” A FULL UNDERSTANDING While most of the valuation process is “fairly hands-off ”, according to Jason, brokers should still convey to the borrower if something seems amiss. “We take the time to understand the model each lender is using so we can provide this information to clients to help them decide which terms are most suitable.” Luke affirms that investing this effort upfront is essential. “We find the better informed the client is, the more realistic they will be in respect of timelines and the valuation figure that is reached,” he states. “There is no doubt that brokers can do a huge amount to support valuers, something we would actively encourage for a better experience for all parties involved.” One way in which Frank helps to speed up the process is by ensuring valuers have full information packs before they attend a property. “Even the simplest things, such as making sure access is arranged correctly, are crucial. There is nothing a valuer likes more than having to make two visits because someone had the wrong keys!” Indeed, there are many steps brokers can take to alleviate the current issues, which Frank argues should have been done long before the PII crisis. “I see no place for the combative approach that, thankfully, only a small number of brokers adopt towards valuers,” he asserts. “They are part of the professional team alongside us, the lawyers, the architect and the planners. We try to engage with the valuer as soon as possible and start some of the legwork so that they understand the project and its timelines before an instruction is given.” On larger schemes, he proposes a two-stage approach, with an initial desktop valuation early on so that everyone is aligned, later progressing to a full report. “Granted, this is neither appropriate nor possible on smaller deals,” he admits. While a broker isn’t expected to be a qualified valuer or solicitor, it is vital
to appreciate what each role entails. “It’s about understanding enough so we can have an informed discussion on a valuation report, rather than just debating a figure because ‘it doesn’t work’, and understanding the legal process and challenges so we can assist the lawyers, rather than just arbitrarily chasing them,” outlines Frank. “This is what makes a good broker and leads to completed transactions.” ALL IN THE SAME BOAT While this series has focused on the plight of surveyors as a consequence of worsening PII conditions, we haven’t considered whether other parties in the transaction are being penalised by the same issue. Architects and contractors, for example, have been hit hard, and so have brokers— some of which have had to close their doors to business rather than accommodate the hike in premiums. Although not mandatory in the unregulated space, PII offers brokers advantages beyond peace of mind, such as access to lenders and associations that require it. Developer Money Market, which is in the process of securing PII, has noticed the industry has retracted considerably. “I’m told premiums have also increased significantly,” Jason imparts. The Loans Engine has certainly felt this pain. “We’ve experienced a three-fold rise in our PII premium since 2019,” divulges Luke. “As with surveyors, this issue is not helped by the lack of insurers.” While soaring costs isn’t a critical pressure on its own, the compounded price of regulatory fees and general inflation will undeniably impact brokers. “There will likely be a knock-on to pricing, as this is the only lever we have to offset the increased operating costs,” Luke adds. Two years ago, when the market toughened, Watts Commercial Finance—which has had zero claims in over 15 years—saw its PII go up by five times. Specialist brokerage Hallcroft Finance has also seen theirs skyrocket five-fold. “When reapplying for our insurance in 2019/20, we found the market had changed dramatically,” says director Adrian Cormican. “I spoke with friends in the industry who had been trading for 20
years-plus, and they too were facing a bill that had at least quadrupled.” Indeed, Cornerstone Finance Group saw a 50% jump in PII premiums, whereas brokerage LDNfinance has had a 100% rise this year which, when linked to its 40% increase in turnover, is a substantial uplift. While it’s not something that preoccupies the company’s thinking, it is a concern for the wider industry. “It also means that if firms face any complaints, compliance or reputational issues, they could find themselves being harshly penalised with their PII options, compared to how they might have been previously,” shares CEO Anthony Rose. When factoring in the cost-of-living crisis and the soaring price of fuel, Adrian feels that brokers must make a greater effort just to stand still. “Add to that the changes that will inevitably come with paying for the bill of Covid and the trouble in Ukraine, brokerages will need to work harder and smarter to be a success.” Like any cost, this will get passed on in some way. “It will probably mean lenders’ rates and brokers’ fees will go up—a bit like the valuer costs,” Callum suggests. With only a handful of PII providers in the market, Clark agrees this is a big risk area for the intermediary community. “It makes a broker not want to claim in the event of an issue, because the lenders all want cover in place, sometimes up to £2m, which is a bit excessive. I feel the industry needs to come together to explore this.” Michelle urges brokers that choose to leverage the expertise and contacts of a specialist distributor to help grow their bridging business to ensure they have adequate PII. “We’re aware that, right now, some specialist distributors don’t carry full PII to cover regulated referral business and, in the unlikely instance that there are issues with the case down the line, this could prove a very costly oversight for a broker.”
83 Mar/Apr 2022
The Platform for Development Finance and Bridging Lenders soprabanking.com/aurius-df
Aurius-DF from Apak Group, a Sopra Banking Software company, is the only solution specifically designed to meet the needs of the Development Finance 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 pre-approval and in-life) • Facility Limit, Advance Limit and Loan Tranche Management • Tracking of involved Brokers, Third Parties 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
Limelight a glimpse into our ever-busy schedule
On 16th March, professionals from across the specialist finance industry attended SKIPIM at Dirty Martini in Hanover Square, London. Hosted by Adapt Finance and Albatross Capital, in partnership with Medianett Publishing, the inaugural, soldout event attracted circa 250 people. The occasion—which was designed to help local businesses and be an alternative for those unable to travel abroad for industry dos’—brought people from all corners of the sector together to catch up, relax and have some fun.
Backstory
‘The idea of increased deal leverage and an improved credit profile can seem paradoxical’ LDS Sales Guarantees’ new regional director discusses where SME housebuilders can get support to grow faster, the sheer challenge of quantifying carbon emissions from new homes, and the increasing demand for its offering Ben joined the business in 2022, having spent the previous four years in senior roles at Homes England, where he helped deliver more than £2bn of development finance joint ventures alongside private and public sector partners. He has worked in the real estate finance market for 20 years and, in his new role, will be forming alliances with lenders to combine sales guarantees and development debt to harness the potential for SMEs to build more homes. How does being part of Landmark Group bolster your offering and expertise in the specialist finance space? Landmark Group has been established for 22 years and is both stable and profitable. It now has a core investment portfolio approaching £200m. We’ve got great relationships across the property market and a reputation for simplicity, pragmatism and reliability—guiding principles that we are applying as we scale LDS and form connections with a wider cross section of the market. What is the biggest misconception of a sales guarantee? Because the offering is relatively new, at first glance, people tend to interpret it in different ways.There’s a little bit of, “This sounds too good to be true”, which we can understand as, from a lender’s perspective, the idea of increased deal leverage and an improved credit profile can seem paradoxical. It is therefore important for us to communicate the mechanics and credibility of the product in simple and straightforward terms. How many proposals do you expect to supply in 2022? As of 28th March, we have issued over £750m of sales guarantee proposals this year. Our live pipeline is approaching £1bn, meaning that we expect to enable the development of new housing worth hundreds of millions of pounds in 2022. How else can the country help unlock SME housebuilding? While the development finance market is presently strong and competitive, SME builders and new entrants can still have a tough time securing sufficient support.This is a problem, since it is these SMEs that can go on to become the larger developers of the future. More must be done in this space to reap the rewards of a diverse and robust housing market. Honourable mentions here go to my former employer Homes England for its partnership with Invest & Fund, which was specifically designed to allow the
government to support micro and smaller builders with access to competitive finance, and to Close Brothers for its Tomorrow’s Developer initiative, which will equip new entrants with the skills and networks necessary to allow them to grow quicker. Along similar lines, we’ve reduced our minimum site size to five homes, enabling us to support a larger range of SMEs.We will also shortly be launching an interactive online platform, LDS Boost, which will provide a compendium of free industry contacts and resources to benefit all our partners. How will you be looking to stimulate sustainable development going forward? Our growth trajectory is such that we will support the building of potentially thousands of new homes over the coming years.The benefits that this will create are manifold, but we do recognise the significant impact that building has on the environment. So, we want to encourage the industry to build cognisant of both embodied and operational carbon emissions. We believe that simply offering nominal financial incentives for more environmentally efficient buildings, for example, does not fully [fix] the problem. I can’t say too much more at this stage, other than watch this space! What are the biggest hurdles and opportunities in property development this year? Rising labour and material costs are already causing challenges, with this dynamic not likely to ease in the near term. In a buoyant sales market, this may not inhibit supply, but if it does soften—and it is hard to argue that we’re not now at the later end of a property cycle—this will certainly impact housing supply in the absence of intervention. Another key obstacle is that the industry currently cannot adequately quantify carbon emissions from new homes, and measurement is an essential precursor to mitigation. With this comes opportunity however, and it’s clear that the market is starting to focus on the quality of new homes being built and funded, as well as the quantity. Solutions are on the way! 88
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How did you spend your very first pay cheque? My first paid employment was working in my grandad’s garden every Saturday morning when I was about 12. I saved up for what seemed like ages until I was able to by a stereo system. Most memorable moment from your time in the industry? Being coached by Professor Damian Hughes a few years ago. I’m really interested in sports psychology and high-performance cultures, and he is world-leading in this field. It’s no exaggeration to say that the learnings and feedback I got from him influence my approach every single day. Your dream job—if you weren’t doing this, what would you be doing? Playing football, specifically centre forward for England. I’m nearly 43, but I haven’t yet given up hope of a call from Gareth…
Refurbishment buy to let
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Product and criteria information correct at time of print (21/03/2022) - MKT001099-033