Bridging Introducer December 2020

BRIDGING Champion of the Bridging Professional

INTRODUCER www.sfintroducer.com

December 2020

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EDITORIAL

COMMENT

Publishing Director Robyn Hall Robyn@mortgageintroducer.com Publishing Editor Ryan Fowler Ryan@mortgageintroducer.com Editor Jessica Bird Jessicab@sfintroducer.com Deputy Editor Jessica Nangle Jessica@mortgageintroducer.com Deputy News Editor Jake Carter Jake@mortgageintroducer.com Editorial Director Nia Williams Nia@mortgageintroducer.com Commercial Director Matt Bond Matt@mortgageintroducer.com Advertising Sales Executive Tolu Akinnugba Tolu@mortgageintroducer.com Advertising Sales Executive Jordan Ashford Jordan@mortgageintroducer.com Campaign Manager Victoria Hubbard Victoria@mortgageintroducer.com Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com Printed by The Magazine Printing Company, using only paper from FSC/PEFC suppliers www.magprint.co.uk

Contents

The end of the tunnel?

E

ven at the peak of lockdown and widespread uncertainty earlier in the year, I don’t think any of us were really considering the possibility of a socially distanced Christmas. And yet, here we are.

Although the Prime Minister has decreed that households can likely mingle and – most shockingly – even hug this festive season, many are still unable, or unwilling, to take this risk. The fact remains that we will be rounding off 2020 in a rather bleak fashion, and that’s not to mention the prospect of a Zoom-y New Year.

For bridging, however, prospects are less gloomy.

2020 has seen this market face considerable challenges, and for the most part rise valiantly to meet them. Some lenders have had to pause, roll back, or even exit the market, but on the whole short-term lending has proven a boon to a disrupted market, and has shown itself to be key to the UK’s economic recovery.

It remains to be seen when this recovery will come, or what shape it will take. News of a vaccine is making for some light at the end of a very long tunnel, but the end of the stamp duty holiday, the rounding up of CBILS and furlough, and the widely accepted inevitability of increased unemployment – to name just a few – are factors likely to throw the market for a loop in 2021.

In the meantime, where we might usually have seen a dampening of activity during December, the final weeks of 2020 look set to be uncharacteristically busy for the bridging market as people race to make the most of the opportunities available to them until the end of March. Robust business is never a bad thing, but facing backlogs, bottlenecks and overloaded in-trays, it might be difficult to get into the festive spirit just yet.

Nevertheless, here at Bridging Introducer, we wish all our readers a happy Christmas, and most importantly a restful one, to prepare for new challenges in the year ahead. B I

31

5 Jonathan Newman What have we learned from 2020?

7 Roxana Mohammadian-Molina Stalking the property market 9 Donna Wells Bridging the alternative lending gap 11 Amadeus Wilson Investors are keen to keep flipping 13 David Pinnington Planning for life after CBILS 15 Danny Carter A solution that needs deep thought 17 Mark Shepherd COVID and the art of property valuation 18 2020: A year in review Looking back at the events and trends of a year like no other 30 Looking to the future Jake Carter covers the points raised at Bridging Introducer’s round-table, which looked at the challenges facing bridging and development in the year ahead 36 Cover: A sharper image Danny Waters and Steve Hogg discuss the new face of West One Loans, and why it is important to stay nimble in times of upheaval 42 Vic Jannels Finding strength in adversity

e www.sfintroducer.com

DECEMBER 2020

BRIDGING INTRODUCER

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What have we learnt from 2020?

Jonathan Newman senior partner, Brightstone Law

W

e are now reaching a stage where we can start to look forward to 2021, which will hopefully prove to be an easier year for everyone.

However, throughout the challenges we have faced in 2020, we have also learned a number of lessons, and it is important that businesses remember these and use them to help make the most of the opportunities that lie ahead.

At Brightstone Law, our team of experts – working across both originations and collections activity for lenders – have consolidated some of their thoughts and experiences, to provide insights into how they have overcome some of the most significant challenges of 2020, and to outline some of the risks and opportunities as we look ahead to next year.

IT systems and processes that enable people to work remotely – but this is just half the story.

While we have ensured that there has been someone physically at the office throughout the pandemic to fulfil paperwork requirements, we have largely been working remotely.

As we have all learned, successful remote working requires more than a technology infrastructure – it needs a change in behaviour.

Effective communication as a business under normal circumstances often comes in bitesized chunks – tapping someone’s shoulder to ask them a question, or running an idea past them in the kitchen.

These small, informal exchanges are something we might take for granted, but without them businesses operate a lot less efficiently.

Fortunately, this was a dynamic that we recognised very quickly, and with a focus on enhanced internal and external communications through whatever channel was available, we were able to create a culture of communication, even with people working in isolation.

LOOKING BACK

One of the biggest challenges we faced this year was getting used to a new way of working. During the COVID-19 restrictions we have had to adapt alongside our clients across all activity.

One of the first things that changed was that borrowers were unable to visit their solicitors to sign loan documentation in person, which is a requirement of most of our clients.

So, we agreed with most of our lender clients that the solicitors could hold video calls with borrowers to provide the required independent legal advice and watch the documents be signed and witnessed in the presence of an independent third party.

Every business has a continuity plan that delivers the technical side of operating throughout disruption, with www.sfintroducer.com

LESSONS LEARNT

Better communication leads to stronger working relationships, which leads to better performance – this is something we all know instinctively, but a lesson that has been brought into sharp focus as a result of COVID-19.

A recent report by Pollen Street Capital, based on data collected from 50 specialist lenders across the consumer, small to medium enterprise (SME) and real estate credit sectors, noted the outperformance of smaller, more hands-on lenders over the course of the pandemic, when compared with larger lenders that were relying on greater automation.

It pointed out that where ongoing contact has been maintained to support customers, a higher

proportion of those customers have continued to make payments – and this reflects our own experience here at Brightstone Law. Proactive communication works, as does the personal direct approach.

It works within businesses, but it also works for creditors and consumers.

Amidst the bombardment of new regulations and provisions, the basic principles remain: communication is key and, in many cases, it means that enforcement can be avoided by achieving consensual arrangements.

LOOKING FORWARD

We can look forward with cautious optimism. The report by Pollen Street Capital uncovered the resilience of the specialist lending market, and the environment will be technically no different in the future than it has been in the past.

There will be further considerations and some added procedural steps to accommodate COVID-19, but this should not prove a significant hurdle for those lenders that place genuine emphasis on proactive and effective communication.

One challenge for lenders in the next 12 to 18 months from a collections perspective will be identifying those customers who may seek to game the system, as opposed to customers in genuine difficulty.

Again, however, this can be overcome by taking a bespoke approach that is able to recognise and adapt to different types of customer behaviour, which requires experience.

As specialist lawyers in this sector, we have established experience that spans a number of years, and we will continue to develop and add to that experience as the market evolves, identifying what is required by our clients in any given environment.

The uncertainty caused by the pandemic in 2020 will place greater emphasis on effective communication in 2021.

Working with the right partners can help lenders communicate more effectively across all aspects of lending, from originations to collections, and this can help them to make the most of the opportunities ahead. B I

DECEMBER 2020 BRIDGING INTRODUCER

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Stalking the property market Roxana MohammadianMolina chief strategy officer, Blend Network

S

talking – as defined in the Oxford English Dictionary – is to follow something or someone by moving slowly and quietly. This description may well portray how we have seen property developers and investors move over the past few months: quietly keeping a vigilant eye on the market and waiting for the right time to act.

As a development finance and bridging lender to property developers across the UK, we at Blend Network are in a privileged position to feel the beat of the market. Our daily conversations with property market participants and the loan requests we review give us a pretty strong sense of where the market is and where it may be heading to.

So, what trends have we witnessed in the UK property market?

A TWO-SPEED MARKET

All investors know that two things are ‘king’ in the property game: cash and location. Location in particular has never been more important than it has this year.

According to the latest Nationwide housing data, average UK house prices rose by 5.8% year-on-year in October following a 5% increase in September.

However, the recent strength of the UK housing market hides a wide gap between some strong performing markets and some other relatively weak markets. We have all read stories of deserted city centres and booming leafy suburban towns.

A detailed look at quarterly regional data suggests that parts of the North have been the star performers in recent quarters, even despite the pandemic.

For example, the North West saw a 4% growth in average house prices during the first nine months of 2020 compared www.sfintroducer.com

to the same period in 2019. In contrast, the UK as a whole saw only a 2.6% increase in average house prices over the same timeframe.

DEMAND FOR ALTERNATIVE FINANCE

COVID-19 meant that many mainstream and high street lenders scaled back their lending, instead focusing on the Coronavirus Business Interruption Loans Scheme (CBILS).

So, many of those property developers and investors who were looking to grab good deals were left in the cold, which left a gap in the development finance and bridging market. This gap was quickly filled by alternative lenders – such as Blend Network – which due to their diversified lender base have been in a strong position to continue lending.

We saw monthly lending records during June, July and September, and so far in Q4 2020 we are on track to deploy a record amount of funding.

According to P2P Market Data, which tracks peer-to-peer (P2P) lending activity across various different markets, alternative property lending has seen a surge in demand in recent months.

SPEAKING WITH SPECIALISTS

Judging by the conversations we have been having with borrowers, property

“All investors know that two things are ‘king’ in the property game: cash and location” developers and investors all across the UK regions, as well as with auctioneers, lawyers, accountants, architects and other professionals involved in the property development lifecycle, the past few months have been ‘manic’ and ‘crazy busy’, as most would describe it.

STRENGTH TO STRENGTH

Everyone seems to agree that property developers and investors have been silently upping their game, and carefully watching the market as it has gone from strength to strength over recent months.

Many people predict that the stamp duty holiday will be extended beyond its current deadline of March 2021, and no one wants to miss an opportunity in this market.

Yet everyone agrees that in order to be able to snap good deals in this market, one thing is key: to have a good lender by your side who speaks the property developer’s language and understands the game. This seems to also be the reason for the increased popularity of alternative lenders. B I

UK house price year-on-year growth 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Source: Na+onwide, Blend Network ------------------DECEMBER 2020

BRIDGING INTRODUCER

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SHORT-TERM FINANCE XXXXXXXXX

Bridging the alternative lending gap Donna Wells director, F4B

I

t’s getting to that time when I suspect that we’re all looking forward to – and are quite frankly happy about – seeing the back of a year that has placed such a strain on all our business and personal lives. I don’t want to dwell too much on the hardships we have faced over much of 2020, but when battling through any period of adversity, it’s important that we learn from it and turn negatives into positives where possible to successfully move forward.

Arguably the biggest lesson we have learned as a business is about being able to adapt quickly, and how vital it is to have a robust support network.

Operating as a packager in the shortterm finance space, we know how to act fast.

Unlike many other forms of finance, clients need funds in their bank accounts within hours or days. They need to move swiftly, because generally speaking the purchase is time sensitive.

If the buyer cannot complete to the seller’s schedule, then any preferential terms may be withdrawn, and the resultant deal cancelled.

Speed has always been of the essence in this sector, but we are currently having to adapt even faster to deal with daily changes to products, policy, criteria and service levels.

From an external perspective, short-term finance has previously been viewed as complicated, expensive and irresponsible – even among some advisers. I’d like to think that these preconceptions have been banished.

Nevertheless it’s fair to say that some additional complexity – in relation to the factors mentioned above, plus funding constraints and additional risks attached to lending – is making it even more difficult for less experienced brokers to keep on top of everwww.sfintroducer.com

changing client and provider demands.

This means that such advisers need additional support to ensure that their clients have access to the types of short-term solutions which will become increasingly important as the stamp duty deadline approaches.

In addition to residential purchases, various investors are also becoming reliant on bridging finance to ensure that purchases can be pushed through in time to take full advantage of this tax break. This factor also underlines the importance attached to a well-rounded advice process and access to alternative forms of lending where necessary.

This is one reason why we recently launched our free 24-hour case checker initiative. This is aimed at providing an option for brokers – who may not be specialists in short-term finance – to doublecheck lending terms received, to ensure they have sourced the most suitable product and lender to match their client’s requirements.

From speaking to advisers, it is working to provide an additional layer of security, as well as highlighting the benefits attached to this important area of the specialist mortgage market.

This importance is only likely to grow in the coming weeks, and on into 2021. Despite the obvious challenges 2020 has thrown at us, demand for short-term finance has remained

strong throughout. According to MT Finance, bridging activity rose by 46% in July to September, compared to the previous three months. Although lower than pre-COVID levels, lending hit £116m during Q3 thanks to an influx of customers who would normally take out loans at high-street banks.

In a trend which is a world away from the mainstream mortgage market, many short-term lenders are supporting this growing demand by increasing their maximum loan-to-value ratios (LTVs) and loan sizes, which is certainly helping them to become a more attractive option.

Education continues to play a key role in this support process, and we are looking to help more advisers understand the potential benefits attached to specialist lending, turn away fewer client enquiries and generate more revenue without wasting their valuable time on cases which may never be accepted.

This is leading to a growing number of advisers taking advantage of the experience and expertise of packagers to tap into the rising demand for alternative forms of finance.

We, as a business, are now in a far stronger position to support them on this journey, and help more nonspecialist brokers bridge the alternative lending gap. B I

Packagers can help to bridge the gap

DECEMBER 2020

BRIDGING INTRODUCER

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Investors are keen to keep flipping Amadeus Wilson director, SPF Short Term Finance

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01-PM-01 (2)

ven though we are living with a pandemic which virtually closed down the housing market for several weeks during the first lockdown, flipping is on the rise.

The investor’s dream – making money from property in a short space of time – is still possible, and on a scale we haven’t seen for some time.

Savvy investors are adapting to market conditions and seizing opportunities where there is money to be made.

New research from estate agent Hamptons International reveals that flipping in England and Wales has reached a 12-year high, as investors buy, renovate and sell properties on quickly. One in every 40 homes sold were bought and sold within 12 months, the highest level since 2008.

Burnley in Lancashire tops the list for properties most commonly flipped – one in 12 properties were bought and sold there within a year.

Such is the level of demand that Hamptons predicts a total of 23,000 homes will be flipped this year. Many investors will turn to bridging finance to fund the purchase and refurbishment, before selling the property on at a profit and moving onto the next project.

The figures suggest that there is indeed money to be made, with the average difference between the purchase and sale price of flipped properties being £40,995, more than £10,000 higher than the average profit recorded last year.

With the market booming due to pent-up demand, the experience of lockdown and buyers’ willingness to take advantage of the stamp duty www.sfintroducer.com

holiday, it is no surprise that such profits are possible.

Canny investors have switched from flipping flats to houses, which has helped boost profits. This ties in with the experience of lockdown and buyers searching for more space – both inside and out.

The rise in working from home also means buyers don’t have to focus on city and town centre locations where a flat may be all they can afford – they can branch out to the suburbs and beyond, where house prices are more accessible and there are gardens aplenty. Back in Burnley, the vast majority of houses flipped were terraced, bought for less than £40,000 – below the 3% stamp duty surcharge for landlords and the general threshold for the tax, increasing potential profit.

While we haven’t been arranging vast amounts of bridging finance on terraced houses in Burnley, bridging is a useful tool for investors keen to flip.

The classic example is an investor buying a house for say, £400,000, doing £75,000 of work and ending up with a property with a finished value of £600,000. Not only has the capital value of the property risen, there is also an uplift in rental values.

The client can then remortgage onto a long-term buy-to-let mortgage, releasing some of the original equity they invested and reimbursing themselves for the cost of the works, before moving onto their next project.

The exit plan is the most fundamental element of this type of finance.

Our refurb-to-let product is popular among investors – we either create a bespoke product for the client, depending on the project, or there are some off-the-shelf products we can access. At the point of enquiry, we let clients know what the cost of the bridge will be, the likely redemption balance once the work has been completed, and what the buy-to-let options could look like at that point in time. Rip out and refurb is popular, with internal reconfiguration, such as converting a two to a three-bed where there is a large lounge. Other popular projects include double extensions.

Market conditions have also led to a significant drop in popularity of houses of multiple occupation (HMOs) for students, with many investors converting these into professional lets. For example, we have one client converting a 21-bed university HMO on the south coast into a really smart 15-bed ensuite targeted at professionals who get their own quarters but don’t have to pay as much as they would for an entire flat to themselves.

While the mini-boom means property prices continue to rise, market conditions remain tricky.

Maximum loan-to-values (LTVs) have come down, as lenders demonstrate more caution and the time it takes to remortgage has also increased, with applications taking longer to process.

The rise of flipping underlines the long and the short of it: if you make your money through property, you don’t just stop because of external factors, even if they are as serious as a global pandemic. On the right project, investors will make money, regardless of the market. B I

Many investors will turn to bridging finance to fund purchase and refurbishment

DECEMBER 2020

BRIDGING INTRODUCER

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Planning for life after CBILS

THE MARKET

understanding and clarifying the processes for their clients.

David Pinnington director, Finance 4 Business

T

he coronavirus pandemic has brought with it many problems, and has affected so many different sectors in varying degrees, especially smaller businesses. Drops in sales as well as cashflow and supply chain disruption are all key concerns for companies affected by the virus, and with over 5.9 million small and medium businesses (SMEs) in the UK, the government had to react quickly to provide access to much-needed financial relief.

THE FINANCIAL RELIEF

Support came in the form of Bounce Back Loans and the Coronavirus Business Interruption Loan Scheme (CBILS). Launched earlier this year, these forms of finance have been critical in providing financial support to smaller businesses that lost revenue or had their cashflow disrupted.

Unfortunately, we discovered that many clients were finding the application process frustrating, with many businesses struggling to navigate through the 40 or more different lenders that were providing the funding. Not only this, but there were also concerns surrounding government advice. Opinium found that two in five businesses believed the government’s advice was unclear, with senior decision-makers unsure where they could get relevant and timely advice.

Across the UK, SMEs needed advice and support from experts to understand their general finance options and how the government could support them.

This is where the UK’s broker industry yet again stepped up to provide much-needed support in www.sfintroducer.com

WHAT’S NEXT?

After securing the finance needed to keep running over the last nine months, businesses and sole traders now need to look to the future and make plans for life after CBILS. 2020 has offered business owners more time for themselves and the opportunity to reflect on their processes, and with the news of an imminent vaccine, now is the time to get business moving and growing again.

Commercial finance offers the chance to do just that, providing the funds necessary to achieve goals by investing in assets and keeping a healthy level of cash flow.

PREPARING FOR THE FUTURE

Unique opportunities will no doubt present themselves, landlords and property investors will look to navigate their way out of the lockdown and start preparing financially for the future.

This might be a commercial landlord looking to increase their property portfolio, take advantage of distressed properties or review their existing borrowing facilities. The property market, with its wide multiplier effects, has been critical over the last few months in helping recover from the financial impact on the UK economy caused by the coronavirus.

There is, however, a downside; businesses obtaining the financial support that was on offer via CBILS have subsequently found that this has had a detrimental effect on their borrowing ability.

Specialist finance brokers are used to dealing with complex situations for their clients and finding the right solution; now more than ever, I expect the specialist market to rise to the challenge yet again, and we need lenders to do the same.

The commercial mortgage, shortterm lending and development finance market has been constantly evolving and adapting to the everchanging climate we are all becoming accustomed to.

Lenders, depending on how they are funded, have had to restrict criteria and appetite. This is understandable, especially in the commercial space, when so many sectors have been decimated by COVID-19.

What has been a welcome relief is the attitude of some of the lenders in the short-term and property development arena. We have seen a number of sizeable, complex development opportunities being agreed by various lenders, underlining their commitment to keeping the property market moving in these difficult times.

The government has announced a £2.2bn finance package in its recent financial review, which is designed to help housebuilders and support new modern construction methods as we see more modular, eco and intuitive building types.

Meanwhile, the latest Office for National Statistics (ONS) data shows that there was only a 1% increase in new housing over the last 12 months, falling way short of the government’s own target.

This much needed financial support shows that the housing market is still very much open for business, and provides us all with reason for optimism and a sense of the opportunities that are available going forward.

As I write, the new tiers have just been announced, and depending on where you are reading this from, will no doubt determine the feeling and mood within your area. Being based in Birmingham, we are heading for a rather different Christmas, and certainly a tamer one!

Wherever you are, try and enjoy the festivities as best you can. 2021 will be another strange year, but I also believe one for optimism.

Resilience is something the finance industry is renowned for, and it is this resilience that will get us to the light at the end of the tunnel!

Happy Christmas all, and stay safe. B I

DECEMBER 2020

BRIDGING INTRODUCER

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REGULATED BRIDGING XXXXXXXXX

A solution that needs deep thought Danny Carter founder and MD, Collective Mortgage Network

W

ith the stamp duty holiday due to expire on 31 March 2021 and the market seemingly taking a positive step following the recent vaccine announcements, there is a flurry of activity in the regulated mortgage market that could lead to an interesting sideways impact.

It is obvious to any adviser working in the regulated mortgage market that clients are as desperate as ever to get their move completed as soon as possible. Yet at the same time, lenders are struggling to keep up with demand, and we are seeing longer than normal response times to get to the position of a full offer.

The uncertainty around time periods for getting mortgages completed – or simply getting through the conveyancing process – could become exacerbated in the new year; the hard deadline of 31 March approaches, which then puts added pressure on the mortgage lenders and greater risk on the borrowers who are looking to move in time.

This is where it is vitally important that advisers support their clients with solid advice and guidance on how to deal with the timing uncertainty.

It is key to first establish whether the client has the funds available to cover the stamp duty cost if the transaction does not complete in time. This is the most prudent of backstop positions. If it is just the case that the client would not want to complete the transaction and pay the stamp duty, this can be worked into the transaction by the lawyers including a long-stop date or not exchanging until completion is ready.

For those clients that do not have sufficient funds, could there be other options available? Could they speak with the vendor and come to an www.sfintroducer.com

agreement on the stamp duty payment?

Could it be split? Could there be a price reduction on the purchase?

Looking at their mortgage, is it possible to increase the amount being drawn to cover the stamp duty?

There are lots of options available to buyers, and the final option could be to look at regulated bridging finance to bridge the purchase and the sale of their existing property, or certain other situations which the adviser can carefully consider.

REGULATORY MATTERS

Regulated bridging finance is generally categorised as ‘open’ (the borrower does not have a pre-agreed sale on their existing property or a pre-contracted exit to the bridging loan) and ‘closed’ (the borrower does have a pre-agreed sale or exit and it is just a timing issue). Both are MCOB loans and only advisers who are suitably qualified and have the correct Financial Conduct Authority (FCA) permissions can assist the borrower.

This is different from unregulated bridging; brokers need to be very careful about overstepping the mark, with the FCA taking a firm stance on unqualified brokers conducting regulated work.

The rates available for open bridging tend to be higher than for closed, as the latter is generally seen as less risky for lenders as the exit route is already agreed and in place.

There are a number of lenders in the market for regulated bridging finance.

Advisers who do not currently have access to these lenders – or who do not currently offer this type of service – could look to work with a specialist mortgage network which has a panel of suitable lenders and provides the support and training to offer regulated bridging to customers.

We set up Collective Mortgage Network to provide just such a network, and we support our advisers with all they need to offer the full suite of regulated mortgages, bridging finance, as well as specialist

commercial, bridging and development funding. Not all networks allow this range of advice to be provided or have access to the whole of the market across all products, so it is worth checking with any network before signing up.

Clearly, the use of bridging finance needs proper thought and consideration, and it is not going to be suitable for everyone.

However, for many borrowers the risk of losing out on savings of up to £15,000 is a real concern, and using regulated bridging finance could be the ideal solution.

For advisers, the important steps are to ensure that all the costs and risks are clearly explained, and that the adviser is comfortable that the product is suitable. The costs of some bridging loans are sometimes difficult to assess on first blush, so getting into the detail is key.

For any adviser with a qualification in mortgage advice but without the relevant FCA permissions, there are two routes to market. The first is to get directly authorised as a firm with the FCA, and the second is to work with a mortgage network.

Getting directly authorised comes with the ongoing requirement to ensure rigorous compliance procedures are followed and filings made to the FCA. Working with a network is generally a much quicker route, and most networks – such as Collective Mortgage Network – deal with all the ongoing compliance work on your behalf.

When moving from the world of non-regulated bridging into that of regulated bridging, this is an important consideration.

The use of bridging finance for consumers will always have a place.

The current economic position, coupled with the stamp duty holiday, now puts us in a unique situation where it could become a go-to product to help clients meet the deadline and benefit from the savings to be had up to 31 March 2021, but advisers need to stay on top of the detail and ensure they give robust and clear advice. B I

DECEMBER 2020

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REVIEW REVIEW

VALUATION

COVID and the art of property valuation Mark Shepherd course director – MSc real estate course, University of Manchester

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f the many challenges the COVID-19 pandemic has posed to the property sector, the undertaking of valuations has proven to be one of the most complicated.

As I write this, England is in its second lockdown and, while not as strict as the first, the social distancing measures put in place have once again made it difficult for professionals to gain access to a property in order to conduct a thorough valuation. This has made matters far more complicated for buyers, sellers, agents and lenders – not to mention the surveyors and valuers themselves, of course – when it comes to completing a transaction.

It is unsurprising, therefore, that 2020 has seen a sudden surge in ‘virtual valuations’. However, should we consider this a short-term solution in the midst of the pandemic, or – even with hopes renewed as vaccine trials progress – a long-term trend?

THE COMPLEXITY OF VALUATIONS

There is both an art and a science to valuing a property, be it residential or commercial. Yes, one might be able to input a few basic details into an online calculator and generate a rough estimate, but these tools should not detract from the complexity involved in property valuation.

Depending on the type of valuation, sales comparisons, income capitalisation, land value and building costs can all be assessed. What’s more, given how the value and benefits of real estate are realised over a long period, social and economic trends must also www.sfintroducer.com

be carefully considered. Of course, the complexity of the process is what typically makes qualifications through bodies such as the Royal Institution of Chartered Surveyors (RICS) necessary for those who make a living out of valuing property.

To what extent, then, could we expect the unprecedented events of 2020, which have forced us to scrutinise all manner of practice and process, to significantly alter property valuations in the UK? VIRTUAL VALUATIONS

Virtual valuations entail an individual – typically the owner – giving a real-time tour of the property to an agent or valuer via a video call. According to Zoopla, between April and May 2020 there was a 90% rise in the number of virtual property valuations completed by agents.

“Depending on the type of valuation, sales comparisons, income capitalisation, land value and building costs can all be assessed” This was, of course, borne out of necessity. Property transactions would have ground to a halt for much of the year, even outside of lockdown, if it was not for virtual valuations.

Zoopla also revealed that in the summer only 2% of property sellers said they would have been happy to meet an agent in person.

Virtual valuations can, in theory, replace on-site options to a large degree.

They still enable a professional to obtain necessary information regarding the size of the property, the number of rooms, its storage and general condition, and any outdoor space.

However, a large onus is placed on the

camera operator to guide the valuer thoroughly round the space. To be cynical, the vendor could more easily glide past elements of the property they do not want to draw attention to.

More technical shortcomings, such as lighting or distorted perspectives, are also somewhat problematic.

That said, property valuations are based largely on data: sales comparisons, market trends, square footage, and so forth. This is available to a surveyor at their desk, meaning that accurate valuations can still be calculated.

COVID-19 AND PROPERTY VALUES

The pandemic has hugely accelerated the remote working revolution, with the government still advising organisations to stay away from their offices where possible. This trend looks to be here to stay, with a survey of just under 1,000 firms by the Institute of Directors in October showing that 74% plan on maintaining home working in the future.

Property values will need to reflect this notable social shift. In the commercial real estate sector, for example, organisations are less likely to seek space for a desk for every employee. Instead, they might now prioritise meeting rooms and collaborative spaces for the windows when teams do assemble on-site.

In the residential market, much has already been written about how buyers and renters alike are seeking properties that have more space that can be used as an office.

Likewise, as people are generally confined much more to their own homes and local areas, there is greater demand for properties with gardens or near parks.

All of these social trends will affect property valuations.

Again, this demonstrates why it is so important that valuers are able to monitor and understand market trends in the current climate – the art and science of property valuations may not have changed, but there are certainly new elements to contend with that require even greater professional competence. B I

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FEATURE

YEAR IN REVIEW

2020: A YEAR IN REVIEW

Jessica Bird looks back at the events and trends of a year like no other

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FEATURE

YEAR IN REVIEW

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his year started on a strong footing. With the election results at the tail end of 2019 providing some semblance of political stability for the first time in a while, the spectre of an uncertain Brexit seemed to be lifting.

Vic Jannels, CEO of the Association of Short Term Lenders (ASTL), says: “In 2019, the wider mortgage market was relatively quiet, as indeed at times was the bridging sector; there was always a look over the shoulder. The market was probably quieter in 2019 in all sections than it should have been.

“Once [the election] happened and you had a majority government, all of a sudden the shackles were off, now we were moving forward, whether you liked the decision or not.”

Looking back almost a year later, the picture has changed dramatically. So, what are the events that brought us here?

QUARTER ONE The specialist market took off in January and February of 2020, buoyed by what Jannels sees as a general “feelgood factor” in the industry.

Marios Theophanous, credit manager at London Credit, agrees: “The current year kicked off to a strong start, and with a more stable government it was expected to be a better year. Activity in the property market had risen, and so did bridging loan applications and completions.

“Valuers’ opinions changed from the previous year, when they had to use distressed sales as comparables and were worried about the general market conditions and where the economy was heading.

“Lenders, mortgage brokers and property agents were optimistic that 2020 was going to be a big year.”

Lloyds Bank’s Commercial Banking Business Barometer found that economic optimism had reached an 18-month high in January 2020, and concerns surrounding Brexit dropped to the lowest point since November 2018.

Avamore Capital did 40% of its 2019 lending volumes in just the first three months of the year, while commentators across the specialist market discussed a positive outlook and growing confidence.

Amit Majithia, principal at Avamore Capital, says: “The worst was over, there was a feeling of optimism and a hunger for the market to actually transact.”

Few could have fully predicted the level of change on the horizon, but distant rumours and concerns become reality as COVID-19 hit the country – and the market – in unprecedented ways.

March saw the news turn to caution across both the mainstream and specialist markets. Lenders pulled products, paused higher loan-to-value (LTV) lending and tightened their criteria, and in some instances withdrew from the market altogether.

Theophanous says: “At the beginning of the second quarter and during the initial weeks of the lockdown,

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a considerable number of lenders paused new business and some withdrew from the market.

“The property industry was severely affected by the closure of estate agents, the cancellation of viewings, the inability of the surveyors to carry out inspections and provide valuations, and the amount of staff that were furloughed.”

Mortgage payment deferrals were introduced on 17 March, and towards the end of the month, the Ministry of Housing, Communities and Local Government (MHCLG) halted all ongoing housing possession claims; these were heralded as positive moves within the market, but were to have complicated ramifications down the line.

Jannels says: “For the person with a 25-year mortgage, [payment deferrals] were not an issue.

But in the short-term market this was potentially going to be a problem, because they [lenders] have funders they are responsible to, and if a mortgage has been written for, say, 12 months and all of a sudden the customer is saying they want another three, the potential problems can range quite widely from the lender having difficulties with its funder, to the customer eroding the equity value of the property.

There are a whole range of different issues in that short-term market.”

The government also launched the Coronavirus Business Interruption Loan Scheme (CBILS), which was to prove integral to the survival of many UK businesses – albeit with largely unexpected complications regarding borrowers’ credit profiles that will likely pose an ongoing problem.

Whereas the beginning of the year saw some commentators predict that small businesses (SMEs) would provide a boon for the economy, after the pandemic hit, Nucleus Commercial found that 2.67 million could be out of business within a month.

QUARTER TWO While some had their sights set on normality after a short period of disruption, the first national lockdown caused vast swathes of the market – from construction through to viewings and valuation – to pause.

Knight Frank predicted that the delivery of housing in 2020 would likely be lower than in the years following the last global financial crisis, with a projected decline of 35%. The Finance and Leasing Association (FLA) found that second charge new business dipped by 80% at the height of lockdown in May. During this period, many lenders furloughed staff, and faced wider logistical issues around not only reduced capacity, but also the sudden move to home working and the need to engage with clients without being able to see them in person.

Majithia says: “There was a fairly significant reduction in the number of lenders operating in the market. Some had issues stemming from their historic loan book, others had funding lines removed → DECEMBER 2020

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YEAR IN REVIEW potentially as a result of not performing under stress.

It has meant a bit of a realignment in terms of broker relationships; there’s more business focused in the hands of fewer lenders.”

Against this backdrop, Chancellor Rishi Sunak confirmed that Brexit negotiations would be proceeding, despite the likelihood that the country was heading into a recession.

However, not everything was negative. Indeed, with disruption across the mainstream and long-term lending markets, the importance of bridging started to emerge more than ever.

“The wider market is now far more aware of the benefits of using bridging,” says Jannels.

“Consumers who want to transact quickly will accept that they may have to pay a slightly higher rate, but it enables them to get the deal done.

“The competition is there, the speed is there, and the willingness to be involved in the market is there.

Commendably, lenders in the bridging sector have absolutely stepped up to the mark.”

The second quarter was also a time of fast-paced technological innovation, from increased use of programmes such as Zoom to a push to widen the remit of digital valuations and automated valuation models (AVMs), typically reserved for lower LTV deals, and the adoption of elements such as e-signatures.

Majithia says: “There was a big trend early on in lockdown for AVMs, I don’t feel that the automatic data is quite ready yet or sophisticated enough, but that’s something that is happening in the market. “[We have also] dispelled the myth a bit that everybody needs to be in the office all the time. All these options were previously available, but as an industry we had to adopt them to confront COVIDrelated issues. Everyone reacted calmly and sensibly, looking for workarounds and solutions.”

For example, Tipton & Coseley started accepting desktop valuations up to 70% LTV and The Mortgage Lender did so for its BTL products up to 75% LTV, United Trust Bank (UTB) launched digital security checks, Darlington Building Society offered 90% LTVs with AVMs, and Gateway Surveying Services launched a virtual valuation service.

“Bridging Lenders like London Credit are always adapting to the market conditions with the aim to provide the best possible solutions to their clients,” says Theophanous. “This unprecedented situation caused by the pandemic has forced the bridging industry to turn to technology solutions and innovative ways to do the work.”

As early as mid-April, some specialist lenders started edging up their LTVs and relaunching pulled products, and although far from the normal state of the market, the news was full of businesses continuing to trade despite the lockdown. To name a few from April alone: MFS arranged a £500,00 bridging loan; Aspen completed a £225,000 bridge in just 10 days

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using desktop valuations; Octane Capital delivered a £7.5m developer exit deal; and Puma Property Finance provided a £14m residential development loan.

Nevertheless, forbearance requests reached almost 1.2 million by May, at which point the FLA called on the government to consider the specific supports it could put in place for the non-bank lending market, citing the particularly sizeable hit being taken by asset, consumer and motor finance lenders.

On 13 May, the housing market reopened, albeit with strict restrictions in place. This brought with it a swathe of lenders relaunching specialist products in June, and a sense that the worst of the storm might have been weathered.

At this time, commentators projected surges in demand, both short and long-term. Brightstar, for example, reported a significant increase in new cases as lockdown restrictions started to ease, and Magnet Capital saw record business levels in May. However, for areas such as the commercial property sector, there was less of a bounce, as retail and leisure facilities were still set for long-term closures, and social distancing measures meant that even reopening was not enough to salvage business levels for many, leading to a fall in rental payments to commercial landlords. Other changes, such as the swift adoption of remote working, led to speculation about the stability of areas such as the prime urban office market.

Digital transformation Jacqui Morcombe area vice president, nCino

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igital transformation in financial services is not a new conversation. The events of 2020, however, have drastically accelerated the need for institutions across the globe to adapt their approach to making business decisions, adopt a more digital mindset, and overhaul their legacy technology systems in favour of more agile and flexible solutions and the cloud.

The past year, while turbulent and disruptive in many ways, has also created an opportunity for financial institutions to modernise outdated products, processes and technology systems while improving the customer experience. Interestingly, it wasn’t always large-scale digital

transformation projects that packed the most punch, but rather highly focused ‘micro-transformations’ that prioritised solving specific customer pain points while maximising backoffice efficiencies.

This bite-sized approach allowed institutions to control the cost of digital transformation while continuously iterating and embracing more manageable change as they found the most effective ways to engage with their customers and serve them with speed and convenience.

With many government loan schemes extending until the end of January, we expect to see the ‘microtransformation’ trend continue well into 2021.

As financial institutions realise the value in smaller, more digestible transformations, we predict the appetite to extend this mindset further across additional business areas will continue to increase.

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FEATURE

YEAR IN REVIEW Theophanous adds that the lifting of lockdown did not necessarily bring with it a return to normal.

He says: “Even when the lockdown easing began – and slowly the property market activity and lending volumes started to rise – because of the valuation uncertainty, lenders were cautious.

“Remote work and having furloughed staff [also] made some procedures more lengthy than usual.”

The ASTL found that bridging completions dropped by 56% year-on-year in Q2, and looking to the wider economy, UK GDP dropped by a record 20.4%, the biggest monthly fall since records began in 1955.

QUARTER THREE Q3 saw a mixed bag of events unfold, from uncertainty around the first wave of payment holidays coming to an end and the announcement of a second installment, to the introduction of the stamp duty holiday on purchases up to £500,000, the extension of the Help to Buy deadline, and the launch of a consultation looking to overhaul the UK’s outdated planning system.

Regarding the stamp duty holiday, Majithia says: “That has definitely stimulated the lower end of the market. Hopefully that gets extended, so we can continue to have transaction volumes stay at a healthy level for first-time buyers.”

On the subject of Help to Buy, he adds: “This was a major government policy that has been extended, with some change in criteria. For first-time buyers this remains a very important tool to allow them to get on the property ladder.”

Jannels adds: “[Planning changes] will undoubtedly continue to shape the market. Sadly, there are going to be a lot of pubs, restaurants and offices [not reopening], which will be rife for permitted development flats.

That’s quite a good thing for those that acquire and develop – and those that ultimately move in to – those properties. It will also potentially be a benefit to town centres.

“Development funding and short-term funding will be needed in order to convert these properties. That’s a really good sign.”

Increased demand post-lockdown led to positive forecasts, such as reallymoving’s projection that house prices in England and Wales would rise by 1.9% between June and September, while the ASTL’s sentiment survey found that bridging lenders were upbeat about long-term prospects for the economy.

Gross bridging loan volumes were found to have risen by 46% during Q3, according to the ASTL. However, other research from the association unearthed concern among 68% of bridging lenders with regard to overwhelmed court caseloads due to the repossession moratorium, while July saw second charge new business drop by 64% year-onyear, according to the FLA, and August saw a yearly drop of 52%. www.sfintroducer.com

The market continued to see some specialist lenders re-enter and regain full strength, while others cut jobs and cancelled pipelines. Some specialist areas continued to see a contraction, despite positive movements elsewhere; for example, Moneyfacts. co.uk reported that BTL product numbers fell by 78 over July alone, although this was an improvement compared to the lows seen in May, and MRI Software reported that commercial tenants were increasingly falling behind in their rent payments.

All in all, far from seeing the country begin to emerge from the crisis and regain its strength, this was a period of considerable change and uncertainty.

Commentators voiced concerns about the damage done by the omission of specialist lenders from COVID-19 support strategies, particularly by not having access to finance from the Bank of England.

This is particularly important considering the number of specialist lenders accredited under CBILS, and the volume of economic support therefore being provided by this section of the wider market.

During this time, the ASTL continued its push to work with HM Treasury on increasing the government’s understanding of the important role – and different needs – of the short-term finance market.

Jannels explains: “We approached the Treasury to encourage them to understand that the bridging and short-term lending sector was actually a different animal to the term mortgage market.

“We eventually had a Zoom conversation; it was very encouraging and enlightening, but it was interesting to note that they didn’t really understand the volume that short-term lending contributed to the wider mortgage marketplace.”

QUARTER FOUR As the final quarter started, thoughts turned towards a potential second wave and further national lockdown, with particular concerns about the effect on development projects, and the disruption to cashflow and supply chains.

Nucleus Commercial Finance reported in October that 48% of British businesses feared the impact of a second wave, considerably more than Brexit (24%).

Nevertheless, Loans Warehouse predicted considerable growth in second charge lending during Q4, Paragon reported that tenant demand had hit a four-year high, with landlords racing to benefit from the stamp duty cuts, and October saw the strongest annual house price growthy since January 2015.

Majithia says: “How does the market look now?

The short answer is not as bad as I thought it would in March. Earlier on in the year you had a huge range of products pulled by the high street banks, most of those have now been reinstated and that market remains liquid and competitive, and then you’ve got incentives that will help as well, like the stamp duty reforms, plus the extension of Help to Buy. → DECEMBER 2020

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YEAR IN REVIEW “From a current lending point of view, the level of transactions has increased enormously since the end of August; it’s a good reason to be cautiously optimistic.”

A review of the Right to Build legislation was announced in late October, with the aim of supporting self and custom building and increasing transparency around how councils meet the needs of communities.

Although earlier in the year the optimistic prediction was that government support schemes would be wrapped up by this point, Q4 saw the further extension of payment holidays, CBILS and the furlough scheme, while it was confirmed that possession orders would still not be enforced in all but the most serious cases.

Meanwhile, market voices grew increasingly loud in their calls for the stamp duty deadline to be extended in order to continue the boost for demand, and to ensure that those buyers facing delays in a backlogged market were not forced to miss out.

The second national lockdown came into force on 5 November. This time, however, the market was better prepared, and specialist lenders made a point of showcasing their plans to remain ‘open for business’.

Despite continued turbulence, positive news was to be heard in certain areas. Allica Bank reported that its commercial mortgage applications increased by 235% between June and November, leading the bank to increase its operational capacity; Arbuthnot Specialist Finance Limited had its best month todate in October, with loan enquiries totaling £108m; and Twenty7Tec reported a small increase in the volume of BTL mortgage searches. However, property transactions by commercial buyers were reported to be down 71% since the first lockdown was introduced, according to Search Acumen.

Looking towards the end of the year, commentators suggest that the majority of SMEs are still struggling and in need of financial support, and that demand for CBILS is only likely to rise as Bounce Back Loan funds dry up.

In addition, Majithia notes that there will be some permanent changes to the face of the market as a result of 2020: “There will be a good few names that people are familiar with that may not necessarily be around. There are going to be people who – if they followed a zero sum game in terms of rates, LTVs or broker fees – will suffer.

“It’s never good for the reputation of the market, or for borrowers and developers who may be on the wrong end of those types of events happening.”

Meanwhile, although Sunak’s spending review introduced some promising elements, such as a £7.1bn Home Building Fund, it failed to address the issue of the upcoming stamp duty deadline, adding to concerns that workloads will become more problematic during the last months of 2020 and the start of 2021, with a cliff-edge in terms of demand come Q2.

As we enter the final month of 2020 there is a lot that remains unclear, from stamp duty changes to the www.sfintroducer.com

Establishing a business in 2020

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telier Capital Partners’ (ACP) first official day in business was 4 January 2020. At that time, it had about £18m of loans drawn, and about £25m in commitments, having been funded during a pilot phase in late 2019 by its joint venture partner and majority shareholder M&G. Graham Emmett, co-founder of ACP, says: “The intention at that time was to grow the business over the first 12 months – both in terms of people and assets under management. The general investment thesis was, and remains, to create an institutional-grade platform.”

Plans for growth have not been interrupted, despite the disruption that occurred when COVID-19 hit.

From a headcount of six when it was formed, ACP now has 17 full-time staff members – including a team of six experienced credit underwriters and two highly experienced nonexecutive directors – most of whom were recruited during lockdown. The aim is to grow to 20 by January 2021, and up to 30 during the next year.

Over the course of a turbulent 2020, the business matured quickly out of its start-up phase by strengthening its in-house capacity, to “standing on its own two feet,” Emmett says.

Since inception, ACP has made 50 loans and deployed just under £100m of capital, and is on track to receive back £20m in redemptions by the end of the year. In addition, it has invested in a bespoke digital loans management

platform to assist in underwriting and the ongoing asset management of its loans.

In all, COVID-19 has not shaken the progress of ACP’s entry into the market.

Even when it came to the sudden need to plan for remote rather than officebased working, ACP was able to adapt quickly, for example implementing daily virtual meetings to help keep the business moving without a shared central space.

Emmett adds: “Actually what COVID did was speed up the implementation of our business plan. The intention was always to move to an average loan size of about £2m to £3m, and COVID sped that up.

“Some of our competitors stopped lending for a little while, so there was definitely a lack of liquidity in the debt market and the short-term market.

We were seeing a lot of opportunity that perhaps in our pilot phase we didn’t see.

“When we got into April, May and June we were seeing bigger loans.

We were able to be opportunistic and choose some of the best deals that we could see at the time. As a result, we are on budget for the year, and we’ve done what we hoped to do.”

Looking ahead to 2021, Emmett says that the business plans to invest in its people and culture, diversify its sources of funding and bring in new capital, while further establishing its typical deal profile.

news that a vaccine might be on the way. One thing is certain, however: the bridging market has come to the foreground as an adaptable source of solutions to increasingly complex problems.

Jannels concludes: “[Bridging] is now a salient part of the wider mortgage market. I often liken it to a jigsaw – if you didn’t have bridging, a lot of the other mortgage sectors would probably not be as buoyant as they are in a normal market.

“People still wanted to progress their transactions, and it’s fair to say bridging lenders really came to the fore in their ability to support and assist.” B I DECEMBER 2020 BRIDGING INTRODUCER

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Reflecting on 2020 Paul Howells CEO, Accumulate Capital

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ooking back on this year, it is fair to say that investor confidence in property development finance has remained unwavering. In what was already a transitional period for the UK’s economy due to Brexit preparations, the pent-up demand from this and the lifting of lockdown restrictions earlier this year has seen property development go from strength to strength in 2020.

The announcement of a national lockdown on 23 March set in motion a turbulent few months. This came in the form of an initial reduction to loan-tovalue (LTV) levels from institutional lenders on the high street, to align with the notes of caution with uncertainty abound. However, this was only a brief consequence, and we have since seen confidence increase.

Most ‘go-to’ lenders have returned to the LTV levels experienced prepandemic. In relation to private investment, the demand has actually increased in the last quarter, due in part to the volatility of the stock markets and a desire for fixed income opportunities.

It was odd, because from this point we saw two diverging responses. While some decided to reduce the risk and invest less, others decided to embrace the fluctuating market and capitalise on the risk.

We have certainly seen an increase in involvement with property development finance from investors as it grows ever more attractive to those seeking to increase their capital by expanding into the property market.

What was interesting was the shift in market dynamics; the buyers’ market was certainly a factor in the favourable pricing renegotiation for our Cheyne Walk project. There has also definitely

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been a phasing out of the buy-to-let (BTL) investment scheme in favour of the high return and relatively lowrisk prospect offered by development finance. A fact that has remained true regardless of the onset of the pandemic.

Another side-effect of the pandemic was the instantaneous shift to digital working. There was a need to rise to the infrastructural pressure of providing potential investors with the same level of involvement in our projects as a few weeks before.

In other ways, this shift merely catalysed a movement that had been gaining momentum for years, with many companies, ourselves included, already working on a digital platform.

If anything, lockdown enhanced the value of the systems we had already built to engage with consumers.

Rather fortuitously, construction was not delayed or affected by the first lockdown, and we were able to continue as scheduled. The main challenge during this period was our inability to visit the construction sites and see their progression first-hand.

It was not until the UK had passed the peak of the virus towards the end of May and into early June that market sentiment vastly improved. The lifting of lockdown on 4 July, with all nonessential businesses given the green light to reopen, saw a sudden boost to the housing market. This, coupled with

Development finance has many changes to come

DECEMBER 2020

the temporary holiday to stamp duty introduced on 8 July, released much pent-up demand for relocation.

For us, and I am sure others too, we saw a large increase in enquiries for residential properties, especially from overseas buyers, and conducted a number of sales on the back of this.

It also enabled us to return to site inspections, whereby our consumers and clients could visit our sites to view the reality of the development and the essence of the locations.

In a safe environment with rigid social distancing in place, we were able to bring this ‘personal engagement’ back into our suite of services. What has become abundantly clear is the importance of this in maintaining investor confidence in the development finance process.

The second national lockdown, brought in at the beginning of November, has followed similar patterns to the likeness of the first, with more virtual interaction and a huge increase in online meetings.

As market sentiment began to dip in confidence again, the news of the first two vaccines to enter the final stages of trials provided a much-needed morale boost. We have seen a large increase in confidence levels from our investors and since the recent announcement provided by Pfizer, a four-fold increase in investment in comparison to the previous month, in half the time.

The immediacy with which the UK government has prepared clinics to distribute the first doses of the vaccine to the most vulnerable, and the promise of a return to normalcy by Easter of 2021, has caused a surge in investment in property development finance.

As 2020 comes to an end, we look forward to the many positive changes to come as distribution of the vaccines begins to make society safe again.

The continued prosperity from investment in development finance – despite the economic challenges of this year – really does show its credibility as the wisest way to capitalise on the property market. B I www.sfintroducer.com

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FEATURE

YEAR IN REVIEW

Bridging loans rise in prominence in 2020 Paresh Raja CEO, Market Financial Solutions

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or all the challenges 2020 has presented, it has been a year of learning and improvement.

Although an undoubtedly difficult year, for some it has provided an opportunity to correct inefficiencies and adapt to new environments.

This is certainly true within the UK property sector – particularly for those involved in financing transactions. The first nationwide lockdown resulted in many mainstream lenders withdrawing products; with applications becoming harder to process while staff worked remotely, and with so much uncertainty around, mortgage providers understandably wanted to minimise their exposure to risk.

However, the alternate finance market was able to provide the loans that prospective buyers needed.

The intrinsic advantages of such firms – such as the speed at which loans can be issued and the flexibility of the products themselves – meant that they were well-positioned to continue providing finance throughout

Industry prominence increased this year

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both lockdown and the months that followed it.

Indeed, it is perhaps their flexibility that has been the greatest strength of bridging loan providers. Free of the red tape of the mortgage space, these lenders have the room to better tailor products and services to the needs of the individual client.

Two recent case studies from Market Financial Solutions (MFS), both slightly atypical, illustrate this point.

LANDLORD BRIDGING

Earlier this year, a British expat required a £1,750,000 loan, at 61% loan-to-value (LTV), in order to acquire multiple buy-to-let (BTL) properties. The previous lender had backed out at the last minute, and the transaction was at risk of falling through as a result. They needed funding – and fast – or else they would lose their deposit and fees.

MFS stepped in and provided the loan requested, with the client’s existing portfolio of BTL properties acting as collateral. The application was processed in under four hours.

An issue arose, though, when it was revealed that two of the shareholders of the limited company the client was acting through were under the minimum age required to receive a loan from MFS. At this stage, a traditional lender would likely have cancelled the loan, or at best taken many days to resolve the issue – losing precious time and potentially resulting in the transaction falling through.

MFS’ underwriting staff, however, were able to quickly provide a solution via working with the legal teams of both parties. Our agility and flexibility meant we were able to overcome the complexity of this case and allow our client to complete on their transaction without fears of lost deposits, being gazumped, or otherwise.

DECEMBER 2020

Another case MFS dealt with this year concerned a client attempting to convert a former gymnasium into a development of luxury flats.

The client requested £200,000 at 60% LTV to fund the property conversion, stipulating that they needed a quick, reliable lender with experience in deploying loans to limited companies.

One issue, however, was that the conversion required the client to acquire a residential property connected to the former gym.

Crucially, the planning permission required in order to acquire this additional property had not yet been received.

Again, many mainstream lenders would likely deem this enough to deny the applicant a loan.

MFS instead took an objective perspective on the client’s prospects and, after reviewing the relevant facts, approved the bridging loan application.

Given that the company had a strong track record in development and there was a residential property already in the mix, our underwriters were able to approve the loan and deploy the funding within days of the application being submitted.

BRIDGING FOR COMPLEX CASES

The flexibility shown above is one of the major reasons that bridging loans have established themselves as a popular alternative to mortgages in the UK, especially among BTL investors.

The number of loans being deployed during 2020 certainly supports this, with the number of bridging loans approved between Q2 and Q3 increasing by 46%, according to a recent Bridging Trends report.

With the UK’s stamp duty holiday due to continue until 31 March, the demand for bridging loans to finance transactions is likely to remain high over the coming months.

Buyers and their brokers will be keen on finding alternate lenders away from the high street that can provide the expertise and speed needed to quickly complete on transactions.

Alternate finance providers have clearly demonstrated that they can provide exactly that. B I www.sfintroducer.com

Cas num aut refe num

0345 241 3079 www.castletrust.co.uk

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Castle Trust is the trading name of both Castle Trust Capital plc (company number 07454474) and Castle Trust Capital Management Limited (company number 07504954) both registered in England and Wales with registered offices at 10 Norwich Street, London, EC4A 1BD. Castle Trust Capital plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, under reference number 541910. Castle Trust Capital Management Limited is authorised and regulated by the Financial Conduct Authority, under reference number 541893. Buy to Let is not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.

FEATURE

YEAR IN REVIEW

Property development finance in 2020 Jamie Johnson CEO, FJP Investment

T

his year has been a whirlwind for the development finance sector. As a key enabler of construction and infrastructure investment, lenders who arrange for this sophisticated form of alternative finance have had to adjust their services to accommodate the disruption caused by COVID-19. This has posed significant challenges for some, putting their skills and expertise to the ultimate test.

Positively, despite the obstacles faced by lenders in the last 12 months, the sector looks prime for recovery. The government is actively encouraging investment into residential and commercial property as part of a long-term strategy to upgrade the country’s existing infrastructure.

This demonstrates the fundamental importance of the market as a driver of economic growth and productivity.

To understand the current state of development finance, it is important to take a step back and assess its performance throughout the different stages of the pandemic. Doing so ensures that we can understand the comparative strengths of the sector and the reasons why it has been able to persevere throughout the pandemic.

MAINSTREAM LENDERS RETREAT

On 23 March, the UK began its first nationwide lockdown. At the time, it was not known how long the lockdown would last, nor what impact social distancing measures would have on businesses. The banks responded by withdrawing the majority of their loan products. Their decision to reduce their risk exposure also meant longer

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processing times for applications, and a higher chance of being refused.

This decision to retreat had significant ramifications for the sector at large, affecting everyone from retail investors through to construction firms. Suddenly, their ability to access funding to complete projects on time and not incur financial penalties was under threat. What’s more, the lockdown meant the majority of construction projects were put on hold.

Development finance firms were also affected by lockdown. The sector contracted, with few lenders willing to take on new cases, and many deciding to focus on their existing book. With exit dates and valuations up in the air, lenders had no choice but to halt new lending. This was significant, particularly as alternative lenders were responsible for £7.9bn in loan origination to property development firms in 2019.

PROPERTY MARKET KICKS BACK INTO GEAR

Thankfully, construction sites were not out of action for long. In May, the government announced the property market was ‘open for business’ by relaxing social distancing measures and encouraging agencies and construction sites to reopen.

This was followed the next month with Chancellor Rishi Sunak announcing a Stamp Duty Land Tax (SDLT) holiday for property transactions in England and Northern Ireland. Finally, Prime Minister Boris Johnson set out plans to accelerate £5bn on infrastructure projects.

The government was clearly keen to kick the property market back into gear, and while mainstream lenders were naturally hesitant, development finance firms were once again willing to consider new cases. However, with COVID-19 delaying construction projects and bringing into question

DECEMBER 2020

existing timelines, development finance firms needed to apply their expertise to properly assess the viability of each application they received.

According to CBRE, lenders began exercising extra caution. This was backed by a willingness to take on cases which took into account the new societal norms brought on by COVID-19.

Importantly, the initial disruption caused by pandemic did not affect demand for specialist finance.

Knight Frank experienced a 60% increase in development finance requests during the six months following the initial onset of the coronavirus. What’s more, it reported an increase in developers using brokers and intermediaries to find sources of capital beyond the high street.

The summer of 2020 demonstrated the ability of the real estate sector to effectively recover from the disruption caused by COVID-19. The market was starting to rebound, which was welcome news for developers, investors and lenders.

A MARKET IN RECOVERY

As expected, news of a second lockdown was met with concern.

With buyer demand sparking a rise in house price growth and transaction activity, there were fears another lockdown would result in the property sector coming to a complete standstill.

Luckily, this proved not to be the case.

Construction sites were allowed to stay open, reducing the disruption caused by the lockdown.

COVID-19 does not change the fact that there is a significant imbalance between property demand and supply.

Investment into commercial and residential real estate is needed to meet the future needs of the wider United Kingdom. With property development finance claiming a larger share of lending market, this alternative form of finance is growing in popularity.

The fact that property development finance has stood firm amidst market uncertainty shows just why it has become an established source of finance for construction companies. For this reason, we should look at 2020 as a year of notable progress for the sector. B I www.sfintroducer.com

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MARKET

ROUND-TABLE

LOOKING TO THE FUTURE Jake Carter covers the key points raised at Bridging Introducer’s recent round-table, which looked at the challenges facing bridging and development in the year ahead

A

s this year draws to a close, the market is reflecting on the unprecedented events of 2020, and looking ahead to 2021. The next year will bring with it fresh challenges, alongside the hope for recovery.

To discuss what might be in store, Bridging Introducer spoke to key industry figures from West One Loans, MT Finance, Collective Mortgage Network, Castle Trust, Alternative Bridging, Movin’ Legal, Precise, Yellow Stone, LendInvest, Market Financial Solutions, MESA Financial Consulting and Shawbrook.

THE YEAR SO FAR Looking back at 2020, Guy Murray, head of development finance at West One Loans, says that the year started positively for development finance, but once the world went into lockdown, concerns focusing on construction sites arose.

“There have been a lot of challenges. Luckily we have gotten through and now we are focusing on 2021” GUY MURRAY

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DECEMBER 2020

Murray says: “Initially, around 25% of the construction sites that we were lending on closed down for a period; however, fairly quickly they began to reopen, which was a big positive.

“Recently, there have been challenges with procurement, in terms of the amount of labour the construction sites can have at any one location, as well as accessing materials.”

He adds: “Overall, this year has been tough, there have been a lot of challenges thrown at us. Luckily we have gotten through it reasonably well and now we are focusing on looking ahead to 2021.”

Murray believes that many of the challenges will continue into next year, but with news of a potential vaccine becoming a reality, there is likely to be a bounce in the market.

Looking to the positives, Murray notes that, at the very least, a lot has been learned across the market.

Matt Watson, business development manager at West One, says: “On the bridging side, the market over the past two to three months has really started to pick up and gain momentum. It will be interesting to see if this continues to the end of the year, with restrictions in place over the country.”

At the start of restrictions, West One changed its risk appetite, taking into consideration the concerns centering around house prices and the government’s block on repossessions, but the firm continued to support existing and new customers .

www.sfintroducer.com

MARKET

ROUND-TABLE Watson says: “As things have improved and the global picture has become clearer, gradually the general market sentiment has picked up. We have seen an increase in applications, inquires, and completions, almost month-on-month since July.”

However, he believes that the bridging market is “not out the woods yet.”

Rory Cleary, senior business development manager at MT Finance, says: “2020 has been the most challenging year for the market since 2008. On the face of it, I think the market looks OK going into 2021; however, whether the market does see improvement into next year depends on how well lenders reflect on themselves this year.”

Tom Madden, sales director, structured property finance, at LendInvest, says: “We are cautiously optimistic, the market is still strong currently and we expect this to continue into 2021.

“Looking at the bridging market, we expect to see a strong start to 2021, and we believe that bridging will become increasingly important when it comes to picking up the pieces. For development finance, it has been a year of consolidation for most.

“Most of our clients are just trying to see their way through on the schemes they are on, and there has been a lot of hesitation to commit to new schemes.”

He adds: “I believe that 2021 offers the perspective of a fresh start for the development finance market.”

Kevin Duffin, commercial lending specialist at MESA Financial Consulting, says: “We saw a big drop off from foreign national buyers at the beginning of the year, due to the restrictions across the world.

“Then, once the travel restrictions were lifted globally, the UK went into a national lockdown, which continued the pause on the market.”

Duffin notes that, with a second national lockdown in place, the international market has pulled back again.

However, Marc Callaghan, national sales manager at Shawbrook, says that the picture is certainly more

“You will start to see more typical clients looking to specialist products to get the best deal” DANNY CARTER

www.sfintroducer.com

“Affordability, demand and momentum are fundamental to a healthy housing market. We have all three at the moment” ADRIAN MOLONEY positive than many might have predicted earlier in the year.

He says: “I think that we would all be happy to see where the market is now, if you were able to look forward in March or April earlier this year. Lenders being there and continuing to offer products has been essential for the marketplace.

“The pandemic has also forced us to move technology further forward, so in that respect, there has been a positive to take away from it.”

FORWARD THINKING While the influence on the world has been catastrophic, commentators note that coronavirus’ effects on bridging and development finance has been constructive in some places.

Scott Apps, business development director at Castle Trust, says: “The market is stronger now than we would have predicted it would be back in May. Apps notes that “disruption breeds efficiency,” which is a positive for the industry in the long run, adding: “Yes, there will be continued uncertainty next year; however, that is not always a bad thing, it is about how to adapt to it.”

Danny Carter, founder and MD of Collective Mortgage Network, says: “I think the difference between 2020 and 2008 is that during the financial crisis 12 years ago there was not any money. This time around, a lot of lenders have more capital in order to ease the financial burden.”

Looking to next year, Carter believes that there will be a shift in terms of client type.

He explains: “The high street banks that would typically lend at the cheapest rates on development options are now amending the terms of their appetite, so you will start to see more typical clients looking to specialist products to get the best deal.

“As a result, the newer or less experienced developers may drop out of the market as they are unable to compete with the risk.” →

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ROUND-TABLE James Bloom, divisional director of Alternative Bridging, says news of a vaccine brings with it the chances of “something similar to the post-war boom.”

Bloom notes that once restrictions are lifted and people are able to go about their normal lives and routines, they will be happier and more likely to spend.

Miranda Khadr, chief executive of Yellow Stone, says: “I think everything is going to depend on whether the government issues any further lockdowns across the country. Lockdowns are the biggest issue for the market as they have massive disruptions for the property chain.”

Adrian Moloney, group sales director at Precise, says: “I think there are some positives to take away from the year. If you look at affordability, demand and momentum, they are three fundamentals to a healthy housing market, and we have all three at the moment.”

Moloney notes that the momentum is there as people rush to get deals completed before the stamp duty deadline, and before Help to Buy changes at the end of March next year.

He continues: “From a developer’s point of view, stock may change from the end of March due to the conclusion of the stamp duty holiday. What you are likely to see is a shift away from first-time buyers and a move towards second steppers.”

“Whether the market does see improvement into next year depends on how well lenders reflect on themselves this year” RORY CLEARY

Andy Reid, head of sales at Market Financial Solutions (MFS), notes that the industry has already had to adapt, with lenders changing their offerings and products. For example, he has seen an increasing number of larger units being split into flats.

Reid continues: “I am more than cautiously optimistic for the market, the level of activity in the bridging space is high.”

GOVERNMENT INCENTIVES IN 2021 Due to elements such as the conclusion of the stamp duty holiday and furlough scheme, contributors note that activity is likely to spike during Q1.

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“The product is now more about finding out what the client needs and tailoring something that works for them” SCOTT APPS However, many believe this will then result in a ‘cliff edge’ once consumers realise they will no longer be able to purchase in time to qualify for the stamp duty holiday. There is also the issue of bottlenecks and stretched workloads in the busy interim.

Emma Hall, key relationships director at Movin’ Legal, says of the conveyancing side: “We are seeing a logjam in activity due to people trying to complete purchases before the stamp duty holiday concludes.

“Looking forward, I believe we will see a dip in activity over December; however, moving into January, February and March, my feet will not touch the ground.”

Hall believes clients will review their finances in the new year, and may turn to bridging in greater numbers in order to complete before 31 March.

She continues: “If you have not ordered your searches by now, you are pretty much scuppered. Some councils are taking 35 days to turn searches around, so you have to take all of that into consideration.

“Looking back on 2015, we had a stamp duty holiday at that point and people were utilising bridging in order to meet the deadline. So I can see bridging becoming much more prominent come early next year.”

Moloney concurs with Hall, saying: “I think we will see growth in the regulated and non-regulated markets, which will be driven by those attempting to get deals over the line.”

Looking at other potential hurdles to be faced in the new year, Khadr says: “I think we obviously have the potential of a no-deal Brexit; however, my key worry is changes to Capital Gains Tax. “I think it is off-putting to so many property investors if that is what that landscape now looks like. As a result, I think we will see a significant drop off in the number of property investments.”

Khadr also points to the increase in stamp duty for foreign buyers, which she believes has been missed by many market voices when discussing the numerous changes on the cards for next year.

www.sfintroducer.com

MARKET

ROUND-TABLE She continues: “I think a lot of the time foreign buyers have salvaged the housing market, so it will be interesting to see the impact of that increase next year.”

Moloney, however, believes that international investors will flourish, despite the changes, saying: “The lack of returns in some areas of the market still means that the UK market is fundamentally a good bet.”

From the perspective of development finance, Murray says: “Over the course of Q1 it will be busy, I believe developers are more motivated than ever.”

Developers are being encouraged to be active due to the stamp duty holiday, with its conclusion spurring them on and stimulating the market more so than it would if the deadline was set at the end of next year.

He continues: “I think the specialist market will play a big part in getting deals over the line in time for the stamp duty holiday’s conclusion.”

Cleary agrees: “The demand for bridging will be there over the course of the start of 2021.”

Watson believes that, as a result of the furlough scheme’s conclusion, the market will see an increase in rental property.

He says: “I believe that people will delay purchases as they are unclear about their own finances, which in turn will result in an uptick in demand for rental properties.”

Watson adds: “I also expect to see a large number of conversions, which will see the [houses in multiple occupation (HMO)] market grow, as people look to accommodate those intending to rent.”

Apps concurs, and adds that it is the type of stock that will change: “Whether this is HMOs, shared accommodation or simple rental properties, I believe this portion of the market will grow next year.

“Geographically, we have already seen a lot of data, which shows that people are moving away from cities in order to find more ‘bang for their buck’.

“Developers will have to react to this shift in the market, towards larger properties outside of cities with green space available.”

“We expect a strong start to 2021, and that bridging will become increasingly important when picking up the pieces” TOM MADDEN

www.sfintroducer.com

“Communicate with each other, you are better able to understand where the problems lie in the market” ANDY REID NO DEAL With the Brexit deadline looming, many thoughts are turning away from COVID-19, and towards how a potential ‘no-deal’ scenario might affect the market.

Duffin believes that, if it impacts currency, a no-deal will push foreign investors to purchase property in the UK quickly. However, he adds that this is dependent on there not being an extension to the stamp duty holiday.

He says: “A no-deal Brexit may not necessarily be a bad thing, if there is stock that domestic buyers do not want.”

Madden says: “I think the biggest concern is the wider secondary funding issue, which could arise from a no-deal scenario.”

In addition, he points to the uncertainty a no-deal Brexit would create, and the possibility of a period of consolidation, where developers put things on hold in order to wait and see what happens.

Murray says: “From a development finance perspective, and the supply of materials in the UK, whether its developers buying kitchens or tiles from within the EU, a no-deal Brexit will create concerns on how to get those materials into the UK. “Therefore, it is important for developers, more than anyone else, to make sure that they have stress-tested their supply chain going into next year with less reliance on Europe, and more reliance on products coming in from the UK.” EXIT ROUTES One of the key concerns to have arisen out of the events of this year, and one that is likely to continue, is the issue of exit routes. If these are becoming more uncertain and taking longer, should the specialist market change its processes to account for the issue?

Hall says: “Individuals are struggling to access current deals in this climate as they may have lost their job, been furloughed or they were meant to exit before the pandemic impacted the UK. →

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ROUND-TABLE

“A better broker is already discussing exit routes before the loan has been granted” JAMES BLOOM

She adds: “I can see this trend continuing into next year as well, due to the stamp duty holiday and the furlough scheme’s conclusion.

“This is not something that is just going to arise as a problem in March, it is currently a problem and will continue as a result of the changes coming in March.

“This is, however, a positive for the bridging market as clients will require more specialist help next year than they have this year, therefore there will be more business.”

Murray says: “I think it is important, when things are taking longer, for lenders to be able to offer an extension to their current facilities, or be able to switch in between financing structures.

“It is valuable for lenders to build out multiple product suites that they can offer customers – that is if they do take longer to get out of current lender facilities.

“In terms of the underwriting, you have got to add an extra contingency in regard to timeframes. The benefit for borrowers will be that they need to put more money towards purchases, which is better that they do that now, rather than having a shorter term deal.”

Callaghan emphasises the importance of communication in preventing issues arising.

He says: “We at Shawbrook ask borrowers to be open with their lender as well as their broker, which can help resolve these potential issues early on.”

Apps adds that Castle Trust consults its clients on the topic of exit loans, in order to assess whether this option is required.

He says: “It is important for us to understand what the client wants. The product cannot anymore be ‘here it is, take it or leave it’, it is now more about finding out what the client needs and tailoring something that works for them.”

Reid agrees that communication in regard to exit routes is essential, especially so going into 2021.

He says: “The communication between the client and the broker is particularly important for the lender, in order for them to be able to fully understand what the client wants for the exit route.”

Reid also points towards lenders working together, saying: “If lenders communicate with each other, you are better able to understand where the problems lie in the market.

Bloom outlines the importance of working on the exit route before the loan has been granted, in order to ensure a swift exit once the term concludes.

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DECEMBER 2020

He says: “A better broker is already discussing the exit routes before the loan has been granted.”

Bloom also warns that bridging is not the best course for every client: “We are now seeing more bridging refinance; however, a lot of those who have taken out a bridging loan should not have taken one out in the first place, so that is a concern to see.”

Moloney adds: “I think it should be within the duty of care to have experienced staff on the team working on this kind of product. You can look at a case as a whole, but there is no point putting someone into a six month deal if you know that it will take 12 to 18 months for the deal to mature and exit.”

Moloney notes that exit routes may well take longer going into 2021, due to major changes taking place, particularly within the first half of the year.

He says: “From a lender’s perspective, we have to look at the term and whether it is realistic. Nowadays, the average term is no longer six months, it is 12 to 18 months.”

Madden also questions what will happen with the exit of Coronavirus Business Interruption Loans Scheme (CBILS) loans next year.

He says: “I think this is something to keep our eye on, as CBILS loans will need to be exited over the latter part of 2021.”

DOWNWARD PRESSURE ON RATES Development and bridging rates have moved downwards over the course of 2020; nevertheless, according to Cleary, there is little pressure on them to continue to decline.

He says: “I think there is a lot of competition among lenders to win deals right now, which has affected rates, although I do not believe there will be much liquidity from new lenders coming onto the market next year.

“I believe what you will find is the lenders who are good at what they do will continue to operate.”

When questioned on whether the cheapest lenders provide the same value and service levels, Cleary explained that, “you get what you pay for,” and the dissimilarity between higher and lower rates often correlates with speed and efficiency.

Watson concurs that rates are unlikely to reduce further than they have done already, saying: “If you look at how rates have dropped over the last 12 to 24 months, they have now reached historic lows.”

“We would all be happy to see where the market is now, if you were able to look forward in March or April earlier this year” MARC CALLAGHAN

www.sfintroducer.com

MARKET

ROUND-TABLE He also goes on to detail that the lowest rate does not always correlate to the best deal: “The lenders that typically offer the lowest possible rate are more ‘vanilla’ than lenders which require higher rates.”

Bloom adds: “The race to the bottom, in terms of rates, is now just about over, I think it is now far more about certainty of funds.”

With some lenders pulling out of the bridging market due to the current uncertainties facing the economy and the UK as a whole, this causes individuals to rush through deals or see them collapse completely.

Bloom says: “Certainty of delivery, particularly on the development finance side where relationships with foreign investors are essential, is important to bear in mind.”

Furthermore, Bloom touches on Cleary’s point that speed and efficiency come at a price. In order to get a deal done quickly, you often have to pay a premium and go to a more expensive lender.

“We have gotten through credit crunches before, so I believe we will get through this and make something positive out of it” EMMA HALL

THE YEAR TO COME For many, it is clear that the uncertainty and instability of 2020 will be felt for quite some time.

Cleary says: “I expect Q1, Q2 and Q3 to not be plain sailing for the market. For the bridging industry, what we base our living on is dealing with situations when they are not easy, so therefore there is a big opportunity for brokers and lenders.

“Looking to Q4 2021, we can expect to see some green shoots appearing, but for the majority of next year I do not expect it to be easy, due to the uncertainty across the industry and the country at the moment.”

Hall agrees that the beginning of the year will be turbulent, causing a push towards the specialist market.

She says: “I believe we will be dealing with more brokers in the specialist area and the bridging area.

As well as this, we are yet to learn the ramifications of what happens once the furlough scheme ends.

“This will shape a lot of the latter half of next year and 2022 for the worse.

“We have, however, gotten through credit crunches before, so I believe we will be able to get through this and actually make something positive out of it.”

Apps says that uncertainty and the end of the stamp duty holiday will likely lead to a pause in buying, particularly if there is still instability in the jobs market, which could then lead to a decline in residential www.sfintroducer.com

“As things have improved and the global picture has become clearer, gradually market sentiment has picked up” MATT WATSON purchases and an increase in the rental market.

So, while residential properties might falter, HMOs, holiday lets and the rental market as a whole is likely to see a boost. Moloney, however, feels that regardless of the challenges, people will still look to purchase next year.

Looking to the positives, Carter says: “The market over the last two years has been incredibly stop-start.

However, lenders are still willing to lend within this market amid all the uncertainty we currently face.”

Murray notes that prices have not dropped, which gives the market confidence going into next year.

However, Khadr says: “I think that, while the market has shown reliance, there are still areas which will struggle going into 2021.”

Regarding property investments, Khadr does not see this area increasing much over the proceeding months.

However, she believes that there will be an increase in PD development next year. She also notes that it will be interesting to see what happens once CBILS loans need to be repaid.

Watson concludes: “The first quarter of next year will be buoyant because everyone in general will be looking to get deals over the line before the stamp duty holiday ends.

“However, the rest of the year will no doubt have bumps and challenges, with the furlough scheme, CBILS loans and Brexit coming to the fore.

“Despite this, the opportunities on the bridging side are massive, and I expect there to be more options for the bridging market in regard to land banking from next year.

If we as an industry can improve communication, reliability, as well as stop chopping and changing products and criteria, then this will give investors and borrowers more reassurance, so they will be able to look at projects with more certainty.” B I

“A no-deal Brexit may not necessarily be a bad thing, if there is stock that domestic buyers do not want” KEVIN DUFFIN

DECEMBER 2020

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INTERVIEW

A sharper image Jessica Bird sits down with Danny Waters, CEO, and Steve Hogg, COO of Enra, to discuss the new face of West One Loans, and why it is important to stay nimble in times of upheaval Where does West One Loans fit within

What sets West One apart from other lenders?

the wider structure of Enra?

DW: We have a number of businesses within our portfolio – two brokerages and the lending business, which is really the core of the group now.

Our heritage was in bridging; we were probably the largest introducer of short-term finance in the UK, so it was sensible to integrate into lending in the product that we knew best, and where we had most flow and distribution. Over the past 10 years we’ve cemented our position as one of the UK’s leading bridging finance lenders.

More recently, the thesis has been to diversify our product range. I wanted to have a good balance between both short-term income and longer dated mortgage assets, and that led to the launch of our second charge and our buy-to-let (BTL) businesses.

The short-term business is also complemented by development finance, launched a couple of years ago.

The key thing is that we try to capture the value chain, and we want to make sure that we’re a one-stop shop. If we can offer a suite of products rather than being a mono-product lender, that adds tremendous value. We can build up a view and an opinion on the borrower, and we can follow them from the acquisition of a piece of land, to constructing, to potentially taking a development exit bridge or onto a longer-term BTL.

SH: We’re trying to find the best balance between being a large, very well-funded, stable non-bank lender, while preserving the nimbleness, speed and entrepreneurship of a smaller lender. So, our heritage is bridging, and that’s about rapid underwriting of very complex credit, often for quite big-ticket sizes.

We are expert credit decision makers.

What we’re trying to do is take that nimbleness and expertise in credit underwriting and parlay that into a much bigger balance sheet.

Paired with that, we’ve been running multiple products across multiple funding lines for a number of years, very profitably. That makes our business model really quite different to others, which are often focused on one product or have very narrow funding,

West One is going through a brand refresh at the moment. What is the motivation behind this?

SH: We have been distributing products quietly through a network of specialist introducers and deep relationships that go back a long way. It’s time to stop hiding our light under a bushel – we want to go wider we want to go national.

We’re not changing the name, because there’s history and legacy in the market we don’t want to lose, but we’re giving it a cleaner face and a new logo. Then we’re tightening up our messages around multi-product distribution and the entire borrower lifecycle.

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Danny Waters

www.sfintroducer.com

COVER

INTERVIEW so well, we can focus more on broking and vice versa.

There’s natural flexibility in our model, which makes us very, very nimble. We can roll with the punches.

or are very thinly capitalised with management that has a marginal interest in the business at best.

Comparatively, West One’s management are substantial shareholders in the business, so we own the credit that we write across multiple product lines.

We’re also backed by a very diverse, stable funding base, so we’re able to deliver a good mix of reliable funding, expert credit expertise and speed of execution.

What is the importance of diverse lending streams when it comes to serving clients?

DW: First it’s about the customer journey. Offering products that support our customers across the lifecycle of their property investments gives us the best chance to retain them.

It’s far easier – and cheaper – for customers to stay with us and shift from a bridging loan to development finance and onto a development exit than it is to arrange new finance with different lenders, with all the paperwork and fees that entails.

The other thing is that it makes us resilient, so we can support our key clients through good times and bad. If a market overheats then rather than chasing decreasing risk-adjusted returns we redeploy our capital elsewhere. Then, if a market correction happens, we can pivot and go back.

Reliable access to credit – even through turbulent times – is really important to our customers. Our resilience is best illustrated this year. 2019 was our best year ever, and we’re going to have similar results in 2020 despite everything that’s happened with COVID-19.

That’s because we have the optionality and generate revenue from a variety of different businesses.

DW: The problem with some businesses as they grow up is that as they make the journey from being small, nimble, entrepreneurial, to institutionalised, they start to forget about the thing that made them successful.

They go from being pretty dynamic, swift businesses, to ones that have service delays and a proposition that is probably not as strong as it was.

That’s one of the things we’re really conscious of as a business, making sure that we still fight young, despite the fact that we’re a well-established larger lending business in this space. That is going to be really important not just now, but also in the future.

SH: Specialist lenders in general are often single product focused, which puts them into a bit of a box. If that product isn’t going so well, they’re constrained. Decisionmaking becomes quite one-dimensional, because if they’re not producing volume in the one product that gives them their reason to exist, that starts to create a cascade of other decisions which become more difficult.

We’ve got multiple funding sources and different products, and we’ve got in-house distribution. If one product isn’t going so well, then we can turn our attention to a different product. If lending isn’t going

Do you think more lenders will start to see the value of this model?

DW: Over the last two or three years we’ve seen a lot of bridging lenders need to diversify their proposition in order to grow. Bridging finance is a great product, and it’s highly competitive from a lender’s perspective at this moment in time, but the problem is that you need to run really hard on your origination in order to grow, because your redemptions have an average maturity of seven to nine months, so you get paid back your money really quickly.

I think most of the larger bridging lenders in the UK have come to the conclusion that in order to achieve their business ambitions, they need to have a more diverse product range, and it serves the customer’s needs, which is absolutely critical for retention.

Steve Hogg

Has West One had to make any major changes to cope with the upheaval of 2020?

SH: We haven’t really broken stride through COVID-19 at all. We flipped across to home working, flipped back again into the office, we’re 100% paperless and our systems are in the cloud, so to some extent we can work from anywhere.

During the first lockdown it got very quiet for a period; there were no valuations, and brokers furloughed →

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COVER

INTERVIEW a lot of staff as well. We did make use of the furlough scheme as our volumes were depressed because there weren’t the casefiles to write.

Through a mix of natural attrition and a very, very small amount of redundancy, the net headcount change through the period is about 20. Obviously it’s a very sad thing to have to do, but relative to some of our competitors, and to the industry as a whole, that’s a very small change.

We don’t trade our people in easily. You combine that longevity and experience and resilient headcount with the tech we’re using, the fact that we can flip to working from home easily and our processes are pretty much runnable from anywhere – and we haven’t seen business interruption much at all.

DW: I firmly believe that when there’s dislocation in the market, lenders can get better risk adjusted returns, and therefore maintaining our presence throughout the entire lockdown period was important, and we definitely saw that within the first two or three months of lockdown. We saw a rise in business volumes and saw margins actually creep up for the first time in a long time, particularly in bridging. Then we got a bit concerned that we might be one of the very few big players in town, and therefore we wanted to make sure that we were being very prudent.

One thing that we wanted to safeguard against was a potential housing correction. We cooled down loanto-values (LTVs) across all our propositions. We also tried to do a sensible review of the employment types that would be most resilient over the next six months.

Otherwise, it was just a case of good old-fashioned common sense underwriting – if the applications and deals made sense we wanted to support customers and our brokers.

Are there any lessons from this year that will stay with the business after the pandemic is over?

SH: I think a primary focus for our investment this year and next is into technology. There’s definitely a happy medium where we want to find the right technology to make customers’ journeys easier and to make brokers’ journeys much easier, saving on busy work for the sake of it. We hold very dear our manual credit underwriting and credit expertise, so we’re not looking to go to auto-decision making any time soon. The secret sauce in our business is very much our ability to differentiate credit – so it’s technology enabling that rather than replacing that.

quarter of next year. That’s acting as a natural stimulus to our BTL range, which is why we wanted to make sure we were in the market with some aggressively priced products to really capture the activity.

In the second charge market, the number of players has actually contracted, and volumes were quite decimated. The second charge market was trading at maybe 25% or 30% of its pre-COVID levels in June or July – that market has bounced back pretty quick. I’d say we’re now at 75% to 80% of pre-COVID volumes, and with the momentum to head back towards the 100% probably in Q1 of next year.

The bridging market is quite unpredictable at the moment. Heading into lockdown lots of lenders withdrew, who maybe had funding issues or just were spooked by the credit environment, and we were receiving a lot of cases that were midway through being processed. Now the market is more subdued.

The fact that there’s lots of forbearance, forgiveness and generally just fewer acquisitions has meant that bridging is probably down 30% across the board.

The thing that surprised us most about bridging is the quantum of redemptions that we’ve had. So our central case when we were starting to put in place our strategy to deal with the consequences of the pandemic was that redemptions would almost freeze over and we wouldn’t see the churn happen in our loan book that would normally be experienced.

That was absolutely not the case. We’ve had a tsunami of redemptions over the last nine months or so, pretty much similar to – if not even more than – what we would have naturally seen in a pre-COVID environment. I think the bridging market is quite dynamic and will be very busy in 2021.

If you look at the number of casualties within the sector, it’s very few really. There’s been a few lenders which have taken the proactive decision to pause for breath and see how the situation plays out before they re-enter the market, but most are now back, and even if they’re not back in they are dipping their toe.

Some lenders just aren’t as well capitalised as they need to be, and if it wasn’t for the capital markets opening in around June, the number of failures in the specialist market would have been significantly higher – maybe it draws a question mark over some of the financing solutions. But that’s a particular feature in the non-bank space. The specialist lenders that have the benefit of a banking license have received lots of help from the Bank of England, and the UK government, which has really supported their business.

What do you predict will be the key trends in 2021?

Is the specialist market is returning to normal?

DW: We’re cautiously optimistic at the moment.

There’s the stamp duty incentive, so if any property investor or landlord is thinking about acquiring property they’re probably going to do it before the first

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DW: I think the specialist market as a whole is going to grow, and the pandemic will be supportive of that growth. As specialist lenders grow, they’re better at identifying opportunities, they’re typically more nimble at addressing markets. I can only really speak for us, www.sfintroducer.com

COVER

INTERVIEW but I suspect that 2021 will be a very good year for our business across all the products that we’re involved in.

SH: Given the nature of what’s happened, credit is harder to assess than it used to be. People have seen an interruption in income, furlough, and dependence on government schemes. Having worked in a bank for six years, trying to change a bank’s underwriting processes to make sense of all that and come up with a good answer and be able to get through a credit committee, that’s going to take a little while for people to get their heads around it because it’s changing every day.

From our perspective, we are very entrepreneurial underwriters of credit risk, so adapting our approach to meet the realities of different customers and different situations in the new world is very simple for us.

The other thing to look at also is scale of bad debt going into next year. Because we’ve been prudent and stayed close to it, our bad debt count is extremely low.

Some other lenders in the market have huge populations still on payment holidays, huge populations that they’re worried about going into bad debt. There’s definitely a range of responses there, but broadly specialist businesses generally ought to be better placed than big banks to react to the postCOVID world.

The BTL and development finance arms of the business were launched relatively recently; what shifts have you seen in those markets since?

DW: The BTL market is more competitive than it was when we entered it. We entered towards the back end of 2018, and as of Q1 of this year we were going gangbusters and the product really had momentum.

That significantly reduced as we entered lockdown, and there were very few new business applications.

What we’ve seen since October is that the market has rebounded pretty quickly, and we’re starting to get back to pre-COVID levels. So I think the markets are probably more competitive than at any point before, particularly given that a lot of non-bank lenders have managed to exit their loan books into the capital markets over the last four or five months, so they’ve recycled liquidity and that will mean they’re concentrating on new business origination again.

In development finance, the size of the opportunities surprises me. We can be deeper and more meaningful in that market than we anticipated, and the real pleasant surprise is just how many of our borrowers were being referred from other areas of the group.

We have more visibility of our borrowers if we’ve worked with them before, so we can be even more accurate and confident with our credit decisions. We can also make a really bespoke product, because we have more dialogue and conversations with them, we’re serving them on multiple products, so we know www.sfintroducer.com

what their actual needs are. Therefore, we can add value to them by designing something specific, and not just off a matrix.

So, development finance has been a very successful entry. We’re already a meaningful player and the complementary aspect to the rest of the group has been both surprising and welcomed.

SH: On the BTL side there’s obviously a macro trend away from the small individual investor, towards a much more industrial footing, driven by tax changes and a transition more to corporate ownership.

Also, in a very flat yield environment where people with wealth are looking for yields, there is more appetite for risk within BTL assets, so there are more complex situations – houses of multiple occupation (HMOs), refurbs – situations where BTL investors are looking for something a little bit more than just simple tenants and simple rental streams.

There is more to do to underwrite the credit in that space, because people are chasing yield though more difficult structures and more difficult kinds of deals.

That’s hugely supportive of nimble intelligent credit pricing in the specialist market.

What is in store for West One in 2021?

DW: The key strategy is to grow in the markets that we already operate in. It’s about executing against the strategy that we’ve already laid out, and really trying to make the investment in tech. We’ve got some exciting releases within bridging finance, which will see us really transform the experience of engaging with us, and BTL is also coming on stream. So, they’re areas that we are focusing on internally.

SH: We’ve got some quite ambitious growth plans in BTL next year. Bumping that back up to a healthy run rate and growing that business is a priority, and opening that up to nationwide network distribution will be a big focus for us in the early part of next year.

Investing in the technology to support that, rolling those journeys out using more of a tech-enabled approach to save people time – that’s the primary focus as well.

What message would you like to get across to intermediaries about working with West One? SH: West One is here, and we have an answer for most questions in the specialist lending space. A big part of the brand refresh is about getting front of mind and getting the West One brand out there.

The message to brokers is this: if it’s BTL or bridging or development, or something challenging that connects all three, then West One is a well-funded, stable lending partner than can move quickly, underwrite intelligently and deliver a great result for your client. B I DECEMBER 2020

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ADVERTISEMENT FEATURE

IN OUR OPINION

INTRODUCING

Four West One Loans business unit heads discuss business, th Andrew Ferguson

Guy Murray

managing director, buy-to-let

head of development finance

Thinking about your business unit, where do you think the big opportunities are going to be in 2021?

Thinking about your business unit, where do you think the big opportunities are going to be in 2021?

Despite some of the uncertainties in the wider economic outlook, we are expecting to see landlords looking to maximise their portfolios and follow strategies that support growing income, adding value or saving money.

Specialist lenders like us can support with all these aspects through diverse product ranges, flexible lending criteria and skilled underwriting. Having seen how we have all coped with the second lockdown, I am hopeful 2021 is a good year to be a specialist lender.

The need for development finance from the specialist lending sector is growing, and we intend to capitalise on this. We wrote our first development loan two and a half years ago and have been growing this part of the business ever since. We have now proven the concept, grown our expertise and developed a great team, so we’re focused on growing our market share in 2021 and beyond.

What’s the best kept secret about what you do at West One? In a sense it is the strength of the buy-to-let (BTL) proposition.

West One has historically been well-known and respected as a bridging lender, and our aim is to try to replicate that for the BTL division in 2021. I am confident we can do that.

Development finance grew organically out of the wider West One team. At the start we rolled up our sleeves and learnt as much as we could about the market ourselves, we then hired experience to fill any gaps. We now have a team who can work across all areas, from sales and underwriting to servicing the loans, which keeps things really interesting and provides a broad array of skills.

What is one positive you will take out of 2020?

What is one positive you will take out of 2020?

There is a sense of everybody being in this together. I have had several chats with industry colleagues where individual brands have been put aside and a common sense of purpose to grow the specialist lending market is evident.

I think during the toughest times you get the best lessons and learn the most. We have been able to find ways to deal with the challenges thrown at us in 2020, and will use these lessons to enhance our business moving forward.

What are you looking to achieve personally and professionally in 2021?

What are you looking to achieve personally and professionally in 2021?

I think 2021 is definitely the year to get fit personally, and to stay healthy generally. Professionally, my aim is to continue on our journey to build a scalable specialist BTL lender that is well known to a large proportion of the mortgage intermediary population.

I want to take what we’ve started further and ensure that development finance forms a bigger part of the overall West One business. I want to constantly improve, and to grow the people around me, both in number and skills. Personally, I want to run a marathon or two. Even if we are still in lockdown, my friends and I have agreed that we will create our own course to achieve this.

Which two households or people, alive or historical, would you choose to bubble with this Christmas, and why?

I like the idea of Christmas lunch with actor and comedian Robin Williams and actor, comedian and President Donald Trump. Both would be hilarious and good company for entertainment value.

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What the best kept secret about what you do at West One?

Which two households or people, alive or historical, would you choose to bubble with this Christmas, and why?

My family, who are all in New Zealand, as I haven’t been able to spend Christmas with them for five years. www.sfintroducer.com

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IN OUR OPINION

OURSELVES

ss, their personal goals and predictions for the year ahead

Marie Grundy managing director, second charges

Michael Grant head of sales, bridging and development finance:

Thinking about your business unit, where do you think the big opportunities are going to be in 2021?

Thinking about your business unit, where do you think the big opportunities are going to be in 2021?

Although the housing market has shown resilience, it is still more difficult to obtain finance now than it was pre-pandemic, so second charges will continue to assist borrowers with more complex borrowing needs. Product transfer numbers have risen dramatically but rarely include capital raising and are often completed on an execution-only basis, so second charges are a great tool for advisers to reconnect with their clients. Finally, seconds can work closely with first charges, used to raise capital to help family members get on the housing ladder or even to support a buy-to-let purchase.

Bridging and short-term lending has really been able to take advantage of the gaps left behind by high street lenders who haven’t been able to move quickly enough on the kind of deals our brokers and clients are looking for.

A lot of landlords and property professionals are turning to bridging to get those deals over the line. That’s going to continue, especially when you look at the high street and what’s happened in the hospitality sectors.

What’s the best kept secret about what you do at West One?

What the best kept secret about what you do at West One? In my opinion we offer the most comprehensive range of second charge mortgages in the market including prime, near prime residential, and BTL second charge products, and we do all these in a meaningful way, with core products that are well supported.

We constantly innovate and continually refresh our range, which means consumers are benefitting from a more competitive market.

What is one positive you will take out of 2020?

Similar to the financial crisis, people have pulled together more and collaborated more freely. Ego has taken a backseat, while businesses and customers have come to the fore as everyone has been reminded of the really important things in life.

What are you looking to achieve personally and professionally in 2021?

I want to continue to be a driving force in the second charge market, while personally I’m looking forward to getting life back to normal and enjoying the basic things, like seeing friends and family.

Which two households or people, alive or historical, would you choose to bubble with this Christmas, and why?

Tom Petty, my musical hero, and Dave Grohl. It would be great to have them jamming in my living room over Christmas. www.sfintroducer.com

It’s not so much a secret, but one of the things we keep having to confirm is that we are still lending, and haven’t stopped. We had a lot of calls from brokers and clients, who weren’t sure if we were still lending, but the message needs to be clear: yes we are!

What is one positive you will take out of 2020?

Thinking about my team, we’ve really managed to come together this year in a way we wouldn’t have expected. Because at the start people had to work from home, we all made a conscious decision to stay in touch with regular video calls. That has really brought us together.

What are you looking to achieve personally and professionally in 2021?

On a personal level we’ve got a baby girl to look after, which will obviously keep me busy outside of work for the foreseeable. But professionally it’s my goal to grow the loan book further and add real value to the development of the wider business.

Which two households or people, alive or historical, would you choose to bubble with this Christmas, and why?

As an Arsenal fan I’d like to have Mikel Arteta round and talk to him about where he’s going wrong, because us fans always think we know best.

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REVIEW

ASTL XXXXXXXXX

Finding strength in adversity Vic Jannels CEO, ASTL

I

had originally written this article prior to the very sad news of the passing of Benson Hersch, who was my predecessor as CEO of the ASTL, a good friend and colleague. I titled the article ‘Finding strength in adversity’, and if anything, that title holds more truth today than it did at the time of first writing.

On behalf of the board, I can say that Benson is the reason why the ASTL is where it is today. He took the reins of the membership and transformed it into an association that was more representative of the industry, with a clear purpose to improve standards and encourage sustainable growth of the sector. Even after his retirement at the end of last year, he maintained a close interest in the sector and has been of amazing support to me during my tenure. To say that he will be sorely missed is an understatement. He was an incredibly warm and insightful man, and he has played a significant role in the careers of many people within the industry. Benson had been poorly for some time and our thoughts and prayers go out to his wife, Phileshia, and children.

It is important that we take moment to mourn the loss of Benson, but we should also celebrate the life of a man who was such a positive influence on the lending industry. If this year has taught us anything, it is that we can find strength in adversity.

Benson handed the mantle of CEO to me at the beginning of the year. I have always been up for a new adventure, so I was delighted to accept the invitation and help to build on the fantastic work he had achieved with the association.

I was pretty certain it would prove daunting, but having been a broker, packager, distributor, lender, choir leader, football manager and school

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governor – among many other things took the unprecedented step – I have always enjoyed turning my of effectively closing down the hand to something new and, loving the economy, including the mortgage mortgage marketplace generally, I was world. This was understandable, and ready for a fresh challenge. probably necessary, and it would be The role started at the beginning unreasonable to criticise any immediate of January and the year looked like it action, given the deadly nature of was starting well for everyone, with the virus. the early weeks of activity promising Lenders also faced additional exciting times ahead for the whole of burdens, such as the moratorium the mortgage market. on mortgage payments and the My plan was to get to know as many introduction of the Coronavirus of the ASTL lenders and associate Business Interruption Loans members as early as possible Scheme (CBILS) and in my term of office, and Bounce Back Loans.

I started planning how While it was important best to incorporate to be supportive of members in regional these measures, it gatherings where was also clear that we would have there was room the opportunity for education to discuss the amongst policyASTL and their makers about aspirations for short-term its future. lending, its Benson had important role in done a great job economic recovery, in shaping the and the impact of a association as one of broad brush approach. the most respected trade And so, at the ASTL, bodies in the whole of the we were proactive in lending industry. Our robust engaging with both HM Benson Hersch rules and code of conduct meant Treasury and the Financial that membership was truly seen as a Conduct Authority (FCA) to provide kitemark of quality. We now needed a voice for our members and our to review how to take the association sector. Establishing a channel for open further, grow our membership, and to dialogue has not been easy. We have establish a louder voice in dealing with needed to show persistence and try urgent and contentious issues affecting different avenues before eventually our market. establishing relationships with the most So, I entered into initial dialogue relevant people at the Treasury. But with our friends at the Financial now we have a platform from which to Intermediary & Broker Association engage on future policy decisions, and (FIBA), the National Association we are in a stronger position than we of Commercial Finance Brokers were at the beginning of the year.

(NACFB) and the Association of We have shown throughout the year, Mortgage Intermediaries (AMI), where in the bridging industry and at the I had been a co-opted board member ASTL, that we are able to find strength around the time of regulation. in adversity. I have every belief that we Things were very much going to plan will continue to do so and that we can – and then COVID-19 brought the build on Benson’s legacy to grow the business of UK Plc to its knees. size and reputation of our sector. For Under enormous pressure to now, I hope you have a restful festive curtail the virus, the government season and a peaceful New Year. B I

BRIDGING INTRODUCER DECEMBER 2020

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