OFFERING CHOICE AND CERTAINTY

Atelier’s joint CEO Chris Gardner and chief originations officer Martin Gilsenan share their views on the impact of rate rises, market volatility and their strategy for 2023

Words by andreea dulgheru

ith consecutive Bank of England interest rate rises and inflationary pressures, it’s fair to say developers have not had it easy last year—something Atelier has seen first-hand. “In H1 2022, things were relatively buoyant, but we were beginning to see pressure build with interest rates and construction cost inflation. We then had the mini-Budget in October, which really disrupted the market,” says Chris. “However, as an industry, we have yet to see this volatility fully manifest in portfolio performance. Across the sector, there are probably quite a few sites experiencing problems, and I think we will have a much clearer idea of the impact in the second half of 2023.”

According to Chris, the market is set for a bumpy ride this year, as the lender anticipates drops in both house prices and transactions in the industry. And it seems other experts think so, too: Savills predicts home values and transaction volumes will fall—particularly in the first-time buyer market, which is expected to see a 43% drop in volumes in 2023, compared to pre-pandemic levels.

When talking about the biggest issues the development finance market is facing—apart from the base rate rises— the conversation generally comes back to the usual suspects: labour shortages and material cost hikes. When asked whether these issues will continue to plague the sector, Chris points to the BCIS Index which suggests material costs have peaked and that the shockwave in cost increases that developers have endured over the past 12-18 months is beginning to dissipate. However, he is not expecting such a positive change for labour, highlighting that procuring the necessary workforce will continue to be difficult and expensive.

Costs and caution

With these factors still hampering the construction sector, it seems that developers are taking a more calculated approach when planning their next schemes. “We deal with a lot of professional developers, and the best ones are absolutely being more cautious—they’re looking to mitigate as many risks as they can before they buy a site,” shares Martin.

So how exactly can developers tackle these market difficulties? According to Martin, a key area to carefully consider is the cost of land. He advises developers planning their upcoming schemes to avoid overpaying for their sites, as this could easily—and extensively—erode their profits. “There’s an old saying that you make your money on the way in; one of the most important things in the current climate is to buy the site at the right price. We look at many new enquiries where the profit on cost is simply too low because developers are paying too much for land. They have to be disciplined enough to bypass those opportunities where the numbers simply don’t work,” he elaborates.

Both Chris and Martin also warn developers to pay close attention to and be realistic about the other costs involved in a scheme, particularly surrounding labour. “If a developer is going out of their area and is having to transport workers and pay for them to stay in that location, these are big costs for them to bear in the current climate,” explains Martin. “This is why we like to work with experienced developers who are focusing on locations where they have an existing supply chain.”

“The supply chain is everything in the successful delivery of a project,” adds Chris. “If you are a developer, one of the best ways you can manage your costs is to keep your supply chain fed and watered with work. If you’ve got a reliable crew and preferred sub-contractors, what you can do is move them from one site to another, so they’re constantly working. You get the best deal, you keep your supply chain together, and you get to work with people you’re used to.”

Five areas of a sound deal

Having been through four property cycles, the Atelier senior management team knows that the best way to navigate through turbulent times is to stick to the basic credit fundamentals, which is what they call the ‘spine of the deal’: location, developer experience, great product, recourse to the borrower, construction costs and procurement route. “When aligned, you have the makings of a viable project, and we will look to progress and support those cases,” says Martin. On top of that, the finance provider recently revamped its entire proposition to scale up and offer a wider lending remit in the UK real estate market. In addition to adding its first-ever variablerate loans linked to the Bank of England base rate, Atelier introduced new lower LTV bands—offering different rates for borrowers bringing in more equity— increased its maximum loan size to £40m, and upped its maximum loan term to three years. “We wanted to make sure that we had a proposition out there that attracted the most robust, resilient and expert developers,” explains Chris. “We’re broadening the asset classes we will lend on as well, extending our reach on residential student and senior living. We’re increasing our appetite for these areas because they are not exposed to residential house price volatility.”

The lender is also working on creating a finance solution for schemes built using modular and modern methods of construction, which is expected to launch around March.

Smart treasury management

However, what sets Atelier’s proposition apart from others in the sector is its attention to rate risk management. “We have taken action to limit the impacts of interest rates volatility for our borrowers, which included the extension of our fixed-rate proposition to lower LTVs.

“As part of our approach to intelligent balance sheet management and commitment to offering good value for money to our borrowers, we have utilised a risk management strategy, typically used by larger financial institutions. We have hedged against the risk of interest rate volatility, which has allowed us to maintain a competitive fixed-rate offering, despite the recent increases in base rate,” explains Chris.

“On top of that, we also have a daily market scanning system to ensure Atelier is always keenly priced. This is proprietary to us and runs internally as part of our operational procedures. It reviews pricing based on LTV, asset class and funding type—for example from banks, asset managers and credit platforms. What we’ve created is a comprehensive package of controls and levers, focused on managing risks and offering borrowers choice and certainty.

Discipline and support

When it comes to operating in a difficult market, Chris and Martin believe there is one key thing to success: discipline. “We all know that we’ll face challenges around interest rates and inflation, but the way you manage that is to remain level headed, consistent and disciplined. That’s the best way you can help yourself and your customers,” states Chris. Martin agrees, adding that lenders have a responsibility to their clients to keep a cool head, while developers are responsible for seeing the world as it is, not as they’d like it to be.

One element that is central to the success of a project is strong partnerships, which are essential in Atelier’s book. “Long-term relationships are the backbone of our business. The first thing we look for in a developer or broker is the desire to build a relationship; we want the first transaction to be the first of many,” says Martin. “We’re in an enviable position in that we get a lot of repeat business, and that’s testament to the collaborative nature of relationships. The goal is to have the broker, lender and developer in perfect harmony.” While a coordinated effort is vital, both Chris and Martin emphasise the importance of challenging one another as partners, as no relationship can be contingent on saying ”yes” all the time. “We’re in a complex area of lending; if you enter into a partnership with somebody, both sides have to accept it’s not always going to go to plan. There are going to be bumps in the road, and that is really going to be the marker of how strong a partnership is,” highlights Chris. “It isn’t just about doing every deal; it’s about forging a longterm strategy and being sensible and grown up about what that means.”