ISSUE 22 JUL/AUG 2022 Will we see regulation?tighter + Why UTB is redoubling its efforts in unregulated bridging p26
THE SPECIALIST EFFECT MAKING LIGHT WORK OF HEAVY REFURB Effective solutions for both experienced property developers and borrowersinexperienced A new ‘Heavy Refurbishment’ product managed by a dedicated team of experienced underwriters and managers, applying a commercial and pragmatic approach that’s tailored to both experienced developers and inexperienced borrowers. T: 020 3862 1002 | E: bridging@utbank.co.uk To learn more, call us, send an email or scan the QR code to our web page for access to product guides and to find your local BDM. For experienced property developers • Up to 75% day 1 LTV (net of interest) • Maximum 75% LTGDV • 100% works funding available • Rates from 0.59% pcm For inexperienced/no experience borrowers • Up to 70% day 1 LTV (net of interest) • Maximum 70% LTGDV • 100% works funding available • Rates from 0.74% pcm
CBP008214 To read about our commitment to the environment and sustainable print publishing, please visit https://bridgingandcommercial.co.uk/page_magazine. AcknowledgmentsEditor-in-chief Beth Fisher Creative direction Beth Fisher Sub editor Christy Lawrance Senior reporter Andreea Dulgheru Contributors Darren Woon Ray Cohen Ellie Duncan Sales and marketing Beth beth@medianett.co.ukFisher Special thanks Ellis Cluff, Tuscan Capital Richard Armstrong, StreamBank Tim Marsh, Toorak Capital Partners John Beacham, Toorak Capital Partners Emily Gates, LDNfinance Leonora McCaldin, Instinctif 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 caron@medianett.co.ukSchreuder Publishing director Beth beth@medianett.co.ukFisher 3rd Floor, 71 Gloucester Place London W1U 8JW 0203 818 0160 Follow us: Twitter @BandCNews | Instagram @BridgingCommercialMagazine
Beth Fisher Editor-in-chief
Jul/Aug 2022 3
S ince the last issue of Bridging & Commercial , some monumental announcements have been made. First, Boris Johnson’s resignation and a major cabinet shakeup saw many in the specialist finance industry optimistic about a change in leadership, expecting it to create growth, stability and opportunities within our markets. Second, mortgage affordability tests were scrapped at the start of August, meaning lenders can now choose their own form of testing according to their individual risk appetites. Third, bank rates surged to 1.75% (the sixth consecutive rise since it was cut to 0.1% two years ago as a result of the pandemic) resulting in broker advice being even more necessary as finance providers decide whether to freeze or up their prices. All this change means that it’s essential to stay up to date with the sector’s latest movements and sentiment—and this is where we come in. The Regulation Issue covers a lot of ground. We discuss the proposals to ban section 21 no-fault evictions and whether this may cause an exodus of landlords [p14]; how the fast pace of bridging raises the risk of money laundering—and what brokers and lenders should be looking out for [p32]; why M&A activity is finally taking off [p38]; and the importance for all parties to act on green building regulations now [p80]. In addition, we interview Richard Deacon on why he decided to join bridging lender Tuscan Capital [p68], LDNfinance’s Amy Baptiste on her new role as head of specialist finance [p74], UTB’s Nikki Brett and Owen Bentley on the lender’s goal to double its efforts in unregulated lending [p26], and StreamBank’s Steve Pateman on the story of a five-year-old bridging business that became a bank [p20]. Time has flown here at Bridging & Commercial since the last issue—and so have we! In June, we took a trip across the pond to meet up with a variety of experts who play significant roles in the specialist lending market in the States to find out how things are done there [p46]. We also traveled closer afield to visit our peers in Manchester over three jam-packed days in July And,[p90].finally, we get some answers to the question we have been asking ourselves for some time: how big is the regulated bridging market? Figures obtained by Bridging & Commercial from the regulator suggest that the stamp duty holiday, rising interest rates, and a heated property market have all played their part in influencing the growth of this space [p58], and we ask the industry whether increased competition in this arena will boost transparency and standardisation in the wider sector, and whether the fear of ‘regulation creep’ is well and truly over. We were pleasantly surprised by how many were in favour of more governance and, while self-regulation practised by the majority in an effective and TCF-friendly manner has improved considerably in recent years, one lender makes a good point: Is regulation necessary to manage the few who don’t?
92908680685846383226201410We told brokers to be brutally honest—and they were!” p26 Bridging & Commercial 4
Products The latest regulated offerings The Cut Landlords can’t catch a break News How a new bank aims to be profitable by year two Exclusive 56 brokers speak their minds Column Don’t close your eyes to high risk Zeitgeist What is causing the M&A surge? One Day Trade in Manhattan Cover Story Are we no longer worried of red tape? Interview Richard Deacon/Amy Baptiste View This should be on your radar Explained The customer is always right BackstoryLimelight Andrew Charnley
Blackfinch Investments Limited is authorised and regulated by the Financial Conduct Authority. Registered address: 1350-1360 Montpellier Court, Gloucester Business Park, Gloucester, GL3 4AH. Registered in England and Wales Company Number 02705948. • Loan term typically from 6 to 24 months • Loan amounts typically £1m to £15m • Loan to value (LTV) up to 75% • Loan to cost up to 90% • Geographical coverage across the UK • Lending against both residential and commercial property Contact us at propertyenquiries@blackfinch.com and see how we can help you FastFully-FundedLenderandFlexibleApproachESG-AlignedPrinciplesIn-HouseLegalTeamLooking for a Bridging Development& Finance partner? At Blackfinch Property, we’re dedicated to helping rejuvanate local areas and economies
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ARBUTHNO T SPECIALIST FINANCE Help your clients achieve their real estate goals with our bridging finance solutions Our offering Get in touch Loan Amount from £30,000 Arbuthnot Specialist Finance is the short-term property finance subsidiary of Arbuthnot Latham, the private and commercial bank. Our client-focused property financing service aims to build long-term relationships with clients and introducers. Contact us on +44 (0)161 694 0059 or email us at ASFLenquiries@arbuthnot.co.uk Loan-to-value up to 75% Term up to 24 months Registered in England and Wales no. 11103603. Arbuthnot Specialist Finance Limited’s registered office is Arbuthnot House, 7 Wilson Street, London EC2M 2SN. Arbuthnot Specialist Finance Limited is not authorised and regulated by the Financial Conduct Authority. Rate from 0.6%
a selection of key updates CENTRALTRUST First-chargeconsumerBTL •availableinEngland,Wales,ScotlandandNorthernIreland and•loansbetween£10,000-£250,000for0status(upto£200,000£150,000for1and2status,respectively) status•80%maximumgrossLTVfor0and1status(75%maxLTVfor2andinNorthernIreland) •variablerateoptionavailable,withratesstartingfrom9.10% 8.60%prices•two-,three-,andfive-yearfixed-rateoptionsavailable—startfrom8.85%fortwo-yearfixedterms,andfromforthree-andfive-yearterms •loantermsbetweenthree-25years •minimum£60,000propertyvalueWEST ONE Consumer BTL • two-year stepped discount tracker product for standard CBTL • 80% maximum LTV • loans up to £2m at maximum 75% LTV (up to £750,000 at 80% LTV) • rates from 3.79% for the first two years, before moving to West One’s reversion rate (currently Bank Base Rate plus 4.99%) • available for landlords with clean credit profiles, including first-time landlords who own their own home • no minimum income requirement • £150 application fee • a specialist option for non-standard properties (including HMOs/MUFBs) also available from 4.04%, at maximum 75% LTV PRECISEMORTGAGES Regulatedbridging •loansfrom£50,000(nomaximumloansize)• maximum75%LTV •ratesbetween0.47%-0.75%permonth• termsfrom1-12months paid)•noERCs(aminimumofonemonth’sinterestmustbeorexitfees• retainedinterestforthefulltermoftheloanavailable
SPRINGFINANCE Regulatedlightdevelopment •loansbetween£100,000-£1.5m build•maximum60%ofpurchaseprice/value+100%ofcostsinarrears•alltypesofcredithistoryconsidered• maximum65%LTGDV •pricedat0.94%permonth(rolledupinterest) andcompletetoincrease•canbeusedforchangeofusetoresidential,innumberofunits(e.ghouseconvertedflats),extensionsover33%ofcurrentsqft,ortoworkstoanewbuildsitewhichiswindwatertight TOGETHER Regulatedbridging •loansbetween£50,000-£500,000(beforereferral)• maximum70%LTV• ratesfrom0.64%forcustomerswithnoadversecredit•termsupto12months twopriced•optionsavailableforborrowerswithadversecredit,from0.79%foronedemerit,orfrom0.89%fordemerits £250,000•HomeTrackvaluationavailableforloansuptoat65%LTV,basedona5+confidencelevel•2%productfee(min.£1,495)• 2%comission SPRINGFINANCE First-chargebridging • loansbetween£50,000-£2m•maximum75%LTVforpurchase,70%LTVforremortgage•alltypesofcredithistoryconsidered•ratesrangingfrom0.69%-0.84%•rolledup/monthlypayinterest•second-chargeoptionsavailableatmaximum65%LTVforloansupto£1mGLENHAWKRegulatedbridging • loansbetween£150,000-£2m•maximum75%LTV•termsbetween1-12months•2%arrangementfee•noERCs,adminorexitfees
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Bridging & Commercial 14
The Cut Section 21 no-fault evictions are proposed to be banned in the government’s Renter Reform Bill white paper, among other moves set to end the injustice of unfit homes and help protect tenants from the rising cost of living. We ask experts to weigh in on how this change could impact BTL landlords Landlords hit again Jul/Aug 2022 15
I believe it will further restrict landlords’ ability to regain possession of their rental properties. The capability to serve a section 21 notice gives a landlord confidence that (subject to complying with a plethora of already quite extensive requirements) they can regain control of their property at the end of the agreed contractual term. This confidence and certainty will be lost as a result of the ban. I think it’s inevitable that many banks will view the reduced ability to secure possession at the end of an agreed tenancy term as something increasing the risk associated with BTL mortgages. This heightened threat could result in a reduced pool of BTL financing available to landlords. Alternatively, we could see lenders increasing their rates to accommodate this. Some landlords may decide to leave the market due to the inflated cost, while those who stay will most likely want to pass part, if not all, of the associated expense on to tenants.
I have no doubt there will be an exodus of landlords, and it will hurt tenants at the bottom of the market most—those on housing benefit. There could be wholesale evictions, and those people will have nowhere to go. I cannot see how those landlords will be replaced by new ones if mortgage lenders make borrowing more difficult.
In my opinion, the effect of this ban on mortgage lenders will be huge, as they rely on repossession rights in the event of loan arrears and other problems, so I honestly see the availability of finance collapsing.
Aoife Reid Partner at Underwood Solicitors
Bridging & Commercial 16
The Cut Norman Phillips Managing director at Drake Mortgages and Network ManagementProperty
I have also seen a lot of other clauses being inserted into tenancy agreements so the landlord has more scope to apply for a section 8. I see more emphasis on care of the property, what constitutes fair wear and tear and nuisance to neighbours and, at the start of a tenancy, residents will have to sign in great detail about each room in the property.
Bev RegionalNealingssalesmanager at Paragon Bank I don’t anticipate landlord profitability being negatively impacted by the abolition of section 21 evictions. A strengthened section 8, including new mandatory grounds for possession, offers landlords adequate protection to ensure their businesses can remain profitable. I also don’t feel that the proposed changes will have a significant impact on lenders’ appetite to support the sector, as the new section 8 grounds provide clarity in areas such as tenant arrears, anti-social behaviour, and if the landlord wants to sell the property. This is a welcome step. These changes aren’t replacing a system working harmoniously. Landlords are facing court delays even when they serve a section 21 notice—sometimes of up to one year—so the removal of this clause won’t prompt a mass sell-off. However, there has been a broader disposal of rental property and, anecdotally, we believe this is being led by ‘accidental’ or smaller-scale landlords. This is contributing to the shortage of stock in the PRS and it’s vital that the government considers the needs of landlords when it develops policy.
Chris DirectorNorrisofpolicy and campaigns at NRLA The impact on landlords’ profitability depends very much on their exposure to future issues. When these arise, landlords could find themselves waiting longer to regain possession, potentially while rent is not being paid or damage is being done to the property—in these cases, the impact could be significant. We don’t anticipate an exodus of landlords, certainly not because of this latest proposal. However, there are some exiting the market due to the cumulative pressure created by constantly changing regulation and tax rules. The danger facing our sector is if investors look elsewhere for less challenging markets, such as holiday lets, further reducing the availability of residential homes.
Jul/Aug 2022 17
Landlords will have less flexibility when it comes to maximising profits for their rental property. Should they wish to alter the way they run it—for instance, switching it to a HMO—they have fewer powers to do this if the change involves moving out a tenant. However, in the recent white paper, the government has stated an intent to “target the areas where there are unacceptable delays in court proceedings [and] strengthen mediation and alternative dispute resolution”. Consequently, more efficient proceedings to deal with delays in court and mediation could help landlords deal with problematic tenants and actually improve profitability. I don’t believe the section 21 ban will have an impact on access to finance, as I don’t see lenders worry about risk factors too much, especially if efficiencies in mediation are implemented.
The basic ideology behind abolishing no-fault evictions is sound. If you’re paying your rent and abiding by the terms of your tenancy agreement, why should you have the worry of being asked to vacate for no good reason looming over you all the time? The landlords that are committed to providing a high standard of accommodation and genuinely care about the wellbeing of their tenants need not fear these reforms. There are potential issues with the plan to allow tenants to withhold or reclaim rent for remortgagebridging,willchangethatvalue.cancomingtootherswilltheirmoneyorsomeneedingwillmightaremustguidancefinalbequalityaccommodation”,“poor-qualitygiventhatcan,tosomeextent,subjective.Hopefully,thebillwillprovideclearonwhatstandardsbeachievedandhowthesemanaged.Somelandlordsexitthemarket—butthismorelikelybearesultoftoraisestandards,asinvestorsmaybeunableunwillingtospendtherequiredtoimproveproperties.Evenso,thiscreateopportunityforwhoarecommittedthesectorwithpropertiestomarketthattheyacquire,refurbish,andaddConsequently,IthinkthislegislationandthetoEPCrequirementsleadtoanincreaseinsecond-chargeandenquiries.
Paul ManagingElliottdirector at Propp
The Cut Raj FounderDosanjhofRentround
Brian Love Head of regional broking at Newable In the short- to medium-term, the ban on no-fault evictions may have some impact on rental income and potential costs, resulting in a marginal reduction in profitability. Despite this, given the number of lenders and related products in the market, access to funding should not be dramatically affected. It’s likely some lenders may scale back on their LTVs and increase stress testing on affordability calculations, which will impact lower-yield assets. However, as has been seen in recent history, where one lender reduces its appetite, often another will step in.
We’re here to help: contact Sonia Mann, Head of Intermediaries on sonia.mann@crowdproperty.com or 07779 258787 CrowdProperty has now funded over £500,000,000 of property projects, continuing to support experienced property developers across the UK with their residential property development funding pneeds.roperty expertise, diverse sources of capital and an absolute focus on customer success. property funded
Steve Pateman
A entersbanknewthebridgingmarket
Words by BETH FISHER
News
Jul/Aug 2022 21
Bridging & Commercial 22
I’ve run quite a few, but its always been somebody else’s architecture.”
Why a bank?
Now it has gained the confidence of the regulators, StreamBank aims to provide a total specialist property finance business, taking on complex cases and providing a human touch I n July, ActivTrades Loans—a five-year-old bridging business— secured a banking licence, with plans to ramp up its lending franchise, presence and broker network in the UK, with £35m of capital behind it. It has been renamed StreamBank—a name proposed by its team to represent the smooth, free-flowing transactional experience its customers will have going from A to B. This reflects its intention to be seen as a lifecyle lender that supports complex transactions.
“Obviously, banks give you greater leverage in terms of liquidity,” Pateman responds. “They clearly have a leverage advantage over wholesalefunded businesses, but the quid pro quo is that you’ve got to have certain levels of capital and a robust infrastructure—because you move from being an organisation that invests shareholder capital to one that also invests retail deposits in its loan book.”
The specialist bank, founded by sole shareholder of the ActivTrades business, Alex Pusco, is supported by CCO Richard Armstrong, chief lending officer Steve Brennan, sales director of property lending Dawn Trustam, and former Shawbrook chief executive Steve Pateman, who will lead the business as CEO.
Once the decision to get a licence— one idea of many that were kicked will conscientiously look at every transaction that comes to us online with a human being”
News
Pateman, who also sits on the board of the Bank of Ireland in Dublin, was planning on retiring when he left Shawbrook. “My aim was to pursue a non-executive career,” he details, “but sometimes opportunities come along. I’ve never built a bank before.
“We
This opportunity to construct a bank from scratch and take it through the approval process and mobilisation was a challenge that intrigued Pateman. “I’ve been in banking for 42 years and I’ve not done that. Now I can say that I have.”
And, early next year, StreamBank will go on to launch deposit products to offer personal savers competitive interest rates.
In the past, the lender has focused heavily on London and the South East. Now, it aims to venture further afield by hiring more BDMs across the nation.
Over the next 12 months and in preparation for its full banking licence, the business aims to enhance its proposition by offering regulated bridging finance in addition to its unregulated bridging range. Shortterm property loans of between £250,000 and £5m (with the possibility of co-funding with other lenders for larger deals), development finance products for ground-up developments and heavy refurbishment projects, as well as commercial mortgages, are also planned. “While we have a policy, we also have the ability to flex it with board approval when we think it’s the right thing to do.”
“It has been an exciting project so far and I think has potential to be a really good part of the UK banking ecosystem. Not a big part by any stretch of the imagination—nevertheless, a bank that is there to do complex transactions that will help create jobs, homes and value for people.”
“I’ve never built a bank before. I’ve run quite a few, but its always architecture”somebodybeenelse’s
Alex Pusco
Lifecycle lender Scores of specialist banks have been launched over the past five years or so, and many of them have entered the mainstream mortgage market. How will it set itself apart? For StreamBank, its core offering will remain in bridging and development. “Our aim is to not be product centric,” Pateman says, adding the bank will not be promoted as a particular type of lender. “We want to position ourselves as a property finance solutions business [across the lifecycle].”
Jul/Aug 2022 23
Balancing act He explains there’s a juggling act of having enough resource and resilience within the organisation and avoiding a high-cost base, which prolongs the time to become profitable, accrue capital and be self-sufficient. “Our aim is to effectively be close to break-even by 18 months, and profitable in our second year,” he reveals, with an aim to grow to £70m of capital and a loan book of somewhere between £350m-400m by year five. Around £60m from ActivTrades’ bridging business to date will migrate into StreamBank with a goal to write circa £20m of business per month and reach a balance sheet of up to £170m by the end of its first year. To do this, the company will need to grow its broker network, with the first port of call to be bolstering its headcount in the Midlands and the North so that it is “on the brokers’ radar for those transactions that the specialists find tricky to accommodate”, according to Pateman. He expects most deals that come their way to need thought, structure and multi-dimensional solutions. “We’re not a volume player,” he confirms. “We don’t have the capital capacity to be swamped.”
News around over the space of three years—was made, the regulatory business plan and the capital planning and liquidity documents were relatively easy to put together. Around nine months later, once the PRA and FCA had tested and were satisfied with the written plans, the process came to a close and StreamBank received approval at the end of June. The evolution meant needing a different infrastructure and a wider team to govern the altered risk profile of the finance provider. Previously, ActivTrades’ bridging business had four people. On day one, the bank will have at least 25—which Pateman points out is still quite small for a new bank. “If you look at a lot of the other start-ups in the market, they are sometimes north of 60 and, in some cases, closer to 100 people.”
“We would like to build a reputation as a bank that brokers go to when they’ve got a complex situation that requires the ability to talk to someone and develop a solution with an individual at the bank, rather than filling in a form and, if it doesn’t hit all the parameters, gets kicked out by the system. We will conscientiously look at every transaction that comes to us online with a human being.”
Pateman describes the past year of building the new bank as “fantastic” and a process he has thoroughly enjoyed.
Complex cases, human touch Pateman recognises that the business previously focused on relatively vanilla transactions, but will now be assisting with more structured, innovative cases.
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Century London’sCapital.Leading Prime Short-Term Lender. What People Say About Us Century really know the market when it comes to prime assets and locations. Mr J.K. – Director The service was excellent, and I would certainly recommend Century Capital. Mr M.B. – Mortgage Consultant Century look to find a reason to say YES, rather than focusing on ways to say NO. Mr J.C. – Director Prime. Property. Finance. It’s what Century do. centurycapital.co.uk | 020 7495 9191 | enquiries@centurycapital.co.uk Residential Bridge Land with PlanningHeavyRefurbishmentSecond ChargeCommercialLoans Bridge centur y capit al “ “
UTB is redoubling its efforts in unregulated bridging
Words by andreea dulgheru
If you thought its imminent entrance in the BTL sector was the only big thing United Trust Bank (UTB) had lined up for this year, think again—the specialist finance lender plans to greatly enhance its unregulated bridging and intendstoheadbridging,headIrefurbishmentheavyproposition.speaktoNikkiBrett,UTB’sofunderwritingforandOwenBentley,ofsalesforbridging,learnhowthebanktogoaboutthis
Nikki continued: “In response, we created a team within underwriting whose focus is to expedite unregulated cases by following a simplified process, leading to quicker decisions with a more commercial and pragmatic approach to lending. This is also where the AVMs Owen Bentley
Bridging & Commercial 28
Meanwhile, inexperienced borrowers, who must employ suitably qualified contractors and professionals with demonstrable experience to complete the works, can obtain facilities at up to 70% LTGDV and 100% LTC (not exceeding £500,000 or 50% of the initial value), with rates starting from 0.74% per month on terms of up to 18 months.
t’s safe to say that UTB has had a successful year so far, having achieved record loan books across its asset and development finance divisions and expanded into the BTL mortgage market. However, the bank is keen to not rest on its laurels—with its divisions experiencing significant success, the lender is now intensifying its focus on unregulated bridging lending, including heavy refurbishment.
“We told brokers to be brutally honest—and they were! No one likes having their faults exposed to them, but it was incredibly helpful and enabled us to properly review our offering and build a product and service they actually wanted,” explains Owen.
Regarding UTB’s intention to boost this part of its business, Owen and Nikki explain there’s one main reason for this: the bank’s desire to be the go-to lender for all types of specialist property finance. “By virtue of becoming great at one thing, sometimes you lose a bit of focus on the other,” says Owen. “When you are regulated by the FCA and get very good at regulated lending, there is a perception in the broker space that you’ll look at all loans the same way.” He explains that by promoting the bank’s unregulated bridging proposition and driving the activity in this space, UTB hopes to make more brokers aware of its entire range of specialist finance. To achieve this, the lender has revised its product guide to better tailor it to customer needs. The company’s unregulated bridging offering now provides loans of between £125,000 and £15m at a maximum 75% LTV, with terms up to 24 months. The range offers rates from 0.48% per month at 50% LTV, rising to 0.75% per month at 75% LTV. It has also enhanced its digital solutions covering its entire bridging range— including unregulated finance—to cover more cases and drive lending. Across its fast-track offering, the lender has upped the maximum loan size from £750,000 to £1m, with its largest LTV climbing from 60% to 65%. For its Hometrack AVM service, UTB has boosted the maximum individual property value from £1m to £2m and the highest LTV from 60% to 65%. The bank has also implemented a range of changes to its heavy refurbishment proposition, which is now split between two categories of borrowers: those with proven heavy refurbishment experience and those without. Expert property developers and clients, who have to show evidence of two recent successful projects, can secure loans at up to 100% LTC (not exceeding £1m or 70% of the initial value) and at a limit of 75% LTGDV, with rates starting from 0.59% per month for a maximum term of two years.
“We asked brokers what was most important when choosing a lender for an unregulated case, and responses were loud and clear: speed and a more commercial approach to underwriting than you would get for a regulated loan.”
I
Broker demand Owen and Nikki explain that these changes were influenced by broker feedback, following extensive consultations with the bank’s intermediary partners.
As part of this, UTB surveyed bridging introducers and received 56 responses from a range of brokers who provided feedback on its unregulated range and, if applicable, gave reasons as to why UTB wasn’t always on their consideration list for unregulated cases.
Exclusive
“That may mean we have to double the volume of unregulated bridging we’re currently completing—and that’s not going to happen overnight. It’s a long-term strategic objective to have a better balance between the two types, while maintaining our volumes and dominance in regulated bridging.
and fast-track enhancements came in.”
Exclusive Nikki Brett Jul/Aug 2022 29
Nikki clarifies that UTB’s priority is to perfect the fintech aspects, regardless of how long it might take. “It would be nice to go out in one fell swoop, but you’ve also got to be careful not to do too much at once and actually cause more trouble for brokers,” she says. Nikki says the finance provider will deliver this fintech solution through multiple smaller portal enhancements, implemented throughout the year. “It might not be fully complete, but there will be additional development in the portal that will make a real difference to the journey,” reveals Nikki.
“What you’ll see from us is a non-stop effort of trying to make things better and quicker, which will come largely through adding more staff to the team, the portal, and the product tweaks and incentives that go along with it.”
And it seems like the hard work is paying off, as both Owen and Nikki confirm UTB has subsequently seen a significant surge in demand for its unregulated bridging proposition. “Since launching the enhanced refurbishment product and streamlined unregulated underwriting process, we have seen a threefold increase in unregulated enquiries from Q1 to Q2. Even accounting for seasonal variation, that’s a really positive response,” adds Nikki. The journey does not stop there, as I’m told the bank will further enhance its service to continue to meet brokers’ needs. “When it comes to unregulated bridging, we’re aware that we need to make a few improvements to make the lending journey easier for brokers and encourage them to work with us. We’ve got a lot of things on the back burner that will come to fruition over the coming months to improve that journey even further,” shares Nikki. For example, UTB wants to make it possible for intermediaries to submit heavy refurbishment deals via its selfservice broker portal—which, at the moment, can only be done by speaking directly to the bank over the phone or by email because of loan complexity. The intention is to remove the early paper trail and make it easier and faster for brokers to calculate what deals they can get for their clients. “This whole journey is to make it quicker for brokers to get what they need out of us at the initial stage, to then be able to sell the deal quicker and more efficiently to their clients, and thus convert those enquiries into applications faster,” explains Owen. “It’s all about the engagement a broker has with the lender they trust, and providing a service that will help them do their job and get more business.”
And this is only the beginning, as the two confirm the bank will continually improve its offering, with an overarching aim of becoming the first port of call for any type of specialist property finance.
“Our aim is to develop our unregulated proposition so that we’re transacting roughly the same amount [as our regulated bridging],” Owen divulges.
“Many brokers have also told us that clients find rate less important than being able to have a higher day-one LTV,” says Owen. “So we subsequently increased our max day-one LTV on refurbishment cases to 75%, and still offer up to 100% of works costs.”
It’s relationships.about Find out more at allica.bank/introducers or give us a call on 0330 094 5555 Allica Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (FRN: 821851). Registered office: First Floor, Eldon House, 2-3 Eldon Street, London EC2M 7LS. Registered in England and Wales with company number 7706156. 98% OF BROKERS SAID THEIR ALLICA BANK BUSINESS DEVELOPMENT MANAGER WAS GOOD, VERY GOOD OR EXCELLENT. Source: Allica Bank’s Q1 2022 Broker Survey of 143 brokers WINNER - COMMERCIAL LENDER OF THE HIGHLYYEARCOMMENDED - SERVICE EXCELLENCE, LENDERS Lending is about more than just the numbers. With Allica Bank, every broker has an expert relationship manager to help find the best solution for their customers. Paired with our bespoke Introducer Portal, you can expect clarity, consistency and collaboration every step of the way.
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The speed of bridging deals raises the risk of money laundering and, unless they take precautions, both lenders and intermediaries can come seriously unstuck
W ashing dirty money through the property market is a hot topic, particularly with regard to high-end trophy transactions in London and the South East. Property is and will remain a risky area—and the fast pace of bridging adds to that. There is an enormous amount of variety within the shortterm secured lending market (and I include both bridging and development finance products in this), in terms of the size and shape of firms. Estimates vary considerably but some believe there are up to 500 lenders operating in the space. These range from the large challenger banks through to one-man bands working from their home office with a modest loan book.
WATCH OUT FOR DIRTY MONEY
The issue for all these lenders is that the risk of money laundering (ML)—including terrorist financing—is potentially the same for all of them, and the fact you know someone personally doesn’t mean there is no ML risk. Failure to explore and ask appropriate questions will leave you exposed to a judge who will take the view that you must have known the real source of their money. Intermediaries also have a responsibility to make sure they are not used to further financial crime. Just leaving it to the lender to determine does not absolve them of their responsibilities. They need to know their customer before putting in an application to the lender.
2. Some lenders when they set up think their obligation regarding ML is just to check identity and the solicitors will do the rest. There is a lot more to it than that. I have come across several firms that have registered with the FCA for ML supervision but have no written policy and procedure in place, or only a short document that references some high-level aspects of legislative expectations, with nothing to show how these would be met. There is a lot to understand and get right: sanctions or politically exposed person checks; having a process to rate customers and transactions as high, medium or low risk; meeting the requirements legislation sets out specifically for high-risk cases; understanding and possibly verifying the source of wealth and funds; and ongoing monitoring. Just as important is being able to evidence you have met your obligations on each case. Following the Ukraine invasion, it became clear that some lenders had no idea of their exposure to Russian borrowers and could identify that only by looking through all of their loan files—one at a time. The mistake would be to think this is just about Russia (and Belarus). It isn’t. Firms should be able to easily identify their exposure to all nations and those who have financial links to other countries. While Russia is a hot topic right now, there are other high-risk countries, such as China. While the levels of sanctions may not be the same, rich individuals from China pose similar risks as Russians with regard to the original source of their wealth. In the crazy world we live in, who knows what other country could suddenly become high risk, requiring firms to understand their exposure?
Five topics to be alert to
founder of Jackson Cohen Associates
Words by RAY COHEN
1. The legislation gives the FCA responsibility for supervising any originating lending entity securing on land in the UK that does not have part IV permissions (ie already authorised by the FCA). That means that, given most lenders in the bridging space are not authorised, they have to register with the FCA as an annex 1 financial institution. This is for ML supervision only and firms are simply registered, not authorised. These firms will, however, appear on the FCA register. I think it’s fair to say that a large number of finance providers are either not aware of this requirement or have failed to act on it. Sometimes, it’s just that they haven’t registered each entity they originate from. This means they are breaking the law. Intermediaries have a role to play: they should check those they deal with are either authorised or registered.
5. My final point is that lenders can’t necessarily rely on having satisfied a funding line. Some are very diligent in looking at AML policy and procedures and wanting every I dotted and T crossed, with references to all the various legislation. Others take a more relaxed view, even to the extent of just asking lenders for confirmation they have them in place, focusing far more on lending guidelines and the quality of the book. There is a lot to ML, so firms should make sure they are applying the necessary time and resources to ensure they meet their obligations.
3. For some providers, the lure of low LTV lending is a strong driver of taking on a deal—and an easy one for an intermediary to promote. Who worries too much about verifying the source of wealth when they are only at 10% LTV on a £10m property and they have plenty of other assets? Just because they may have loans with other mainstream lenders and monies are in a UK bank account doesn’t mean it’s a safe approach. Just looking at the fines the banks have had for ML failures should be enough to make you realise they don’t necessarily get it right.
4. I also have a concern about training. Some firms are good at this, some do nothing, and others are in between. Online courses are fine but they should be tailored for relevance or supplemented by other guidance. There is also a need for regular refresher education—but this doesn’t always take place.
The challenger banks have substantial resources devoted to ML, and perform risk assessments, set policy and procedures, and carry out the initial checks and ongoing observation (much of which is by automated systems). Transaction monitoring is not just for banks—interest payments and redemptions both occur in bridging, for example. The different approaches and means available can materially affect the time it takes to get a deal over the line. Smaller firms can be nimbler but need to be careful not to close their eyes to risk while trying to complete quickly. What do I see going on? It is worth stating up front that lots of finance providers out there are doing good things to address ML, even where it can mean losing a deal to another that may not be as concerned. That is not to say that all lenders need to do exactly the same, but the basics appropriate to the risks firms face should be.
Column
Bridging & Commercial 32
Specialist lawyers in secured finance Jack Medlicott T: 0151 281 9040 E: jackmedlicott@msbsolicitors.co.uk Contact meet our team
What recent trends have you experienced in the market? JM: If you look across the sector, volumes of applications are consistently up; lenders have continued to write deals, and completions continue to flow. There are a number of factors that influence this. For example, interest rates for bridging loans are at historic lows, and the competitive nature of the property market means that the traditional BTL We catch up with the partners across
Bridging & Commercial 36
onandgrowthexperiences,hearNorthfirmfull-serviceMSBdepartmentsandproperty,thefinancelitigationatSolicitors—alawbasedintheWest—toabouttheirplansthoughtsthemarket
Advertorial
As a firm, how have you emerged from the pandemic? Brad Armstrong: Although everyone has undoubtedly faced difficulties through Covid-19, the period has been a positive one for MSB. As a firm, we have experienced significant growth. Revenues have increased and we have welcomed over 70 new team members to the business across our various departments. Our secured finance team has contributed to this success and growth. Prior to the pandemic, we made vital strategic decisions. We added quality and experience to the company and invested significant time and resource into developing our case management systems. This paid off and we were able to service our existing clients without issue, all while attracting some new key clients. This momentum has continued, and we have emerged thriving. What have the past six months looked like for the team at MSB? Jack Medlicott: In March, we were delighted to open our Manchester Office in Spinningfields. This was an exciting opportunity for our team and very much the next stage in our strategic plan. The expansion has enabled us to cement existing client relationships and explore new ones within the lending industry. The division now consists of four partners who are assisted by solicitors, ranging from newly qualified to senior associate level. Over the past year, we have added quality to the team and significant technical experience to allow us to handle complex transactions in the timescales required in this market. In recent months, we have added a team of property finance paralegals who provide administrative support to our lawyers and help in the rapid progression of transactions. We also have a dedicated post-completions team that handles all registrations internally, and provides support to the portfolio management and collections department. We have spent considerable time developing our case management system to enable us to accurately track the progress of our cases and report to lenders on their pipelines. We have developed ways to integrate this with our clients’ CRM software, enabling real-time updates to underwriting and sales teams. Through automation, we’re now able to receive instructions from our lenders 24 hours a day; our system will issue initial documentation and allow that transaction to progress within minutes—regardless of the time of day or night that we are instructed.
L-R: Neil Kelly, Emma Carey, and Jack Medlicott
Advertorial investor or homebuyer is moving into the short-term finance sector to gain the upper hand on buyers proceeding on traditional high-street products. The rise in regulated bridging products is a positive sign for the sector and demonstrates a growing belief from the traditional borrower that the bridging market is a viable option and the historic negative stigma attached to this product is diminishing.
Darren Barwick: Prior to making an offer, it’s very important to understand the borrower, the security they have already given to other lenders, and the security the provider is taking. If the borrower is a company, then lenders need to understand not just who the directors are, but also the shareholders and any party who has significant control. They will not necessarily be the same entities. Once this is understood, a decision can be made on who the lender will require guarantees from and whether a business can show the requisite commercial benefit to give a cross-company guarantee. Many borrowers will already have granted a debenture over their company, which may charge future property acquisitions or have a negative pledge which prevents further charges. A lender needs to recognise the best way to deal with this so that its security works.
I always encourage my lender clients to discuss these points with me as part of their underwriting process to identify and resolve any issues before they become problems.
What do you believe should be at the forefront of a lender’s mind when considering enforcing security?
Meet MSB Jul/Aug 2022 37
Finance providers often take the view that obtaining title to a property is a legal issue after a finance offer has been accepted. However, it’s important for a lender to understand the security it is taking. Moreover, a valuer should be given a title plan of the security so they recognise the extent of the property that they are valuing.
What are some common mistakes or pitfalls that lenders should look out for when underwriting loans?
Mark Forman: First, it would be, “Have you explored every other solution with the defaulting borrower?” If the answer is yes, and either the defaulting borrower hasn’t engaged, or any solution they have suggested isn’t satisfactory, then enforcement would be the next step. Whether the lender wishes to maintain a relationship with the borrower moving forward may also influence its decision as to whether to pursue enforcement.
Second, the finance provider should give consideration to the condition of the property market at the time, and the likelihood of the asset being in negative equity. I would advise clients to engage with local LPA receivers and estate agents to ascertain what price could realistically be achieved, and whether this would satisfy the debt arising from the default. However, the lender should be careful that its inaction doesn’t lead to any perceived ‘waiver’ of its rights under the facility agreement.
activity M&A Zeitgeist Bridging & Commercial 38
Zeitgeist Jul/Aug 2022 39
Words by ELLIE DUNCANramps up
The specialist finance market has been anticipating a resurgence in merger and acquisition (M&A) activity for several years now. But it is only in the past 12-24 months that several purchases have come to fruition. For many in the industry, this flurry of action is long overdue. And it points to a market ready to scale up, diversify and further professionalise. Back in 2018, Bridging & Commercial reported an increased appetite for mergers among non-bank lenders going into 2019, mainly driven by a desire to expand more rapidly than was possible via organic growth. This trend was, though, slower to materialise than expected.
After a fallow period, M&A deals take off as companies seek to scale up, with rising interest rates forstrengtheningpotentiallythecasemovement
Bouncing back However, by early 2021, there was a notable change in mood. Jean Roche, fund manager in the pan-European small- and mid-cap team at Schroders, wrote in February 2021 that UK mid-cap companies were attracting “a renewed level of bid interest”.
ANDBEBUSINESSESBANKBUYERSBETWEENDISCONNECTGENERALWHATOFNON-LENDINGMIGHTWILLINGTOPAYWHATSELLERSWANTTORECEIVE”
Warren Mutch, head of speciality finance at Shawbrook, points to another reason: “For some time, there has been a general disconnect between what buyers of non-bank lending businesses might be willing to pay and what sellers want to receive. Valuations are driven by the discount—relativepremium—ortothevalueof the loan book, which in turn is driven by the intangible value within the business, including brand, existing broker relationships [and] technology, which won’t disappear with the founders or existing management should they choose to exit.”
The findings of EY’s ‘UK Bridging Market Study 2022’ has shown the appetite for M&A has risen. In accordance with this year’s findings, 40% are thinking about M&A over the next year, while 13% view “sale of business” as an option.
Another driver of recent M&A activity, according to Nick, is the institutionalisation of non-bank lenders and increased professionalism within. “If you think about being able to access the public capital markets, it denotes a level of institutionalisation of the business—a level of scale. We think that’s been very positive for the market and has enabled growth and access to some of the more sophisticated forms of funding,” he adds.
Warren believes this disconnect is particularly acute in businesses that focus on shorter-term loans, such as bridging, where the repayment profile is rapid, and consistently high origination levels are required to maintain or grow a loan book.
Nick Parkhouse, UK financial services partner at EY, believes the hangover of the 2007-08 financial crisis limited M&A activity in the space, in addition to the raft of regulations introduced across the financial services industry over the past decade.
Matthew Duncan, managing director at KPMG UK’s financial services M&A practice, says the specialist finance sector has been a “vibrant space” for M&A over the past two years.
Being able to demonstrate their progression and get buy-in that the positive trajectory will continue has also been behind acquisitions, like when Enra Specialist Finance agreed to be purchased by Elliott Advisors (UK) in March this year. This followed a five-year period of ownership under Exponent Private Equity. Nick explains that, following Exponent’s investment, Enra launched a number of products in the BTL and second-charge space “and very successfully scaled them”.
“Activity was quieter in the period before this, but both financial sponsors and banks have purchased non-bank lenders in the past 24 months.”
Zeitgeist
Scale and sophisticated funding
Bridging & Commercial 40
Add to the mix the pandemic and Brexit, and it is little surprise the opportunity for M&A among specialist finance never quite gained momentum.
Matthew continues: “Specialist lenders have enjoyed a perfect mix of strong loan demand, access to low-cost funding and near-zero loan losses, driving highly attractive risk-adjusted returns in a market for M&A that continues to search for higher-yield opportunities.”
“FOR SOME TIME, THERE HAS BEEN A
Pitfalls and potential While increased M&A activity is typically a sign of a sector in good health, not all deals are equal. The road to a successful company merger or acquisition can be fraught with problems.
As Nick points out: “Where M&A goes wrong has, historically, been where people have overpaid and then looked to drive unachievable growth in response or taken on too much leverage to try and make the proposition work.
However, with fiscal uncertainty comes opportunity, as Warren observes.
Jul/Aug 2022 41
Matthew suggests the rising interest rate environment in the UK might put varying pressures on different business models which, in turn, may drive a different rationale for M&A.
“It is, therefore, important for customers and brokers that nonbank specialist lenders are able to meet that demand which, in turn, requires them to have a range of sustainable and consistent funding and capital options, including M&A. This activity can create opportunities for both new entrants and existing lenders to scale up,” he says.
“The other is where the growth aspirations were excessive and weren’t reached, and the subsequent work to try to rectify the estimations were not in the long-term best interests of the business.”
“Being able to show not only active growth but also that they were able to launch new products and improve the sophistication and institutionalisation of their business have been key, and makes them more attractive to an investor,” he adds.
“Seasoned market players have seen all of this before and should continue to prosper and garner interest from potential investors. But some may find that the combination of rising rates, higher inflation, volatility in availability of securitisation funding, and changing consumer sentiment will disrupt volumes and margins, challenging their viability as standalone businesses,” he explains.
MOVINGBRIDGINGFORPRODUCTINTRODUCECAPACITYOFFERSTOVERTICALS,EXAMPLELENDERSINTOBTL”
With forecasts of a recession looming, many firms in the specialist finance arena may be tightening their belts.
Zeitgeist
According to Matthew, M&A has multiple benefits: “It offers capacity to introduce new product verticals, for example bridging lenders moving into BTL, funding opportunities through enhanced capacity, access to additional distribution, lower blended costs, and/ or diversification of funding sources. “For those with an appetite for further M&A, benefits include access to investment capital to participate in sector consolidation and grow market share. In combination, this should continue to offer choice to brokers and keenly priced products for borrowers.”
“The current economic climate may put pressure on some non-bank lending businesses, whether that’s a consequence of funding costs and subsequent margin pressure, or underlying loan performance,” he says. “In these circumstances, nonbank specialist lenders may seek a sale of part of their business, or a move towards forward-flow arrangements “M&A
Bespoke demand For a transaction to be successful, however, it has to work for all parties involved—for the companies themselves, brokers and, ultimately, the customer. That could be in the form of increased product offerings, a larger geographical presence, expanded specialist knowledge, or improvements to technology. Warren maintains there is strong demand from consumers for credit from alternative and specialist lenders, which can provide “a more bespoke proposition to those who value it”.
“We’re entering uncharted territory,” she explains. “It’s important amid these challenging times to assess end goals. Perhaps, in light of what’s happening, a better course of action may be to consider an exit or, conversely, there may be another company worth acquiring to fortify and expand existing operations.”
as a capital-light option. Growing a loan book can be highly capitalintensive for shareholders, so it’s not surprising some are looking at other options—noting that the level of liquidity from prospective buyers continues to look strong.”
RECENT M&A NEWS
March 2022: Mortgage & Surveying Services Group, which is the parent of the Stonebridge mortgage network, buys a significant stake in Connect IFA
Zeitgeist Bridging & Commercial 42
March 2022: Enra Specialist Finance agrees to be acquired by Elliott Advisors (UK), which purchases the stake from management and Exponent Private Equity
May 2021: Begbies Traynor Group buys finance broker MAF Finance Group, in a deal worth £11.75m
“That said, the idea of whole businesses or whole loan books being sold is not the only option,” he explains. “Partial loan book sales and increased use of forward flows to connect originators with buyers of loans—such as Shawbrook—will be increasingly used. This allows non-bank specialist lenders to focus on their lending operations, while reducing their funding and capital challenges.”
November 2021: Allica Bank agrees to acquire AIB Group’s £600m SME loan book, bringing its total loan portfolio to more than £1bn
The Mortgage Lender
January 2022: Shawbrook Bank announces it is to acquire specialist intermediaryonly mortgage business
April 2022: International insurance brokerage Howden acquires SPF Private Clients
June 2022: Barclays Bank UK announces it is buying specialist mortgage lender Kensington Mortgage Company, with the deal expected to complete in Q4 2022 or early 2023
Warren believes there will be more deals across the non-bank lending sector, should the current macroeconomic uncertainty persist.
Business adviser Claire Trachet, founder and CEO of Trachet, says that, as the world enters a bear market, it is the late-stage startups with a negative cash flow and which have raised money at high prices, that are going to be the most compromised.
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ONE DAY Bridging & Commercial goes to NY Beth Fisher takes a trip to Manhattan to find out about the US bridging market first hand Words by BETH FISHER Photography JAMIE YAELA
Toorak Capital Partners—which now funds 25 bridging and development lenders in the UK—hosts an annual summer event for all its key partners, including 75 US originators, and I was asked to come along. I almost didn’t make it—my passport was stuck in the system with several hundred thousand others—but, thankfully, the stars were on my side. After getting the green light from HM Passport Office one week before my flight, I decided to make the most of the few days I was there by arranging to meet a variety of experts who play significant roles in the specialist lending market in the States to find out how things are done there.
The events take place across multiple states, with its most recent one held in Miami earlier this month, and another in Las Vegas later this year—the latter of which is expected to attract close to 1,000 people over three days at the Venetian Resort.
Wall Street welcome While the need for trade bodies and a full calendar of events is all too similar to the UK’s bridging scene, I was intrigued as to “There’s a trust factor that’s associated with doing business, especially when you’re talking millions of dollars of real estate. So we recognise that the social aspect is important”
“There’s a trust factor that’s associated with doing business, especially when you’re talking millions of dollars of real estate. So we recognise that the social aspect is important,” he reflects.
Associations After getting to the Big Apple, one of the first professionals I speak to is executive director and founder of the National Private Lenders Association (NPLA), Leonard Rosen.
The trade body—which has 150 members, mainly consisting of lenders and capital providers, with the rest made up of service providers—advises and educates the public, as well as both state and federal policymakers, on the role of private lending (previously called ‘hard money’ lending, which was changed as it had negative connotations) in real estate markets throughout the US. Like the ASTL in the UK, the association encourages members to serve on its committees for the betterment of the industry. “We have legislative, best practices, ethics and membership committees, and they give us reports on a monthly basis,” Leonard tells me. The NPLA requires members to follow a code of ethics and submit an annual statement attesting to their adherence. “We take ethics and best practices very seriously,” Leonard says. He believes the industry can police itself, and that government intervention is an overreach. “When there is regulation from legislative bodies, we clearly have a voice and make sure that it is known— the idea is to work with and not against them in order to get a positive outcome. That’s good not only for the consumer but for the industry as a whole.”
Bridging & Commercial 48
One Day hile we are known for our love of attending a party or two, it’s not every day we get an invitation to New lendingCorrespondentYork.platform
“Pitbull Conference is the market maker in the US for our space,” Leonard imparts.
In the 1980s, Leonard was the nightly news anchor for the Financial News Network, and has a career spanning over 30 years in financial services.
From conversations I have had with others so far while in the States, I have learnt that Leonard is a big personality in the specialist lending space. It came as no surprise to find he is the CEO at Pitbull Conference, a major private lending event series in the US that attracts private lenders and brokers from across the country, including California, Florida, Texas and New York.
Consequently, Private Lender Law Group offers its Wall Street institutional expertise to originators in every jurisdiction to those that lack it.
Jonathan explains that smaller regional banks are giving credit lines to originators and the securitisation market and large investment banks are also involved. “Big investment banks, private equity and asset management funds, and insurance companies are all interested in the paper being generated in the bridge space here in the US.”
When asked whether he thinks the market needs more regulation, he responds: “I’m an elected Democrat. I never thought regulation helped business. It just raises prices; it’s not protecting anybody.”
One Day how else the two markets were comparable. Fortunately, I was introduced to Jonathan Hornik, partner and chair at Private Lender Law Group, a company that represents more than 100 lenders, originators, investors and Wall Street banks across the US, facilitating around 1,000 bridging and debt service coverage ratio (landlord loans) per month.
According to Leonard, funders Roc Capital and Toorak “changed the entire landscape of a space that’s been around for 100 years”.
Jonathan is also a founding member of the NPLA and is completing his fourth term as mayor of Marlboro Township, a town in New Jersey.
“Most good lenders don’t want to own property. They want to be paid their interest. And, if they can’t, they want to foreclose on their property and sell it. Because of the extent to which the blue states put barriers in place to stop the natural life of a loan from working itself through, lenders are pulling out of them and going elsewhere.”
Jul/Aug 2022 49
Akin to the UK bridging sector, the US has seen a rise of institutional money over the past 10 years. “Wall Street and Main Street have discovered this space,” Jonathan says.
Jonathan—who has been a driving force in defeating proposed legislation that would have hit the specialist lending market— claims the biggest problem affecting this is politics: the red Republican versus the blue Democrat states. Consequently, there is now a shift in bridging lenders’ appetite away from blue states.
“These are business-purpose loans, and the US has a long history, as does the UK, that commercial loans are negotiated. People are on par with each other. The less involvement with the government in doing business, the better off we are.”
“There are more business-friendly places than New York and California right now,” he says, “I’m definitely seeing a shift.”
Legal labyrinth While financial regulation in the UK is all governed by the FCA and PRA, things in America are a lot more convoluted. For example, there are two levels of law: federal and state. To complicate matters, there are 50 state laws—each one being different. “We are up to speed on each state law and prepare complying loan documents for this, as well as having a product called a white page, which summarises all the essential laws for anybody to enter any state at any time. It’s about three pages long and gives a good overview of what you need to comply with. We then help with the compliance aspect,” Jonathan details. Currently, licensing is required in circa 11 states, where lenders have to achieve a qualification to be able to lend. According to Jonathan, there is a significant push in the ‘blue’ (Democrat) states to prohibit private lending to preserve neighbourhoods and prevent gentrification. “For instance, there is a pending bill right now in New Jersey—the Assembly Bill 793,” he states. He adds that he was speaking with the NJ governor’s counsel office to explain that this could stop private funds from being invested in dilapidated housing that needed to be repaired.
Big-bucks business During one evening, when I had dinner with Toorak and the UK crew at a gorgeous rooftop restaurant in the Meatpacking “I never thought regulation helped business. It just raises prices; it’s not protecting anybody”
Because of the country’s size, Jonathan emphasises that it is relatively easy to relocate business, with many lenders moving to Arizona and Texas.
“The consumer-direct, owner-occupied residential home market is extremely competitive and not something that most lenders in our space are interested in.”
For example, RCN Capital—a private lender established in 2010 on the east coast, borne out of the great recession—is completing between 450 and 550 loans per month, totalling approximately $140m-150m, with around 240 employees. Some 55% of those deals are in bridging, 40% are long-term rental loans and 5% are construction/multi-family finance.
The business, which is funded via one majority shareholder investor and large warehouse lines, in addition to selling loans (including bridging) into the capital markets, has grown nationally and has offices in Connecticut, North Carolina and Los Angeles. Technology played a vital part in its growth. After purchasing a fledgling company called Bridge Loan Network back in 2014 to access its loanoperating software, it built a proprietary system that has reduced costs and enabled it to write more loans.
The company works with brokers, customers directly and correspondent lenders to sell its products. In correspondent lending, RCN provides funding to other lenders in the marketplace and, behind the scenes, will close and service the loan through a third party.
Bridging & Commercial 52
While there are many differences between the UK and US specialist finance markets, one thing can definitely be said of both—that the industry enjoys a good, well-earned celebration.
While the UK bridging market is largely reliant on intermediaries, correspondent lending at RCN makes up about 50% of its business, with direct and broker transactions equating to around 25% each.
As a consequence of interest rates rising in the US, Jeff tells me that today’s marketplace is “extremely volatile” from a capital standpoint and the previous “ravenous appetite” is all but gone.
“The reason for that is the minute you cross the threshold into owner-occupied lending, all of the federal licensing kicks in and, often, there’s state licensing on top of that,” he explains. As a result, he does not expect growth in that area.
“The securitisations that are getting done are being scrutinised much more heavily, and capital is not flowing as freely as it was six months ago,” he remarks, which is raising concerns among US private lenders. “The sooner we get to a final resolution on where we’re going to end up with rates, the better.” Party on the roof On the last day of my trip, I spent a balmy evening at Gallow Green rooftop restaurant at the McKittrick Hotel on 27th Street, Manhattan, at Toorak’s annual summer event. It attracted more than 150 guests from across the US and UK, and featured mentalist Oz Pearlman among a variety of entertainment.
Since RCN’s inception, its CEO Jeff Tesch has himself underwritten over 16,000 loans and overseen more than $3bn in originations. All of the business it transacts is non-owner-occupied investment lending; according to Jeff, “very few” providers in the private lending industry offer what we would call ‘regulated bridging’.
“The securitisations that are getting done are being scrutinised much more heavily, and capital is not flowing as freely as it was six months ago”
One Day District, some of our peers were astonished by how much business the specialist lenders in the US were writing, especially in relation to the size of their teams.
John Beacham—who was recently named an EY Entrepreneur of the Year for New Jersey because of his entrepreneurial spirit, purpose, success in boosting business and impact in the market—said during his speech that, since inception, Toorak has provided more than $9.1bn in capital and funded more than 25,000 loans.
Toorak-funded projects have renovated, stabilised or provided rental housing for close to 40,000 families to date—an average of circa 1,000 families per month last year. It was exhilarating to see so many people in one place celebrating the achievements of the past 12 months and resembled much of what we experience at the B&C Awards back at home.
John Beacham
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Since the end of the stamp duty holiday last year, the onset of climbing mortgage interest rates, and the increasingly hot property market, we have been fascinated to find out what influence these phenomenon’s have had on the regulated bridging market. Turns out, quite a lot Words by BETH FISHER
In recent years, the broader bridging market has seen surging competition and an abundance of debt from institutions needing to be deployed. The regulated arena has been a good home for some of this.
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The upsurge in homeowners now actively considering bridging is in stark contrast to around a decade ago, when it was largely used by corporate borrowers and investors and often considered a loan of last resort.
Since then, numerous new lenders have entered the market, resulting in a varied range of products that meet the needs of a greater number of borrowers—including owner-occupiers looking to unlock equity in their home.
Cover Story ust shy of 2,500 regulated bridging loans were completed by 34 lenders during Q2 2021-Q1 2022, according to a FOI request submitted by Bridging & Commercial to the FCA. While the pandemic left a sizeable dent in the regulated bridging space in 2020, it has quickly bounced back.
“Regulated bridging has the benefit of reasonable returns for lenders with a relatively low risk,” explains Steve Matthews, head of residential lending at Octopus Real Estate.
Unsurprisingly, the month that saw the most regulated bridging transactions was June last year—the final month of the stamp duty holiday. A hefty £143.4m of business passed hands across 335 cases—more than double than in the month before, and the only time regulated bridging has hit the £100m-a-month mark in the past three years.
While not all firms in this dataset were dedicated bridging businesses (some were mainstream providers that transacted bridging sales in addition to their core offering), it gives a clear view of how many lenders are active in this part of the sector. In 2019, 2,985 regulated bridging loans were transacted, worth £957.7m; in 2020, 2,015 loans were completed to a sum of £728.1m; and, in 2021, 2,368 loans were made, totalling £931.8m.
“Competition in the sector has also driven down rates, which has made it a more attractive product for customers,” says James Bloom, director at Alternative Bridging Corporation. This cost gap is ever narrowing; while residential mortgages have crept to the 3% mark, bridging loans at a rate below 5% can be made.
“Rates for regulated bridging finance have not increased across the sector in line with the rest of the mortgage market,” explains Harry Arnold, director at Anderson Harris. “The gap between the cheapest bridging loan at a low LTV and the cheapest equivalent fixed rate is only
Looking at the most recent figures, regulated bridging is continuing to be popular. In the first quarter of 2022, £312.5m was lent, with two out of three months surpassing £100m of business. If the next three quarters see similar results, the regulated bridging market could hit more than £1bn this year—a significant slice of the overall short-term lending sector. With this trajectory in mind, we take a look at what factors have been causing this boom, whether growing competition in the regulated bridging space will increase transparency and standardisation across the wider short-term market, and whether the fear of ‘regulation creep’ is well and truly over.
From last resort to realistic option
Cover Story £30m £60m £90m £120m £150m 2022 2021 2020 2019 JanFebMarAprMayJunJulAugSepOctNovDec 50 100 150 200 250 300 350 JanFebMarAprMayJunJulAugSepOctNovDec Monthly value of regulated bridging loans Volume of regulated bridging loans Jul/Aug 2022 61
Chains and cash buyers
This has caused a surge in regulated bridging enquiries, where applicants need to show they have the funds to simply make an offer, according to Alison HoughtonCorfield, director at Master Private Finance.
She predicts that as mortgage lenders struggle to meet service level agreements and continue to pull rates at short notice, regulated bridging volumes will keep rising where speed is required.
“Bridging is a realistic option for many cases. Therefore it seems like it has been more of an educational shift for brokers and their customers rather than a trend,” suggests Emily Hollands, head of specialist finance at OSB Group.
Laura Sneddon, commercial network manager at Fiducia Group, agrees that rising inflation and the spiralling cost of living will have a bearing on the housing market. “Releasing and raising capital will undoubtedly become more difficult in the traditional mainstream arena, opening opportunities in the regulated bridging market,” she comments.
“These unfair practices are pushing equity-rich clients towards bridging finance to ensure they can acquire the property before anyone else,” she says. “This trend will likely increase as we aren’t building enough homes, so the housing crisis will get worse year on year.”
Laura Toke, bridging relationship director at SPF Short Term Finance, concurs that the competitiveness of the market means that investors have to put themselves forward as a cash buyer, or provide evidence that they are not in a chain to have their offer accepted.
“We’ve seen the share of the market shift further towards regulated bridging in the past 6-12 months,” reports Gavin Seaholme, head of bridging and second charge at Shawbrook. “This has been driven in part by movement in interest rates, the affordability of standard mortgages, and the economywide impact of the rise in the cost of living.”
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Cover Story just over 2% pa, excluding arrangement fees. This is a huge reduction from the historic difference of 5-6%.”
For example, specialist lender Together recently helped a borrower buy a home with a regulated bridging loan when a high-street lender would not complete on the purchase because the windows and doors needed to be replaced.
On top of this, the property market has heated up in recent years, especially so with the backdrop of a growing housing deficit and a stamp duty holiday ushered in during 2020 as a reaction to the pandemic-impacted economy.
As some mainstream providers will not lend on certain asset types, homeowners looking to add value to their properties through lease extensions and home improvements, raise funds quickly for cashflow purposes, buy at auction, work on selfbuild projects or use capital to bolster their property
Furthermore, an ongoing supply chain issue and more buyers competing for individual properties have resulted in some estate agents requiring DIPs before property viewings can even be booked.
“A regulated bridging loan is a great way for a client to present themselves as a proceedable buyer, as they are no longer in a chain and relying on their property sale to complete on the onward purchase.”
Standard systems on the way?
“The flip side of the positives of competition are potential confusion in the market and an increased likelihood of new lenders not lasting the course through unsustainable pricing models”
portfolios, or invest in their expanding businesses, can use regulated bridging as a solution.
“Bridging continues to enable borrowers to take control and lead the race in acquiring their desired property without having to wait for their current home to sell,” comments Jamie Pritchard, director of sales at Glenhawk. While Covid restrictions are no longer in place in the UK, the flexible working trend is very much here to stay for some companies, which has resulted in the sales process becoming more protracted. “When you have solicitors and other essential people working from home, it can take just that bit longer to make and finalise longer-term borrowing arrangements, so bridging is the obvious option to prevent the property chain from collapsing,” explains Chris Sheppard, business relationship manager at MSP Capital. “Also, it’s a fairly common experience that traditional sources of funding are harder to access than in the past.”
Sam claims developers insisting on clients being “proceedable” has also resulted in borrowers needing to explore bridging if they do not have a buyer lined up.
The specific purposes for regulated bridging are still largely based around chain breaking, downsizing or
In addition to bridging rates falling, competition is said to have driven down title indemnity and joint representation costs, making the transaction as a whole more affordable. According to Dave Coleman, head of sales at Positive Lending, estate agent staff and mortgage advisers now have a greater understanding of bridging finance.
“Once all the windows and doors have been replaced, the borrower will then refinance with the original high-street lender,” explains its specialist account manager, Michelle Walsh.
With buyers feeling the pressure to complete purchases to avoid being trumped by other buyers, the product has “saved the day” for many, according to Sam O’Neill at Clifton Private Finance. “This led to an increase in word-of-mouth referral,” he notes.
“The flip side of the positives of competition are potential confusion and an increased likelihood of new lenders not lasting the course through unsustainable pricing models,” Jason states. Distinct from unregulated bridging—which is often used for its speed, flexibility and commerciality—its regulated counterpart is compared largely via price. “Service should come as standard, so advisers are obliged to look at price over everything else,” states Sam. “USPs such as online valuations etc are also accumulating factors, but I see increased competition in the regulated space only as a good thing if the new lenders are bringing something to the table.”
“Cases are usually complex and no two are alike, which means policy and underwriting need to reflect all the nuances and flexibility that this type of lending demands. In my opinion, process and policy are two different remits and should be treated as such.”
Alison feels unskilled intermediaries in bridging are most likely to be fearful. “They tend to muddle their way through and, all too often, more experienced brokers have to pick up the pieces and ensure the client has the correct guidance and advice for a smooth transaction and feasible exit for all parties.
Regulation creep The concept of the wider bridging market becoming regulated has historically raised alarms across the industry.
Cover Story when people are experiencing a change in family circumstances. This means that transactions are already relatively standardised. Could this mean the procedures of a rising regulated bridging market start filtering into the unregulated space? More standardisation could result in a simpler process and better overall experience for all parties concerned. It might also reduce the variation between lender requirements when underwriting an application.
“This may, however, restrict the range of products on offer. For example, there has been a tendency for regulated bridging lenders to offer only 12-month terms on unregulated products, where there is no regulatory requirement for this,” cautions Tom Rowlands, head of property finance at Pure Property Finance. This dynamic has also encouraged finance providers to enhance digital transactions for both efficiency and to lower overhead costs— much like in the mortgage market.
“Our interpretation of this is of great concern with lenders that are unregulated yet offer unregulated second charges exempt from regulation due to business purposes on the client’s home. We firmly believe that any use of
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Previously, the idea of regulation on the horizon was seen as “the beginning of the end”, says Jonathan Newman, senior partner at Brightstone Law. “In fact, these events turned out to be the beginning of the beginning.” He references how the short-term market has “exploded” since MCOB was introduced.
The worry centred around the associated internal costs to adhere to MCOB rules—such as hiring the right staff, monitoring processes and training—which could be particularly intimidating to a newer or smaller lender.
“I believe funding source, the need for capital reserves, regulatory compliance and lack of knowledge within the regulated market are significant factors on this two-tiered approach,” states Jim. “I don’t see lenders standardising transactions for these reasons.”
As standards are set by the FCA but individual lenders decide how to interpret them, you will see variations in the way firms operate or service their clients, explains Nick Jones, sales director at West One.
Additionally, while regulated lending is more standardised, each lender needs to compete through its own USPs, and therefore it is unlikely brokers will expect them to adopt a blanket approach in the future. It is argued that some non-bank lenders in the regulated arena have significantly different offerings for their regulated and unregulated business, with a bigger appetite for the latter.
While standardisation makes the process simpler, it is not necessarily what brokers look for when it comes to bridging finance. “A big positive to the bridging world is that each lender really does have its own niche. It’s not so much about who can offer the best rate, but who can actually offer you exactly what you need,” explains Imogen Sporle, senior private broker and head of term finance at Finanze. Examples include finance providers that can complete within two weeks, require fewer documents or are able to lend to ex-bankrupt borrowers. “I think if the process is standardised, we run the risk of losing that and therefore a huge part of why so many people use bridging,” she adds. Market Financial Solutions has noted a significant rise in standards since 2006. “The benchmark gets set higher and higher, in both the products and how they are delivered,” says its CEO, Paresh Raja. “Services become more professional, but also more innovative. That is what brokers and borrowers then look for. Other lenders must adapt or fall behind.”
“There was a fear that regulation could inhibit innovation in the short-term market,” explains Pritchard.
Mainstream versus niche In addition, the “unsustainably cheap pricing” of regulated bridging could cause problems down the line, according to Jim Baker, sales director of bridging at Spring Finance.
“Leaner systems become increasingly important as lenders are pushed to reduce their pricing— and profitability—as competition increases,” says Jason Berry, group sales and marketing director at Crystal Specialist Finance. While regulation may homogenise some processes, James highlights that every bridging transaction is different, with its own considerations regarding security, borrower circumstances and the exit route. “This is why it is difficult for very large institutional lenders to make an impact in this market.”
According to Sneddon, a growth in regulated bridging lenders is also likely to mean a greater reliance on technology, such as AVMs and ID verification. However, she believes that complete standardisation rails against the very nature of the product.
“Intermediaries more commonly hold professional qualifications, have comprehensive internal due diligence practices in place or, if affiliated with a network/club, will be held accountable to the regulations of that company,” explains Sneddon. “The organic migration to a more regulated environment seems to have been taking place vicariously in the industry over the past few years.”
“It’s up to leaders and trade bodies within the industry to call out inadequate working practices,” adds Matthew Anderson, head of sales at Arbuthnot Specialist Finance. Encouraging more lenders to be involved in associations and formulating robust guidelines is also recommended. “Just because we’re talking unregulated rather than regulated, it doesn’t mean there is less due diligence,” comments Lee Merrifield, underwriting and credit manager at MSP Capital.
However, Sneddon believes self-regulation is a “grey area” where standards on which lenders and intermediaries are to be judged are imposed with no verification. “This will naturally lead to various interpretations, degrees of accountability and procedural differences in place. Who decides the framework? What standards are the principles “If you’re involved in a financial transaction for a client, particularly if their home is involved, at no point should self-regulating brokers be allowed to complete this type of transaction”
“A lot of lenders would prefer not to have more regulation because of the potential impact of more paperwork and process on making a commercial return,” says Chris. “From our point of view, if some of what we do gets encompassed into regulated lending through a new regulation umbrella, we would just get on and deal with it. We’re certainly not looking for that, but we would be sanguine if we saw more regulation. We would adapt if needed.”
Cover Story a client’s main residence should be accessed only via FCA-regulated brokers that follow a clear, transparent process with the client’s best interests at heart.”
“It’s true that an unregulated lender doesn’t have to go into such depth of detail or gather data on, for example, payslips or the latest assets and liability statement, but what is required under a regulated approach may well not change the decision anyway,” Chris adds. “We have direct interaction with the client and will have a good idea as to whether or not a proposed loan will wash its face.”
“A lender’s success is invariably linked to its reputation, particularly given the importance of brokers in facilitating deals,” notes Paresh. “So lenders that embody transparent, honest and reliable means of working are likely to find favour with brokers, which results in repeat business and a growing loan book.”
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Imogen argues if regulation becomes stricter, certain types of borrowers would be excluded, or there would be more hoops to jump through, making the process time consuming and expensive. “As we have seen before, I think it will just cause the big landlords to get bigger and the smaller ones to sell their properties due to the hassles of refinancing.”
“The scale of the impact could be a retraction of brokers and lenders in the market,” posits Pritchard. In a solutions-driven industry, Matt Watson, CEO at Tenn Capital, believes regulation has the ability to “choke off” innovation.
Toke believes any rise in regulation should not be an issue for firms that provide good-quality advice.
“Established bridging lenders who offer unregulated bridging loans do adhere to proper and professional behaviour, and the trade bodies that exist do help create and maintain professional standards,” says Pritchard.
“Perhaps the industry is entering the acceptance phase of the change cycle,” suggests Paul Elliott, MD at Propp. “We’ve being through shock, denial, fear and anger and we’re coming out the other side now.”
The most noticeable effect could be around resource capacity. “Regulated products generally take a longer time to package and ensure that advice is suitable, with additional requirements for obtaining documents from clients,” says Tom. “This will slow down completion times and occupy advisers for longer periods of time.”
While this may initially have an impact on the levels of business a firm can write in the short to medium term, Tom believes it would be relatively easy to adapt to regulatory changes if the firm is prepared.
According to Raphael Benggio, head of regulated underwriting at lender MT Finance, brokers and lenders have accepted that homeowner bridging is here to stay, and have used it to evolve their business and product offering, viewing it as an opportunity rather than a hindrance. “The majority of our industry no longer fear regulation but have been embracing it more and more.”
Self-regulation: wise or weak? For some time, the bridging market has had a degree of self-regulation—moral principles set out by individual lenders—with many businesses agreeing to standard sets of values and practices. For example, the ASTL insists that all its members adhere to its code of conduct.
The biggest question has always been whether an increase in regulation will have a significant commercial influence.
“It’s a case of illustrating the bridging loan was suitable advice for the client and ensuring your processes are wind and watertight, which you should be doing anyway,” she argues. “We don’t see this as having a negative commercial impact.”
Sneddon thinks more regulation would encourage better practices, demonstrate a higher professional standard, and go far to prevent “bad apples” causing headlines in the future. “We believe regulation is a good and inevitable feature of the market; there will come a tipping point when commercial deals will need to be overseen— whether that’s by the PRA or FCA or, indeed, a new body which takes that role on,” states Toke. Others say that regulation will ensure all aspects are examined properly. “How many unregulated businesses will dedicate time at board or senior management level to discuss customer outcomes, best advice, capital adequacy and treating customers fairly? How many firms set time aside to conduct routine risk observations and compliance-focused one to ones, looking at lender bias and quality of advice? This sort of scrutiny can only be good for the industry,” opines Paul.
In Alison’s opinion, a broker who self-regulates is not future-proofing its business. “If you’re involved in a financial transaction for a client, particularly if their home is involved, at no point should self-regulating brokers be allowed to complete this type of transaction.”
Jordan Fearnley Brown, co-founder and principal of Albatross Capital, concurs that, as he runs a lender that prides itself on speed, his main concern would be around processes slowing down. “If this isn’t affected, I can only see it being a positive for customers.”
In July, the FCA announced the details of its new consumer duty rules. “This will impact the [regulated] bridging sector as intermediaries need to evidence that products and services meet the four customer outcomes,” states Dale Robinson, director at EquityOne Finance. Is this a sign of more to come in this niche part of financial services, and will those in the bridging market embrace it? Alison is of the opinion that further regulation can only be a positive for clients using bridging finance and “will identify the brokers who often dabble in bridging purely for their own gain, with no long-term responsibility towards the client”. “I’m not worried by the prospect of more regulation,” adds James. “I feel that it may help to grow the market by giving customers more confidence to engage with it.” That said, he argues that regulation would need to be specifically designed for the sector’s unique characteristics. “Simply applying regulation that is used in the term mortgage market could be very damaging, not just to businesses but also to customers.”
This means ensuring customers receive the correct advice and pay fees that are fair for the work involved. However, Emily notes there could be unwanted consequences, such as unnecessary barriers that make some solutions for customers unobtainable. After all, regulation is to protect borrowers— and a reduction in options could defy that.
“I am hopeful that if the unregulated market is heading towards a regulated direction, we can find a way to keep it flexible and maybe put a bit more emphasis on things like continued education, TCF and the like, instead of making it a banking environment,” adds Meir Peer, founder and managing director of Redi Finance.
The regulation tipping point While self-regulation has worked reasonably well so far for the majority, some borrowers are still being provided with bridging loans that cannot be refinanced onto mortgages or development facilities. This will become more critical as interest rates continue to rise, warns Rhys Cann, bridging and development finance consultant at Pilot Fish Finance. “Increasingly, we will see that clients will not be able to refinance at the same leverage they may have been used to in the past.”
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Lee is not keen on the idea of increased regulation. “We want to see the unregulated market continue, not disappear. For one thing, it offers more scope and freedom to support green projects in the property sector,” he highlights. “We would deal with any requirements if more regulation came in, but we’re certainly not looking for it. In the bridging market generally, more regulation might put some competitors under pressure.”
This is echoed by Jason. “We must ask ourselves, is the current bridging landscape leading to poor consumer outcomes? I personally don’t believe that it is, given the general professionalism of intermediaries, brokers and lenders alike. It is simply not in our self-interests to act otherwise.”
Cover Story judged against? Who monitors adherence? What are the repercussions if not followed?”
Jamie Jolly, director of bridging at Hampshire Trust Bank, is ambivalent about whether there should be more regulation in the bridging market.
“What’s key for me is to ensure that we don’t view regulation as a bind,” he says, adding that the attention should be on the positives it can bring. “What regulation does is clearly map out and highlight principles and behaviours for us to follow and embed into our businesses so we can create and promote the correct culture, products and processes.”
While the market has become more professional and transparent on its own, Jim points out there are still lenders with unclear pricing and that apply punitive unfair charges to customers. “From a broker perspective, I’d say the selfregulation practised by the large part of the market is excellent and has moved on considerably in recent years,” he says. “So, it’s a question of whether more regulation is necessary to manage the few who don’t self-regulate in an effective and TCF manner.”
Furthermore, industry support depends on what the focus will be on. “If increased regulation is focussed on AML/KYC, I’m in favour,” says Watson. “I think everyone should have high standards in this area as a non-negotiable. “However, if regulatory oversight extends to transaction mechanics, then I would have a problem with this. The flexibility to be creative and innovative is essential. At all costs, the ability to do this and to deliver for clients must be protected.”
With our professional team and established history as a FTSE 250 Company, we provide funding for experienced developers across a wide range of projects.
DEVELOPMENT FINANCE AreasAWARD-WINNINGwespecialise in Get in touch today Residential Development Student Accommodation Bridging Finance Marketing Loans Pre-Planning Pre-let Commercial Development www.paragonbank.co.uk/development-finance 020 7160 2400 devfin@paragonbank.co.uk Paragon Development Finance Limited. Registered in England number 03901943. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Development Finance Limited is an entity within Paragon Banking Group. DEV0054-002 (08/2022) We offer flexible development finance loans from £400k to £35m, all tailored to suit your needs.
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Interview Words and photography by andreea dulgheru
After months of
Why I joined Tuscan speculation the specialist finance industry since he left Masthaven, Richard Deacon he announced he was joining Tuscan Capital as its sales director.The man why he chose the lender his
Richard Deacon
A matter of trust As his time at Masthaven approached its end, Richard assessed his situation and asked himself what anyone in his position would: what do I want to do next? “It was really important for me to choose a lender that I could trust and wanted to work for,” says Richard. While he was initially planning to join another bank, it was only after talking to various nonbank lenders that he realised what he truly wanted: to work with a firm that had the ability to be flexible, provide tailored solutions for brokers and their clients, and to quickly adapt to the everchanging specialist finance market.
Although his time with Masthaven came to a bitter end in February this year when the lender announced it would be withdrawing from the UK finance market over the next two years, Richard looks back fondly over his 14 years at the company. “It was a great ride, and I met really good people, some of whom have become friends for life.”
Richard started his career back in 1997 at HFC Bank, where he got his first taste of working in finance. After completing his training, he quickly progressed to become a branch manager for several of the bank’s offices around London, including Enfield, Romford, Ilford and Stratford. However, after a scary medical experience at the ripe age of 29, when he suffered a mild stroke, Richard realised that his original job at HFC was not what he was looking for career-wise. Thus, he decided to join a larger bank, Abbey National, which went on to become Santander during his tenure.
“My job description at the time was to go out and knock on as many doors as possible, educate people on what bridging finance was and how it could help people, and sell this to them. We did a lot of second charges back in the day, or first charges for professional landlords, who used their properties to get capital to become cash buyers.”
Fast-forward to a few years later, when Richard’s next role arrived, delivered by none other than Rob Jupp, CEO at the Brightstar Group. At the time, Rob was running Personal Touch Packaging, and invited Richard to join his company and help him further expand it—an opportunity he happily accepted. “This was my first foray into the specialist finance market,” says Richard, who tells me that during his time working as a packager, he got the chance to discover the big lenders in this sector and learn more about different products, including bridging finance, courtesy of Masthaven founder Andrew Bloom, with whom he became acquainted. However, the good times did not last long, as the 2008 financial crisis hit and with it came the demise of Personal Touch Packaging. Rob went on to work for Savills, but Richard decided to take a different route. A definitive move “I had to look after myself, my wife and young child, and it was a case of getting out before the pack of cards tumbled,” he explains. After speaking to Andrew, Richard joined Masthaven right on his birthday—a move that would end up defining his career.
From a small team at the time—only four people gathered in a tiny office room—Masthaven quickly grew to become a significant player in the market, becoming accredited by the Financial Services Authority (now the FCA) to provide regulated bridging loans in 2010. It secured significant funding lines from institutional investors, including the William Pears Group, and became a fully fledged bank in 2016.
W hen B&C exclusively revealed that industry heavyweight Richard Deacon had joined Tuscan, Twitter and LinkedIn were flooded with congratulatory messages from the industry, excited to finally know where Richard would go after the downfall of Masthaven, and delighted to see him succeed once again. As I chat away with Richard, it’s easy to see why he is so beloved by many in the industry—his friendly, sunny demeanour radiates through every word he says, even when talking about his out-of-the-box image choice for his signing [ed note: ‘Deacon’ plastered on a ‘Tuscan FC’ tee]. But behind all this lies a wealth of experience gathered through decades of working in financial services, which defines him as one of the best.
“I always go back to my ‘Richie Principle’ of the three Ps: people, products, and process,” Richard says. “If you can get the right people in place, you can tailor the best products and create the right process.
Colin is incredibly well respected; he’s got significant industry experience and isn’t afraid of making a bad choice—he will always want to make a deal.”
“It was really important for me to choose a lender that I could trust and wanted to work for”
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Not only that, but Richard desired to work with a business leader who he could connect with on a professional and personal level, and who would be a role model for him. “I will turn 50 soon, yet I still want to have a mentor with whom I can discuss anything—and vice versa,” he shares.
Interview
After several conversations with close friends from the industry and different lenders, Richard decided that Tuscan would be the best fit for him, because of not only the firm’s flexibility and adaptability, but also the people— particularly given the reputation of the finance provider’s CEO, Colin Sanders.
Great growth plans Now he has officially started in his role at Tuscan, Richard is confident he can use his extensive experience to take the lender to new heights. “I’ve seen good times, bad times, and periods of stability. I’d like to think that the understanding of developing a very small company into a bank is key for this young firm that has massive aspirations to grow. Tuscan’s got several funding lines that aren’t utilised anywhere near as much as they should be at the moment. Together with the products that we have and the team, all that’s left to do is get in through the front door,” he states. And it seems that Tuscan has lofty aspirations, as Richard tells me it has its eye on more refurbishment, development and commercial finance deals, as well as plans to expand its national reach by appointing a new senior member for the South West and possibly launch its proposition in Scotland. “We don’t lend in Scotland at the moment because of a couple of underlying restrictions with our funding lines, but we want to change that. We’ve got a couple of good legal connections in this area, and there are some incredibly good brokers there. All we have to do is talk to the funding lines to gauge their appetite for lending there, and we might give it a go.”
Richard emphasises his focus will be on growing the lender’s distribution, as he believes there is plenty of potential to at least double the number of brokers Tuscan works with.
L-R: Dena Thompson, Richard Deacon, Jade Arnold-Brown
Richard divulges that, as part of its long-term system development strategy, the business is working on setting up its own broker portal for a potential launch in 2023.
Interview
Fast-track via fintech Tuscan is also looking at further improvements across fintech. “I think there’s massive room for improvement in tech within the industry. Of course, because of the unique nature of this sector, it will never replace the human interaction—if you’ve got a quirky case, you need to have that discussion face-to-face. But can tech improve things? Absolutely,” says Richard. In July, Tuscan extended its fast-track offer process to its refurbishment bridging range to significantly speed up the application journey. This enhancement allows brokers to obtain a digital DiP within four hours of submission, by providing seven pieces of information for the case: the full address of the property/ site; a brief outline of the proposed refurbishment works; purchase price/ current market value of the property; refurbishment costs; planning status; estimated GDV of the final property; and the experience of the borrower/developer. In addition, the finance provider will further improve the overall fast-track options by entirely replacing traditional valuations with AVMs for qualifying cases—Tuscan is now allowing AVMs for purchases at 70% LTV and refinance to 60% LTV for properties with a confidence level of 4.5 being acceptable.
“It’s going to be hard work, as there’s a tremendous amount of competition out there, but I think it’s achievable—and it’s the reason why I joined Tuscan,” says Richard.
“It’s going to be a bumpy ride, there will be long hours and tough decisions to make, but Colin, myself and the rest of the team are confident in each other’s abilities and desire to make it work.”
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Aiming high When I ask Richard what goal he is most keen to accomplish, he responds that it is to make Tuscan one of the top five non-bank bridging lenders in the UK within the next five years.
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Interview
Words by BETH FISHER
The specialist finance department at LDNfinance (LDN) is having a record year, cementing the brokerage as a key player in this sector. It’s therefore a no-brainer that the business is looking at further growth and expansion
Amy Baptiste
‘We have started to see some of the building societies well known for residential mortgages enter the regulated bridging market’
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To help manage the next phase of its development, former administration manager Amy Baptiste has stepped up to be the brand’s head of specialist finance. Having spent most of her career as a paraplanner, Amy joined LDN as a senior paraplanner for specialist lending before building up and managing the administration team across both specialist and residential disciplines for the past three years. Described by the company as an “integral individual to the business” and well known within the industry, Amy tells me how she plans to capitalise on the opportunities out there, and why we are seeing a rise in regulated bridging offerings.
Amy Baptiste
Interview
Part of my new role is to ensure I am collaborating with our lender partners and maintaining these strong relationships to ensure our advisers and clients have market-leading access to funding. I regularly hear of finance providers exceeding their quarterly targets— although there is some caution as to whether these high levels will continue. I can see some lenders really excelling over the rest of the year, but some may find the market tougher. How these businesses are backed will determine what impact the rate rises will have on what they can offer.
According to the latest EY ‘UK Bridging Market Study’, 85% of the sector expects competition to continue or get more heated. How is this impacting your role as a broker?
There has been an influx of lenders offering fixed rates as well as trackers, which can provide additional comfort to clients.
When we partner with new lenders, we look for who can offer us the right terms for the client. This includes leverage, rates and fees. What cannot be stressed enough is the level of service and confidence the lender can provide in getting the deal over the line. It’s crucial for a finance provider to have a strong track record. We pride ourselves on working very closely with them and value their reputation. One thing we always say to new entrants in the market is how incredibly competitive it is. With hundreds of lenders out there, having a clear and concise offering will set them apart. We are regularly in touch with them prior to launch and provide honest feedback to ensure they are set up for success.
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From a lender perspective, the increased competition is a positive as it as means finance providers have had to improve both their service offering and proposition in order to get more business. In terms of intermediary competition, to be honest, the market size is more than large enough for everybody, and we enjoy collaborating with our peers—often, in fact—and helping each other place cases. Since Covid restrictions eased, many lenders started loosening their underwriting criteria. Now, with bank rate rises and a cost of living crisis, what are you seeing with regard to available liquidity, funding appetite and leverage/risk?
Having been a paraplanner for over 10 years and having managed the LDN administration department for the past two, I have a deep-rooted understanding of the property finance ecosystem and sales management. Similarly, I have been working with our specialist team for three years, offering bespoke admin support, which has enabled me to build strong relationships with our specialist advisers, their clients and lenders. What changes would you like to bring to LDN over the next 12 months and why? The biggest area of change for me will be growing our overall sales by unleashing the full potential of the department. My plan is to improve one-to-one management to help our current advisers achieve their goals—and to be known as the best company to work for within the specialist intermediary market. Another primary aim is to grow the division through onboarding and collaborating with more introducers to maximise the opportunities out there. What new trends are you seeing from customers in terms of their specialist finance requirements? At LDN, we’ve seen a rise in regulated bridging enquiries. We believe this is due to chain breaking off the back of a seemingly never-ending, intense purchase market, and the acquisition of properties that are not habitable upon point of sale. We are finding that bridging finance offers clients the flexibility to access quick funding to complete the work, move in and then refinance. There are only a handful of lenders in the regulated market but they are dealing with the increased volume of business very well. Interestingly, we have started to see some of the building societies well known for residential mortgages enter the regulated bridging market—often at very competitive rates—and our existing relationships with these lenders from our residential department have opened up some exciting partnerships lately. We forecast the bridging market will remain strong for the rest of the year and a keen focus for us. I’m lucky that our clients can work with our large residential mortgage department as part of our service to ensure the refinance can be done under one roof.
“There is still plenty of liquidity in the market and a hunger to do deals. We are, however, seeing more lenders ringfencing products and funding for key accounts”
Congratulations on the promotion! What will your new responsibilities include? Thank you! My overarching responsibilities are to manage the specialist lending department and make our existing processes more efficient so our advisers are able to increase their volume of business, and ensure we can achieve our growth targets for the coming years. I’ll be reporting to the directors, managing introducers and improving lead sources, monitoring the department’s KPIs, and overseeing the compliance and administration processes for the specialist advisers. I’m also very excited to be working with our new CRM provider to create a bespoke process for our specialist lending. With more efficient procedures in play, this will help grow business volume for our division.
There is still plenty of liquidity in the market and a hunger to do deals. We are, however, seeing more lenders ringfencing products and funding for key accounts.
What attributes do you look for when teaming up with a new specialist lender, and what questions do you always ask?
How will your previous experience in paraplanning help you in your new position?
Interview In your opinion, how has specialist finance evolved over the past 12 months?
We have seen finance providers diversify their product offerings over the years, now catering for clients in multiple scenarios. In recent times, there has been a surge of bridging lenders stepping into the BTL market. However, with strong global market influences, this movement appears to have reversed, with some delaying their launch and others pulling out of that market completely. Service is central to any lender’s proposition and, with the high pressure that valuers and solicitors are under at the moment, communication levels need to be constantly assessed to ensure all parties are working collaboratively. I see a big part of my role—and something we are very focused on at LDN—is about ensuring we maintain our service standards in what is a challenging market. What industry changes do you expect and hope to see in the near future? Something I am very passionate about is advocating how skilled and extensive the knowledge is when working in the specialist lending space. We understand that enquiries can be complex—no two cases are the same. I am aware that sometimes the industry doesn’t do the best job of promoting itself and, although it sounds odd to say, sometimes we are too humble. I am constantly in awe of my peers and the amazing talent this industry harbours. Something I believe would assist the market is increased professionalisation of the sector. The introduction of a specialist qualification would set a high standard of service and advice for our clients, and something we could use to highlight the proficiency of our market. I love how meritocratic this sector is. As a woman in the industry, I have always felt supported and in an environment where I can be my authentic self. I respect how diverse the industry is, and feel extremely proud to work for such a respected firm.
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Words by DARREN WOON GREEN BUILDING REGULATIONS: ‘THE TIME FOR OUR INDUSTRY TO NOW’CHANGESFORPREPARETHESEIS Homes and businesses are expected to meet standards to lower energy consumption and protect the environment by 2025. Darren Woon sits down with industry experts to discuss how developers, brokers and lenders are handling the government’s ‘green building revolution’ targets— and the financial implications
Andy notes that the Alliance has committed £175m, and so is providing funding as well as expert support to SME housebuilders. This is enabling the building of more high-quality, energy-efficient homes. “The alliance provides loans of between £1m-20m to finance new SME development projects across England,” Andy details. “Homes funded must achieve a minimum EPC rating of B, and will benefit from increasing interest rate margin discounts as the energy efficiency of the homes rises above this. Those achieving an EPC rating of A will benefit from interest rate margin discounts of 2%.”
When looking to secure this kind of finance, Alison Houghton-Corfield, national relationship director at Master Private Finance, shares what developers need to consider. “Will there be true environmental benefits delivered by the project?” she asks. “Developers need to deliver measurable environmental benefits, both while building and upon completion of the project. They need to fully understand the stance of local governments on green building and ensure correct infrastructures are in place to enable successful funding and completion.”
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In addition to the potential financial ramifications, Andy mentions that there is certainly room for improvement as far as education and, more importantly, experience across the industry is concerned, and this is proving to be an obstacle in itself.
Alison elaborates on this when highlighting the need for construction teams to have the right people on board.
Last year, the Greener Homes Alliance was created when Octopus Real Estate struck up a partnership with Homes England, the government’s housing delivery agency.
When I ask him to give an example, Andy explains that heat pumps need to be put outside and then linked to hot water cylinders. This is unlike gas boilers, which typically go indoors. “So, if you try to include heat pumps as an afterthought, you have to rearrange things, whereas if the architect allocates space for them and the water cylinders from the start, it’s much easier and more cost-effective.”
“There is a huge gap currently around people having the required skills to deliver sustainable green projects,” she points out. “This could prolong completion times and increase costs exponentially, which could be very problematic further down the line.”
The solution? Start the discussion now and gain the experience necessary to ensure everyone is prepared for the introduction of the Future Homes Standard. Aaron
The same can be said for increasing U-values, he says. In essence, increasing these means adding more insulation and, if this is considered only in hindsight, it will affect room sizes and construction techniques. “If designed in from the start, then you can plan everything appropriately, and save money and time in the long run.”
Looking to the immediate future, in which sustainability is expected to remain front and centre in the property industry, Andy refers to the changes to tighten the minimum energy efficiency standard (MEES) regulations, set to be introduced next year, as a sign of even greater governing pressure. From April 2023, it will not be permitted to let out buildings in England and Wales with an energy efficiency rating lower than E. “As a result, it’s likely that many investors, landlords and building owners are going to need to invest heavily to get their properties up to scratch, and a knock-on effect is that demand for energy-efficient buildings will grow, as will their value. The opposite will be true for buildings that are not fit for purpose.”
The “radical” new standards follow the government’s 10-point plan revealed in November 2020, where greener buildings featured as a key component in its ‘green industrial revolution’. The objective covers a range of areas, including offshore wind; low-carbon hydrogen; nuclear power; zero-emission vehicles; green public transport, cycling and walking; aircraft and ships; as well as carbon capture, use and storage. It is also intended to raise ambition regarding greener buildings, protecting our natural environment, and green finance and innovation. But how are the targets pertaining to carbon conservation, nature preservation and greener buildings and finance affecting the profitability of developers— and particularly SMEs? “Building to higher U-values (the rate of heat transfer through a structure) and lower air permeability and using more recent technological advances such as heat pumps will of course carry a cost penalty,” says Andy Scott, head of residential development at Octopus Real Estate. “However, these costs can be largely mitigated if designed for from project inception.”
View arly last year, then housing minister Chris Pincher demanded that homes and businesses needed to meet “rigorous” new energy-efficiency standards to lower energy consumption and bills, as well as help to protect the environment. After a consultation on the Future Homes Standard, Pincher proposed steps to dramatically improve new homes’ energy performance, with 2025 touted as the year in which all new housing would be zero-carbon ready.
“Blackfinch integrates ESG considerations into all stages of the lending journey, promoting dialogue with developers to hit the targets and enabling us to more efficiently assess risk and understand the impact of our lending decisions,” Lucas adds. “Finance providers need to be crystal clear on their criteria,” Alison affirms, “which will be difficult as the government doesn’t seem to have a true handle on it yet.”
View Noone, sales and operations director at Master Private Finance, stresses this more than most. “At present, the silence on green action is deafening,” he says. “I’m yet to see a ‘revolution’ as the government approach is inconsistent and lacks focus.” This statement resonates loudest in light of rumours circulating around when the future ban on gas boiler purchases will be, and Andy calls attention to the changeable nature of the policy environment in general. He underlines July’s heatwave as indicative of the ever-present issue of climate change, as well as the increasingly stringent regulations governing carbon emissions. “It’s in the industry’s interests to get ahead of the curve and change before we are forced to.”
Lucas Cutts, assistant investment manager at Blackfinch Property, echoes the claims that conversation is key, something the guidelines have aided developers and lenders in when it comes to aligning objectives by “creating a common language in a historically subjective space”. The objectives also appear to have had a positive impact on the way development lenders assess risk, despite concerns surrounding the government’s own capabilities.
The alliance seems to be an ideal solution for those looking to get things off the ground in anticipation of meeting the new standards by 2025, by offering free, expert advice from sustainability consultants McBains—which provides developers with design guidance and practical steps to achieve an improved EPC—and Octopus Energy, a 100% renewable energy supplier and part of the Octopus Group. “If the projects on site in 2025 are to be already compliant with new regulations, with no expensive retrofitting required,” Andy concludes, “the time for our industry to prepare for these changes and to adapt design methodologies is now.”
“More could be done in terms of providing developers with the education and resources they need to deliver on these targets, but the landscape is certainly navigable,” Andy continues. “Initiatives like our Greener Homes Alliance are in place to support developers, but it would be great to see the industry go further.”
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9 7 64 5 2
1 Who: MSB Solicitors
What: Starting the day with a shandy, a little bit of tennis and a lot of sunscreen, and winning the raffle
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3 Who: Assetz Capital Where: Assetz Capital HQ, Manchester What: New MD Andrew Charnley’s plans for the company’s future, the importance of nurturing talent, and supporting diversity
4 Who: Ultimate Finance Where: Dakota Grill & Restaurant, Manchester What: Catching up with Ultimate Finance’s head of bridging, Liam Cavanagh, and the best tomato dip in town
2 Who: LDS Sales Guarantees Where: The Bull & Bear, Manchester What: Expanding into apartments, sales guarantees in an uncertain market, and getting a taxi back to the hotel—next door
8 Who: SPF Private Clients
Limelight a glimpse into our ever-busy schedule
7 Who: Master Private Finance Where: Norma, Fitzrovia What: Eating focaccia with cutlery, the amazing progress being made to improve diversity within the industry, and not standing for lip service
What: Selling onesies in South Africa, our love of aesthetic, and interesting property development data
Where: Liverpool International Tennis Tournament
10 Who: Toorak Capital Partners
What: A party in Manhattan, Oz Pearlman reads our minds, and being called Barry all evening 8 10
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5 Who: Finanze Where: BrickHouse Social, Manchester What: An exciting new product soon to reach the market, fighting over the vegan pizza, and why is everyone called Ben?
What: Discovering how Redi Finance was started (and the meaning behind its name) over an American breakfast we are still thinking about
9 Who: TrustedLand Where: Dishoom, Soho
Where: Radio Rooftop, Strand What: The chaos of being on the road, spotting a footballer in the lift, and questionable accommodation
Where: Gallow Green Rooftop, New York
6 Who: Redi Finance Where: Moose Coffee, Manchester
The biggest problem for specialist lenders now is the scarcity of skilled people. Investing in talent is imperative if we want our industry to grow and have an impact for years to come.To catalyse industry growth, we must foster an environment where people can thrive, challenge and grow. Assetz plans to lend over £1bn to SME housebuilders per annum. What is your strategy to meet that ambition? It’s about putting our customers first. If we understand them and their needs, we are able to grow with them.This will involve increasing touchpoints with our network across the value chain. We need to build robust relationships with all at local and national levels. It’s also about having the right team to execute the job, which is often about doing the simple things to the best of our abilities, all of the time. We heavily invest in talent through upskilling initiatives, including our recently launched Assetz Academy apprenticeship programme, which supports existing and new colleagues.
Assetz Capital’s new managing director discusses how government instability is undermining housing supply, what today’s buyers want, and why investing in talent and SMEs is imperative Andrew joined the specialist marketplace lender in June during a juncture of critical growth, having spent almost four years at fellow Manchester-based lender Together. He has worked in the commercial lending sector for 28 years in various asset classes, and has held numerous senior leadership positions at Lloyds Banking Group, Barclays Corporate, National Australia Bank and City Invoice Finance. In his new role, Andrew will be leading a team of 130 people as the business aims to increase market share and drive innovation while increasing its impact on society.
Backstory ‘We need a focused government that takes SME housebuilders seriously’
What one thing does the industry not know about Assetz? Assetz provided over £330m to SMEs during the pandemic, demonstrating our significant reach through CBILS lending.This is a huge number for a business of our size, and it came at a very uncertain time for UK PLC. Assetz aims to grow its influence in the wider housing market. How will you look to accomplish that?
What was the worst job you ever had? Back at school, I was a pot wash for a local Italian restaurant. I wasn’t keen on the washing up but loved the delicious food and the satisfying brown envelope filled with cash at the end of each week.
What will be the biggest problems for SME housebuilders and developers over the next 12 months? Soaring costs of materials, energy and labour are big challenges. Rising land prices are also an issue, as those who don’t acquire at the right level will find it really challenging to profit, especially where fixed-price contracts are not entered into. Furthermore, we need a focused government that takes SME housebuilders seriously, and they must be willing to invest in lenders and borrowers. How did you spend your very first pay cheque? When I joined the National Australia Bank back in 1993, you had to pay your student debt back within 12 months, so my first pay cheque went on a sizeable reduction to that. Not quite the first pay cheque excitement most expect.
Your dream job—if you weren’t doing this, what would you do? I would have liked to have been a professional rugby league player, playing fullback. Sadly, my skills were not up to the required standard. If you had to delete all but three apps from your phone, which ones would you keep? Starbucks—I need a strong coffee before 6.30am. Sky Sports—I must have my fix of sports news. Podcasts—I’m a massive fan of Diary of a CEO and High Performance.
First, we will build relationships directly with SME housebuilders throughout the UK while continuing to support our introducers.This will enable us to provide advice, guidance and funding, which will allow growth and community benefits to be realised. Second, we must offer real-time, truthful insights into the housing landscape and what needs to change— from a political, economic and social standpoint, at a national and regional level.Third, we will continue to work closely with existing customers, partners and advisers to improve our processes and, ultimately, their experience with us, thus retaining more business and focusing on what matters. What initiatives are you implementing to bring about more tangible social impact? I look forward to supporting Assetz’ work in the care and supported living sectors. I’ve had personal experience, which has enabled me to see how crucial this market is, particularly given our ageing population. By investing in SMEs, we will be supporting local businesses who, in turn, invest in local workers, allowing communities to thrive. In addition, we must do more to support modern methods of construction.The new generation of buyers are looking for modern properties equipped with the latest technology that reduces energy costs and maintenance issues, and improves comfort and quality of life. What do you foresee as the biggest hurdle for specialist lenders this year? We haven’t seen the full impact of Brexit. So far, we have been mostly insulated from it by the pandemic, but it’s a big issue. In addition, the recent instability of the UK government is making it harder to implement sustained, positive change in construction and housebuilding.
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