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EDITORIAL

COMMENT

Publishing Director Robyn Hall Robyn@mortgageintroducer.com Publishing Editor Ryan Fowler Ryan@mortgageintroducer.com Editor Jessica Bird 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 Joanna Cooney joanna@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

Groundhog day... but for how long?

A

s I write this comment piece, the UK is entering its seventh week of lockdown.

It’s become somewhat tedious for many within and outside the bridging industry as the drudgery of homeworking takes its toll.

More importantly, people are struggling to make ends meet. Brokers are still trying to get deals away, which is commendable, but there are stories emerging that do not paint every lender in the best light. For every story of a lender pulling out all the stops, there are those pulling out the rug on people.

These are challenging times. No broker or borrower expects lenders to do things that are impossible in the current situation. What they want, however, is an honest answer. If you can’t do something, say so.

Brokers and borrowers alike will remember those lenders that are open and transparent. Those who were around in the dark days of the crash remember those firms which supported the market, and many still maintain the relations built in that period.

This isn’t a case of having a go at lenders – it is about making them aware of what brokers are saying. Sometimes things change, and deals can’t be done at the last minute, but please be frank with your brokers; they’ll appreciate it.

Having seen lenders return to market in recent weeks with the use of automated valuation models, there is renewed positivity. There are a number of lenders which have really risen to the challenge, and not by just lending. This is to be applauded. If you are one of those, it’s a time to give yourself a pat on the back. Well done.

I’d also like to take this time to express our gratitude for the continued support from the market during the ongoing crisis. Sponsors and contributors continue to provide their support, and we are grateful for their efforts. For now, we all need to remember that this is going to end.

We need to make sure the market is ready to flourish when it does. B I

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Contents 5 Jonathan Newman An AVM cannot fully replace a traditional valuation 7 Kevin Thomson Getting ready for the end of the lockdown 9 Nicky Richmond Looking at the Land Registry changes 11 Bret Jackson The role of tech in beating the lockdown 12 Jamie Johnson Why the UK housing market will survive COVID-19 14 Feature Bridging Introducer takes a closer look at the EY/PWC Bridging Market Study 25 ASTL Laying the foundations for growth 26 Brian West Time will tell on the value of AVMs

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Some things never change Today’s market is unpredictable, but some things don’t change. We’re still here to help you and your clients.

We’re working with our existing customers to support them throughout these tough times. Whether it’s extending maturities or arranging payment holidays, you can count on us to treat your customers right.

Castle Trust | Belvedere House, Basing View, Basingstoke RG21 4HG | Tel: 0345 241 3079 | www.castletrust.co.uk 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

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AVMs are only a short-term solution Jonathan Newman senior partner, Brightstone Law

T

he latest UK Bridging Market Study was published by EY this April, featuring the results of a survey of 50 UK bridging finance lenders and brokers.

The research was conducted before the COVID-19 pandemic, which goes some way to explain why it concluded that the ability to use automated valuation models (AVMs) was the least important for bridging lenders, when compared with other factors.

How things have changed. With a lockdown across the country and the pause button being pressed on the vast majority of physical property inspections, AVMs have quickly become the go-to change in process for consideration by lenders – so as to enable transactions and help lenders to continue lending.

So, why have AVMs traditionally held limited appeal in the bridging market, and what are the key considerations for the growing number of lenders turning to them now?

An AVM is a statistical valuation of the property, using an algorithm that is based on the past performance of similar properties in the area.

The courts have famously held that valuation is an art, not a science, so do not expect valuers to get it precisely right, which is why they allow a tolerance margin of 5% to 15% when deciding whether valuers can be held professionally liable for over-valuation.

The theory behind AVMs is diametrically opposed to this, however; making the practice of valuation a science, rather than an art. Admittedly, this is softened by the presence of a confidence score, so there is some margin for interpretation.

In practice, experienced lenders rarely expect traditional valuations to be 100% precise, which is easily www.mortgageintroducer.com

shown in their own case studies when comparing prices achieved in forced sale situations with original valuations, so they factor a margin of error when setting loan-to-value (LTV) terms.

On standard properties with many recent direct comparables available, there is no reason why an AVM should be any less accurate than a physical valuation – indeed, many valuers will access the same sources.

However, the scientific approach may work less well with higher value properties, where there can be spectacular divergence even between neighbouring properties, due to varied accommodation and improvements.

“Lenders considering moving to an AVM-based process are well advised to consider very carefully the liability terms in their arrangements with suppliers” Indeed, one drawback of an AVM is that without an internal inspection, it’s impossible to know about the true state, condition and internal configuration of the property, which can significantly influence the price it is able to achieve.

But there are some important other considerations, aside from the valuation alone. For example, an internal inspection determines the true occupation status of the property:  Is it being let, and to whom?  Is the property vacant?  Who has given access to the valuer; is it the borrower in situ in their own property, and if not, why not? I have known imposter frauds picked up at property inspection.  Does the inspection reveal occupation by the borrower, when the property has been presented as vacant, and the loan is unregulated?  Is the property showing signs of multiple occupation, when presented as a single unit occupation?  Who are the occupants and do the details accord with legal enquiries?

These are just some of the flags that an inspection by a conscientious professional valuer properly instructed will pick up, but which an AVM will not be able to reveal.

These issues go not just to value, but directly to enforceability and recovery as well.

Typically, valuation, and questions around the method that has been used, comes into focus at the point when things go wrong.

For example, in a situation where a lender needs to foreclose and the valuation proves out of kilter with sale price achieved, and the lender fails to recover the debt from the property.

The valuer, indemnity backed, then becomes a potential route for recovery.

Even in such cases, lender or valuation claims are statistically less than the norm, but they have already been on an increasing trend in the last 18 months, and historically do increase in recessionary times.

So, lenders considering moving to an AVM-based process are well advised to consider very carefully the liability terms in their arrangements with suppliers. Liability can be limited and capped by some suppliers.

Whatever parameters lenders put around the use of AVMs, they must be sure that their terms of engagement are clear, robust and fit for purpose – and clearly understood at both ends.

AVMs can be very useful, particularly in the current environment.

But whilst they can move transactions quickly, and are a solution in that sense, it is a case of proceeding, but doing so with caution.

Simply put, an AVM cannot fully replace, in its entirety and like for like, a traditional valuation carried out by a professional with local and direct experience – and it should not be considered to be a direct substitute.

Nevertheless, by adopting extra diligence in the process and conditions put in place around the use of AVMs, they can meet the short-term need to keep lenders lending. And therein lies the judgment call. B I MAY 2020 BRIDGING INTRODUCER

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Preparing to come out of lockdown Kevin Thomson sales director, Connect for Intermediaries.

A

fter nearly seven weeks, the government has now announced some easing of the lockdown measures.

It is likely that restrictions will continue to be eased over the coming weeks, so we all need to prepare now for what business will look like as we transition to a ‘new normal’.

Working life as we knew it will probably not return for quite some time to come, but we do need to prepare for a new pick up.

Looking ahead the question is, will we quickly get back to normal and have a V-shaped bounce back in our economy, or will it be more U-shaped, with a longer period at the bottom before the recovery is really seen, just like after the credit crisis? My guess is that with the slow easing of lockdown, it may well be somewhere in between.

Unlike the credit crunch, there is likely to be a lot of pent up demand.

The housing market is integral to the UK economy and we are already hearing that major house builders are about to return to site, together with associated businesses earmarked as able to help kickstart the economy; indeed, by the time you read this they may already have done so.

We all have to be ready to support this, whether it is a gradual restart or, more like a restart to a Formula One Grand Prix, full steam ahead when the yellow lights go out.

Whichever it is, we can’t afford to be left in the pits still putting on the wheels when our entrepreneurial clients have already hit ‘go’.

The commercial sector, as with other business sectors, has been supported and helped by the Coronavirus Business Interruption Loan Scheme (CBILS) and now the Bounce Back Loan Scheme for smaller businesses.

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Brought in as part of the government’s support package for performing businesses to help them weather the COVID-19 storm, this has led to an unprecedented number of calls to banks’ and brokers’ relationship managers. What it has also done, however, is support a vast number of businesses, so that as many as possible can start again when restrictions lift.

The banks have coped as well as they can whilst putting in remote working methods, with a massive influx of calls that no amount of disaster or crisis planning could have prepared them for.

Meanwhile, although not everyone may be successful in their applications, the scheme continues to evolve and provide support so that the majority of firms and their advisers can resume work when it’s safe to do so.

A key way to prepare for the restart of the industry is by increasing communication with clients to understand their business plans.

This can unlock new opportunities, while any support you give your clients with their applications for the CBILS or bounce back loans will give you a greater insight into the business workings of your clients, providing you with a greater understanding of their needs not only for now but for when the new normal emerges.

As with any period of adversity, there are opportunities to be found.

With house building being one of the first industries to seemingly return, this gives rise to development opportunities

as well as prospects for investors looking for bargains to expand their property portfolios.

Preparation and collation of clients’ information in readiness for when they want to hit ‘go’ may seem too early, but it puts you in pole position.

There may also be the need for a short-term, bridging solution whilst a commercial application that needs a full valuation can be instructed.

Whilst looking forward, remaining positive and preparing for the new normal, whatever that is, we do have to reflect that keeping safe, looking after close family, elderly relatives and those that have to be shielded must remain our number one priority.

With this in mind, what we have to ask ourselves is, if we do have a Grand Prix restart to our industry, are we ready, and are our clients?

Can our businesses safely bring staff back to their offices with social distancing still in place? Will your company and all of your staff be able to adapt to the new norm? Have furloughed staff kept up to speed with the changes our industry has made, and if not, how will you bring them up to date? Not to mention, will we all get increased holiday requests just as the market returns?

Judging by the noises from government, we are not at ‘go’ at the moment; nevertheless, somewhere between ‘ready’ and ‘steady’, those that are prepared will maximise their opportunities. B I

The noises from the government are somewhere between ‘ready’ and ‘steady’

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Land Registry changes its rules Nicky Richmond managing partner and head of real estate finance and banking, Brecher

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t is rare that the Land Registry does something which anyone outside of the world of property law might want to read about, but as it turns out, 4 May was that day.

“Changes to identity verification and signing deeds” is not, you might agree, the snappiest title from GOV.UK, but it does what it says on the tin.

The changes will be welcomed by lenders as they not only make verification easier where parties are unrepresented, but also relax a registration requirement in relation to

deeds, changes which recognise some of the practical challenges facing the industry in this lockdown period.

IDENTITY VERIFICATION

The new legislation will allow verification for Land Registry purposes to be carried out by an expanded list of professionals. This relates to unrepresented applicants so, for the most part, will not be relevant to the lending market.

SIGNING DEEDS

Prior to this change, the Land Registry required the applicant for registration to send a certified copy of certain deeds, including legal charges, to the Land Registry.

A document can only be certified where one is holding an original. This

has caused delay during the current crisis, as it is taking much longer to get deeds back to lawyers to certify.

The Land Registry will now accept certified copies of deeds that have been signed using what is known as the ‘Mercury signing approach’.

This means that the signature page of a document, for example a legal charge, will still need to be signed in wet ink and witnessed in person, not by a video call, but it can then be scanned or photographed and sent back to the lawyer and the document completed and uploaded to the Land Registry on that basis.

In plain English, it means that the wet ink version, which previously had to be with the lender’s lawyer, or under its control through an undertaking, is no longer needed for the application, and a scanned version can be certified.

We know that certain lenders have been advised that ‘virtual’ witnessing, namely by video, would be adequate.

However, the Land Registry statement makes it clear that this is not, and has never been, the case.

EPIC CHANGE

The Land Registry is increasing options for document certification

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For us lawyers, this ability to rely on a scanned signature is an epic change, and should mean that transactions can be completed more quickly.

A word of caution, however: the Land Registry rules are draconian precisely because Land Registry fraud is so rife.

Lenders and their lawyers will need to be extra vigilant in the current environment, and each lender will form its own view as to what it will be prepared to accept.

At the time of writing, details of the changes are due to be published and, as ever, the devil is in the detail, but it looks like a move in the right direction for lenders and their clients.

The changes are stated to be temporary, but given the likelihood of a long period of restrictive movement and semi-lockdown, it is likely that they will become the new normal, like everything else. B I MAY 2020 BRIDGING INTRODUCER

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Tech is key to lockdown survival Bret Jackson head of marketing and communications, BWD

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his is the second article on the bounce I am writing from home. Not that working from home for me is anything new, but for this length of time it is completely new territory.

Being a relatively new father (November 2019) the additional family time has been amazing, and it has been priceless to witness elements of my son’s development I would have missed when in the office.

Whilst video conferencing and other types of online tools are not new, they are certainly being utilised fully during this lockdown. Their uses have now gone beyond business to social purposes. A colleague of mine was on a virtual stag do the other week, and I myself have encountered numerous virtual pub and coffee meetings.

Regardless of the advance of technology, there is nothing like social interaction, both from a personal and business perspective. Reading body language, confirming next stages, and discussing matters over lunch, to name just a few, are not possible via video, or certainly not to the extent I prefer.

As I write this, it is still unclear when the lockdown will be lifted, but I am pretty sure life will not go back to normal as we know it.

One use of technology I have been impressed with, and in fact that I feel is a piece of ingenuity, was posted on LinkedIn by Ashley Illsen, CEO of Magnet Capital.

A drone was utilised to take images of a development project Magnet Capital is funding in Kent, to assist it and the surveyor to understand what stage the build is at. It also helped that it was a bloody lovely looking development.

It is clear that technology has its exceptional benefits in general, but in these bizarre times, finding and www.mortgageintroducer.com

10:56

demonstrating ways to continue to conduct business is excellent.

It also provides a positive message to the industry and developers: lending can still be done.

I have to say, some lenders and intermediaries have adopted excellent social media practices to highlight that they are open for business. MT, Octane and HTB are the lenders that stand out, producing excellent material and posts to show their support for the industry and how they have adapted.

“Some lenders and intermediaries have adopted excellent social media practices to highlight they are open to business. MT, Octane and HTB are the lenders that stand out, producing excellent material” From a recruitment perspective, it has certainly been mixed.

Thankfully, we have multiple divisions and some clients have adopted different tactics to others.

Some, for example, have identified this as an opportunity to engage with us to obtain the right talent and get them on board, so that they can serve their notices and start once this is all over.

Others have pulled offers, jobs, and frozen all recruitment immediately.

Whilst this may be viewed as reactive, many smaller organisations had no real choice. As discussed in my previous article, the government has come out to support all industries with the furlough scheme, VAT deferral, and loans.

One bit of negative news, although inevitable, was the administrators being called in to Blackmore Bond. The Mini Bond provider had not fulfilled its obligations to pay bondholders since last year, so when it missed the February payment, it was a case of when, not if. With all that is going on

currently, this was probably the best time to announce its demise, as it will hope the news will get lost in the noise and not be publicised in the national press, like it has been previously.

At a time when incomes are being frozen or cut, £45m of investors’ funds will now have to be located. Some of these individuals relied on the quarterly payments as part of their retirement living, now likely lost forever.

Hopefully, this will spark the Financial Conduct Authority (FCA) into realising that enough is enough, outlawing these types of investments and reviewing other providers operating on this model.

Finally, I would like to say a big thank you to everyone who has got involved in the many challenges that have been created to support the NHS. The golf chipping challenge, the 2.6, the popular 5K, which everyone in our office has been asked to do, even if they walk it. My personal trainer asked me to complete the at-home Filthy Fifty, which did raise an eyebrow when I received the message, but it was clean.

This involved conducting an array of different exercises, 50 reps on each, in the quickest time possible, which will then be the donation amount. This started with a few of us, but as with many of these challenges, suddenly picked up pace. The routine is:  50 press ups  50 squats  50 crunches  50 shoulder press (with weights if available, vertical press ups if not)  50 lunges (25 each leg)  50 bicycle crunches (50 each side)  50 plank single arm row (25 each side)  50 squat jumps  50 mountain climbers  50 sit ups Being 6ft 5in tall, I am at a bit of a disadvantage for some of these exercises, but managed in 11mins 57sec. If you fancy a challenge, give it a go, but whatever you are doing, keep up the good work. B I MAY 2020

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UK property will endure COVID-19 Jamie Johnson CEO, FJP Investment

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he UK government’s implementation of strict social distancing laws in a bid to contain COVID-19 has been affecting the ways that businesses are able to operate, and how consumers are managing their finances.

At the moment, government is providing the financial stimulus necessary to ensure the private sector can overcome the initial challenges posed by COVID-19 and the associated lockdown measures.

Directly and indirectly, COVID-19 has affected the performance of different sectors and financial markets in different ways. The world’s major indices have suffered considerable losses – recently, it was reported that The Dow Jones Industrial Average crashed by almost 32%.

Other financial assets have so far proven resilient, such as UK real estate.

I will explore the reasons why this has been the case, and what recent statistics tell us about property’s projected performance below.

that average residential property prices that month were 3% higher than the year prior.

With Brexit uncertainty forgotten, sellers were again eager to place their properties on the market.

Coupled with the government’s growing excitement about ushering in a ‘housebuilding revolution’, it seemed that the UK was finally ready to confront the ongoing housing crisis and match the growing demand with an adequate level of supply, generating strong increases in market activity and a resurgence of strong value returns across the board.

COVID-19 HAS PUT A PAUSE ON TRANSACTIONS

Lockdown measures imposed by the government in a bid to contain COVID-19 have had a significant impact on the real estate market.

For the moment, the government is actively discouraging people from buying and selling properties; some lenders have reacted to this news by deciding not to take on new enquiries.

However, I do not believe that the momentum around the post-‘Boris Bounce’-market has disappeared.

In fact, in lieu of transactions being available, pent-up demand is likely to further exacerbate market activity once the pandemic is over.

In November 2018, Savills forecasted that the average value of UK properties would increase 15% by 2024 – assuming a majority government was elected and a Brexit deal agreed.

Although both of these events occurred, COVID-19’s economic disruption could have introduced a new impetus to revise this figure.

However, Savills is confident that longterm demand for UK real estate will in fact drive prices higher, and as a result has not changed its original projection.

Short-term forecasts were revised to take into account the significantly decreased transactions levels expected for the next two months or so, but the long-term predictions for growth have not been altered.

Ultimately, it can be said that COVID-19 has, in a sense, taken the place of Brexit uncertainty in artificially suppressing market activity and, thus, property price growth.

It is also worth mentioning that COVID-19 is a public health crisis, not an economic one.

This means that once the virus is contained, there is no reason to suggest that the property market will not make a quick recovery.

I am confident we will see a surge in activity once lockdown measures are lifted and the virus outbreak has been effectively resolved. B I

THE ‘BORIS BOUNCE’

House prices are typically used as an indicator of capital growth for real estate. In 2019, the political deadlock over Brexit resulted in significant market uncertainty and modest house price growth.

Some commentators feared house prices would drop significantly as a consequence of Brexit – however unlikely such events actually were.

Boris Johnson’s victory in the 2020 General Election, and his subsequent ability to pass the EU Withdrawal Bill through parliament, resulted in surging investor interest in residential real estate, with the evidence being shown in house price indices for March 2020.

Both Halifax and Nationwide recorded

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There is no reason to suggest that the property market will not make a quick recovery

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FEATURE

EY BRIDGING MARKET STUDY

EY’s UK Bridging Study

The results 14

FEATURE

EY BRIDGING MARKET STUDY

Bridging Introducer caught up with the authors of the latest instalment of the EY UK Bridging Market Study to gauge the sentiment of lenders across the nation

T

he coronavirus outbreak has had a profound impact on worldwide economies and industries; self-isolation measures imposed by the government mean that the crisis has also changed the way businesses are functioning, with an unprecedented number of employees working remotely, while working to fulfil the same objectives they would previously. At the start of 2020 Ernst & Young (EY) compiled their annual bridging market which tracks developments and shares insights on the sector.

However. much has changed in the short time between the report being conducted and published with the COVID-19 crisis. Whilst the short-term outlook for the market may have changed somewhat the medium to long-term implications of this study provide insight on how the recovery will pan out.

The study, which was conducted between 15 January 2020 and 5 February 2020, collated responses from over 50 UK bridging finance lenders and brokers with a combined bridging loan book size of £6.4bn and annual brokerage volumes in excess of £500m.

The majority of respondents pointed to broker related channels as the most important for loan originations, a continuing theme from 2019.

Aggregator websites were also named as an important source for originations – this was the first time that this has been raised in the report.

Some 52% of respondents said refurbishment was the most popular reason for borrowers obtaining a bridging loan. This is in contrast to the 2019 survey, where respondents said business purposes were the most popular reason. Two-thirds of respondents

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reported an increase in competition over the past 12 months, which was higher than what respondents expected in the 2019 outlook.

Going forward, 50% of respondents are expecting an increase in competition over the next 12 months.

Change in regulatory rules was cited by nearly half of respondents as one of the three biggest challenges impacting the UK bridging finance market in 2020.

This is a marked increase from last year, where 26% of respondents viewed it as one of the three biggest challenges in 2019.

Also, pre-COVID-19, 25% of respondents cited defaults as the key challenge impacting the UK bridging finance market in the next 12 months, albeit respondents in the 2020 survey expected a lower increase in foreclosures in the next 12 months when compared with respondents in the 2019 outlook.

Sentiment appears more upbeat on the theme of Brexit, with 42% of respondents naming Brexit as one of their top three business challenges for 2020, compared with 81% of respondents in the 2019 outlook.

Overall 43% of respondents cited M&A as one of their key strategic options over the next 12 months, however only 9% of respondents cited sale of the business as a strategic priority.

Therefore, potentially presenting a challenge in the case of a larger number of acquirers identifying a smaller number of willing sellers.

To update this study we’ve invited Nick Parkhouse and Stuart Mogg of EY to give an update on their findings following the COVID-19 crisis and some of our regular commentators to give their take on the report. → MAY 2020 BRIDGING INTRODUCER

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FEATURE

EY BRIDGING MARKET STUDY

Executive summary By: Nick Parkhouse and Stuart Mogg from EY Our 2020 survey was conducted between 15 January and 5 February 2020, before the COVID–19 pandemic and associated uncertainty had begun to materially impact the UK economy. While the short-term view of survey participants may have altered since we concluded the survey, the report provides a useful insight into the long-term view of the market.

This year’s survey was bigger than previous years’, incorporating responses from over 40 UK bridging finance lenders and brokers with a combined loan book of £4.3b. The range of respondents’ bridging loan book size runs from £2m to over £500m, with a median of £60m (increasing from £50m in our 2019 report).

TECHNOLOGY MOVES INTO SHARPER FOCUS Technology didn’t feature as high up the market’s agenda as was expected in our 2019 report, but the results of this year’s report paint a different picture, with

tech moving into much sharper focus. In particular, the 2020 report found that over a third (39%) of respondents agreed that open banking would significantly improve origination and underwriting, compared with less than a quarter (21%) the year before.

The use of automated valuation models (AVM) and underwriting processes have both seen an increase in perceived importance to lenders and brokers alike.

However, while investing in new tech is high up the agenda for many, there remains a significant portion (38%) who cite the adoption of technology as challenge for their business.

We will be watching the sector closely over the next 12 months to see how technology impacts the market, particularly as a result of the sustained period of remote working and social distancing due to COVID-19, where firms and customers alike have embraced new technologies at an unprecedented rate.

COVID-19 IMPACT ON COMPETITION, ESPECIALLY IN THE PROPERTY MARKET Competition in the UK bridging finance market increased over the past 12 months according to 67% of survey respondents. We have seen interest rates on loans under downward pressure, while witnessing →

Life after lockdown Vic Jannels CEO, ASTL

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he third iteration of the, now annual, UK Bridging Market Study by EY was unfortunate in that it was released shortly after the beginning of lockdown, based on research that was conducted before the scale of the coronavirus pandemic had been truly recognised.

Consequently, there were some elements that could immediately be considered to be out of date, such as the disregard the majority of respondents gave to the importance of AVMs. Much of the research, however, remains pertinent in the current environment and will continue to do so when we emerge from the other side of this crisis, and I would like to focus on two areas that I found particularly interesting.

The first is that changes in regulatory rules was cited by nearly half of respondents as one of the three biggest challenges impacting the UK bridging finance market in 2020. This is a marked increase from last

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year, where 26% of respondents viewed it as one of the three biggest challenges in 2019.

And the other area is that 25% of respondents cited defaults as the key challenge impacting the UK bridging finance market in the next 12 months, albeit respondents in the 2020 survey expected a lower increase in foreclosures in the next 12 months when compared with respondents in the 2019 outlook.

Both of these findings align very closely with some of the messages that we, at the ASTL, have been delivering to the market for quite some time.

Regulation is a key consideration for any trade association, but it is of particular interest in the bridging sector, where some areas of the market are regulated, and some are not.

In the last year, the regulator has made noises about the full regulation of the sector, and while there have been no concrete announcements, this would appear to be the long-term direction of travel.

This is why we believe it is so important to demonstrate a high-standard of selfregulation at this stage so that, if FCA regulation were to be expanded in our sector, it might be done so on the basis of a market

that is already functioning well, rather than one that needs to be corrected. Regulation is no bad thing per se, but heavy-handed regulation can be very disruptive for an industry and expensive for businesses.

One way to guard against the introduction of an intrusive regulatory approach is by maintaining high standards of underwriting right across the industry and this also serves to mitigate against increased rates of default, which was another area of concern that was highlighted by respondents to the survey.

In a competitive lending environment, which is likely to remain as we emerge from this pandemic, it can be tempting for lenders to increase market share by relaxing some of their processes and attitudes to risk.

But this is a short-sighted approach to short-term lending and, at the ASTL, we require all members to adhere to a Code of Conduct that ensures the highest standard of professionalism and risk controls.

Following this approach will not eradicate defaults of course, but it will encourage more responsible and sustainable lending that will help to address concerns both about the level of defaults and the consequences of potential regulatory intervention.

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FEATURE

Introduction

EY BRIDGING MARKET STUDY

Executive summary

Originations

Product

Key customer considerations

Market trends

Key challenges for the lender

Key challenges for the market

Key cap remain

Product an increase in the cost of origination. This increased competition has meant lenders and brokers are focusing a lot of attention on how they can differentiate themselves in the market. Speed of execution and highquality service remain imperative, and interestingly, we’ve seen a concerted move from lenders towards offering more flexibility to repayment options. This will be incredibly important as we emerge from the current crisis, where many borrowers might find they have very different needs and funding requirements from just a few months ago.

As we know, COVID-19 has had a significant impact on the property market, which is an area of particular focus for bridging lenders. Lockdown restrictions have meant that viewings, auctions and the completion of property transactions have been largely delayed, which has subsequently meant many lenders have pressed pause on new originations. This has reduced competition in the short-term. →

director, Charter HCP

I

have just finished reading the EY Bridging Market study 2020 which I reviewed with some scepticism given the number of other market studies I have seen in the past few weeks.

All of these have been the opinions of those who feel they are qualified to comment without having any real knowledge of each part of the process from funding through to client delivery.

I was not disappointed by the report as it was exactly as expected, a collection of unsubstantiated surveys that appear on the face of it to be exaggerated to show a market thriving more than it actual has been.

I would be interested to know under what circumstances the questions were delivered and what verification was really undertaken.

In fact it would be good to see who were the participants as in the copy report I received I could not see that information and as it is a collective I cannot see why people would not put their name to it.

I have been told by a former head of one of the world’s largest media organisations that a study where the companies participating are named is 70% more accurate than those that are not, so that in itself makes a big

18

BRIDGING INTRODUCER MAY 2020

Respondent

What is the main reason for borrowers to obtain a bridging loan? Please rank the following purposes from 1–5, with 1 being the most popular reason and 5 being the least popular reason1.

Which of the opt indicators over t

10%

20% 14%

4% 15%

52%

29% 26%

25%

26%

20%

14%

Most important

14%

Second most important

14%

Neither important nor unimportant

27%

Second least important

27% 16%

29% 10% 13%

9% 2%

Business purposes

Refurbishment

35%

31%

Mortgage delays

Auction purchase

20%

Re-bridge

Average mon 10%

37%

54%

Average loan

Least important

29% 10% 27%

According to 52% of respondents, “refurbishment” is the most popular reason for borrowers to obtain a bridging loan, increasing from 29% of respondents who chose this as their most popular option last year. On the other hand, “business purposes” has decreased in popularity with only 20% of respondents citing this as the most reason for borrowers to obtain bridging loan,on compared with 32% of and difference to thepopular reviews credibility. is ata least based standard reporting respondents in of 2019.

My point is that this review the market real verified information, if it or not then

Reviewing the review Terry Pritchard

Bridging loan purpose

•

21% 13%

•

Over half of r is 1.00%–1.25

•

39% of respon decrease from

•

The majority 9–12 months

has no credibility everyone questioned caveat that at the start so we at least • 14%ifof respondents cited “auction purchase” as the most popular reason for know.

• Overall, respo to obtain a bridging only 3% very last year. does not offer aborrowers true representation of theloan, compared EY and with PWC are well respected loans were lo entire sector, •and I (at this point) could not important businesses with some excellent people who Respondents also cited “other” reasons, such as finish and exit, acquisition, higher. tell you if it does. general offer good factexit. based reports, downsizing, planning enhancement,in chain-break and development As a matter of interest, we commissioned unfortunately on this occasion I fear they Note: Figures charts may sum to 100% due are to rounding. a report ourselves inin2019 thatnotwas from some way off the mark as we see it 1. Respondents ranked the loan purposes on a scale of 1–5. For example, 52% of respondents ranked “refurbishment” as the top reaso a different angle but shared a few of the and as funding intermediaries we see the questions and the comparison over that market from the inside and also from our period were polar opposites, something small (but beautiful) broking division the that did not fill me with confidence. In outside so the data we hold is accurate but fact and as an example, the questions and does not support all of the data offered in discussions over completion times seems these reports. In fact maybe next year we to have been taken as a one figure industry will do one as a comparison. standard, however, we all know that the When all said and done, this is the past difference between a standard bridge and and we are in the middle of the story and a development bridge can be six weeks some observation struck a chord with me: and this is not adequately reflected in the “reputation of the lender, certainty of funds, commentary around those completion times ability to deliver and being able to follow quoted, so, this needs more detail. through on promises.”

That is just one point, and if I wanted to The Bridging sector has come a long way be pedantic then we could say this about in the five years of my participation as a everything covered in the review. broker, with its reputation having improved On the positive side the document is enormously, but now we are at a crossroad at least eloquently written and easy to where I fear the actions of some will have understand and at times does offer some indelible impression on our future. interesting opinions that could be correct if Lender behaviour will be very much in the we knew the foundation of their theories spotlight right now, particularly as and when were solid. loans come up to term. If we are to reaffirm The fact of the matter is that if you are the positive opinion of the report and secure going out their to give people what they a happy ending, we need to tread very very would generally consider a document to rely carefully, with the 2020 EY report likely to then make sure the basis of said document be something to behold – Stay Safe. → www.sfintroducer.com

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FEATURE

EY BRIDGING MARKET STUDY Introduction

Executive summary

Originations

Product

Key customer considerations

Market trends

Key challenges for the lender

Key challenges for the market

Key capabilities to remain successful

Strategic routes

Impact of technology

Brexit

How the EY team can help

The impact of technology in the market Technology disruption in the UK bridging finance market To what extent do you agree with the following statements in relation to technology disruption in the UK bridging finance market? Please score each of the following activities of the value chain from 1-5, with 1 being strongly agree and 5 being strongly disagree.

8%

6%

15%

15%

23%

31%

17%

29% 37%

35% 35%

33%

17%

10%

12%

Open banking will significantly improve the efficiency of the origination and underwriting process

Biometrics will significantly improve the efficiency of the origination and underwriting process

Strongly agree

•

23%

21%

17%

Agree

12%

6%

Automated loan management system, allowing live data to be extracted accurately and at the click of a button, is a key differentiating factor among lenders

Neither agree nor disagree

There has been an increase in the proportion of respondents who expressed 1 agreement with the statement “open banking will significantly improve the efficiency of the origination and underwriting process” with 39% of respondents agreeing compared with 21% of respondents last year.

•

Disagree

Lenders are increasingly using AVMs on property to assist them in their due diligence process when carrying out a valuation

Strongly disagree

A lower proportion of respondents expressed disagreement (2) that lenders are increasingly using AVM’s (53% of respondents last year disagreed or strongly disagreed with this statement compared with 35% of this years respondents).

Are we a bit old fashioned?

•

• Based on the above, respondents generally agreed that technology will help drive business efficiencies. However, 38% of respondents cited “adoption of technology” as Similarly, there has been an increase in the proportion of respondents who expressed At Magnet Capital we have also seen lenders will compete. For me there is one one of the top three challenges for their business in 2020. agreement (1) with automated loan management systems as a differentiating a proliferation of lenders moving into clear area that stands out. factor (26% of respondents last year agreed or strongly agreed with this statement compared with 44% of this years respondents). development finance, which I suspect is an

Ashley Ilsen

overflow from what is now a very crowded bridging sector. From my own experience I’ve noticed from conversations I’ve had with other lenders that an overcrowded space

OLD FASHIONED? One of the biggest trends seen from last year’s survey is the continued prominence 11 of technology in our sector.

Some 39% of respondents now believe that open banking would significantly improve the obtention of new business, and this is in addition to the use of AVMs and further automating of the underwriting process.

It’s somewhat apt that in the current crisis use of technology is now a necessity rather than a luxury and I expect the pandemic to accelerate the need for lenders to invest in their tech.

At Magnet Capital we focus heavily on our internal technology in order to streamline the underwriting process and this has been a primary source of focus since our inception.

Conversely, I’ve always been a big champion of old fashioned lending practices and there is ultimately no replacement for face-to-face to meetings with clients and a first-hand inspection of a project or a property (no matter how much we’re all enjoying Zoom conference calls at this time).

This is also taking into account that 52% of lenders noted refurbishments as being the primary use for bridging loans.

This inherently raises the challenge of bridging lenders needing to be even more hands on in a business environment that is still learning how to remain socially distant.

Note: Figures in charts may not sum to 100% due to rounding.

CEO, Magnet Capital 1. Sum of the percentage of all respondents who chose “1 — strongly agree” or “2 — agree.” (2) Sum of the percentage of all respondents who chose either “4 — Disagree” or “5 — Strongly disagree.”

T

t says a lot about the rapidly changing face of our market that the data produced by Ernst & Young, changes significantly year on year.

Now in its third year, the annual EY Bridging Market Study is one of the widest data samples that we have for the short-term lending industry. It is also unfortunate that the survey was conducted just before the Coronavirus pandemic started to hit the UK and I’d implore the good people at EY to perform a follow-up study on their shortterm findings later this summer.

We have undoubtedly entered a period of short-term uncertainty and the true impact of the coronavirus on our market will not become completely apparent for some time.

We can, however, look at their long-term results with great interest and we can also look back at what lenders and brokers have reported about 2019. Here are two key areas: A CROWDED SPACE Interestingly, 67% of those surveyed reported that they have found competition increased in the bridging market in 2019.

Similarly, an increase in competition was cited by lenders as the biggest challenge ahead for 2020.

20

BRIDGING INTRODUCER MAY 2020

“I’ve always been a big champion of old fashioned lending practices and there is ultimately no replacement for face-to-face to meetings with clients” has been on everyone’s minds for some years now, and yet every year we seem to be adding new entrants.

A growing market should allow for more capital deployed (not necessarily more lenders) but considering the effects of coronavirus, surely we’ve now reached a point where lenders will either need to exit or merge? I did also spot a brave new face entering the bridging market just earlier in May 2020 and my hats off to them!

Competition has historically pushed lenders to lower rates and higher up the risk curve.

Respondents confirmed that average monthly interest rates were lower in 2019 than in the previous year, and LTVs were higher. Having reached the peak it will be interesting to see on what other battlefronts

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I N A S S O C I AT I O N W I T H

Introduction FEATURE

Executive summary

Originations

Product

Market trends

Key customer considerations

Key challenges for the lender

Key challenges for the market

Key capabilities to remain successful

Strategic routes

Impact of technology

Brexit

How the EY team can help

EY BRIDGING MARKET STUDY

Key customer considerations when choosing a bridging finance lender Key customer considerations when choosing a bridging lender How important are each of the following capabilities to a customer (or broker) when choosing a bridging lender? Please rate each capability with a score of 1–5, with 1 being very important and 5 being unimportant.

8%

17%

21% 46%

23%

38%

58%

37%

33%

44%

33%

27%

37%

31%

37% 21%

15% 6% 6% 2%

10%

2%

Speed of execution

2%

Reputation of the lender

Very important

•

12%

Important

12%

4%

High quality service from the lender

Level of information required from the lender

Neither important nor unimportant

58% of respondents cited “speed of execution” as very important for a customer when

choosing aoutlook bridging lender, the on priorthe year survey results.

The long-term will inconsistent part be with based • 46% of respondents cited “high quality service from the lender” as a very important duration of the lockdown, but also more generally, consideration, which has increased from 37% of respondents who cited this same as the most important last year. the rate ofoption economic recovery, which is yet unknown. respondents cited “funding flexibility” as the most important capability when Lenders• in23% theofproperty market will be keenly following choosing a bridging lender, this is a new option for the survey this year, which has the rate ofemerged pick up housing market transactions as in a key reason for respondents in choosingas the product alongside speed of execution and high quality service. activity starts again.

• •

8% 2%

10%

Low pricing

Funding flexibility

BI Less important

2%

Unimportant

Over half of the respondents cited “reputation of the lender” as a very important or important consideration and this was a prominent for respondents lenders that had reached, or couldchoice demonstrate a whose loan book size or annual brokerage volume is under £100m. clear trajectory to reach, significant scale. However, Respondents also cited “other” key customer considerations such as certainty of funds, to deliver presented and being able follow through onpandemic promises. These opinions theability challenges bytothe COVID-19 suggest that according to respondents, customers may in some cases value certainty could speed see wholesale debt providers retrenching from of funding, and quality service over “low pricing.”

the UK bridging market, which would be a real blow to bridging lenders over the next year.

As with most sectors, the COVID-19 pandemic has Note: Figures in charts may not sum to 100% due to rounding. significant for the bridging WILL WHOLESALE DEBT PULL Respondents rated each capability with aFINANCING score of 1 to 5 and therefore can score more than one capability at each rating —introduced e.g., could choose both “speed ofchallenges execution” and “high qualityUK service from the lender” as beingFROM 1 — very important. finance market.

AWAY THE BRIDGING MARKET POST C-19?

The market faces continued uncertainty in the A particularly interesting and positive finding of our short-term, but long term, the UK bridging market latest report is that lenders experienced heightened remains attractive and we are excited to see what the future brings. B I interest from investment banks last year, notably for

The end of an era?

Phil Mabb director, BridgeDevelopment CEO, Magnet Capital

I

am going to start with a positive – to quote: “While short-term the market faces continued uncertainty, from a longterm fundamental perspective, we think the UK bridging market remains an attractive one.” Hold that thought.

Most stories have a beginning, middle and end. COVID-19 certainly marks the end of one era and a milestone we will look back in years to come, but more importantly the beginning of a new chapter.

How things have changed, not in my life time have a seen a report potentially so out of date so shortly after delivery - talk about history vs news.

22

BRIDGING INTRODUCER MAY 2020

Whilst I won’t dwell on the past too much, not least because “past performance is no guarantee of future results”, having spent five years working for a global financial performance measurement firm, I find myself questioning the output from the EY report: “We collated responses from over 50 UK bridging finance lenders and brokers with a combined bridging loan book size of £6.4bn and annual brokerage volumes in excess of £500m.”

Lies, damn lies and statistics… The limitations of the report being down to third party input (presumably un-incentivised?) are acknowledged, as is the increased contribution uplift compared to the 2019 EY report, but does this represent a sufficiently broad church to provide meaningful results?

- I am not sure, neither did I expect a root and branch exercise.

Well, I say that since there are hundreds of

bridging lenders, a lender whose £bn+ loan book is probably absent, and whose inclusion may have provided a better barometer for some key statistics. Further, is there not potential for duplication of the input from contributing lenders and brokers?

In reality, how many brokers conduct volumes of that level when comparing and contrasting with the potential input from the large number of independent brokers out there.

Finally, my biggest bug bear is LTV statistics which to my mind are a strongest measure of risk.

Statistics show 73% are in the 60-70% LTV range – the trouble against what measure, OMV, 180 Day or 90 day? – that said, the good news is many use the latter two measures, which in the current climate may well prove to have been very prudent indeed.

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REVIEW REVIEW

ASTL XXXXXXXXX

Lay foundations for growth now Vic Jannels CEO, ASTL

O

nce again, in recent weeks, the bridging market has demonstrated a level of resilience and commitment to innovation that is rarely seen in other sectors. Lenders have been quick to respond to the demands of the current environment and identified new processes and technologies to enable them to continue to provide muchneeded lending to customers.

At the same time, they have engaged proactively with existing customers to identify those who are experiencing financial distress and identify options to work together towards a solution.

Activity levels have been encouraging, but this is by no means business as usual. So, it presents a good opportunity for all businesses involved in the bridging sector to put the necessary preparations in place for when activity ramps up in the future, which it will.

There are many reasons to anticipate a surge in demand for short-term finance. The lockdown imposed an artificial suspension of economic activity at a time when the property market was beginning to gather momentum, so there is bound to be some pent-up demand from investors as properties begin to be listed for sale again and viewings become possible.

Perhaps more pertinent, however, will be the requirement for finance from small to medium enterprises (SMEs), entrepreneurs and small businesses.

The government has introduced an unprecedented range of measures to help businesses survive the current environment, but many will still have short-term cashflow requirements to help them get back on their feet and build for the future as they restructure their finances and put longer-term funding in place.

www.mortgageintroducer.com

Bridging lenders are perfectly placed to play their part in facilitating this economic recovery, and have developed a deserved reputation for providing fast, flexible finance.

So, we can look beyond this current period with optimism.

But what steps should brokers and lenders be taking to prepare ro conduct business after lockdown?

One thing to emerge from the uncertainty of recent weeks is the importance of partnering with businesses you can trust to deliver clarity and certainty, and trust to do the right thing even when the surrounding environment is changing so rapidly.

DEEPER UNDERSTANDING

For brokers, this is the opportunity to identify those lenders which are best placed to serve the needs of your clients, and to start building a deeper understanding of their areas of expertise and processes.

I would always recommend that brokers look for ASTL membership as part of their criteria for choosing lenders, as our code of conduct ensures the highest standards of transparency and professionalism.

For lenders, now is also a good time prepare your business for the future.

Again, I would recommend that the ASTL should play some part in that.

Not only do our members play a

role in enhancing standards and the reputation of the market, but there are also practical, tangible benefits that can provide bottom-line savings.

For example, membership of the ASTL provides lenders with access to discounted rates on essential services, such as ID verification and fraud screening, as well as the opportunity to learn and share best practice, which can prove particularly important during times of significant change.

And, of course, at the ASTL we commit a lot of time and energy to promoting the benefits of bridging lending to brokers and sending them in the direction of our members in order to source solutions for their clients.

At the time of writing, property website Rightmove has suspended its house price index due to the lack of activity from which to draw meaningful data. However, the market will return, just as the economy will, and property investors and businesses of all sizes will have an appetite for capital to help them get back onto the front foot.

Bridging lending is continuing, albeit at relatively low levels, but the indicators point to a future of growth.

Now is the time for brokers and lenders to lay the foundations for that growth, so that they are best placed to help customers, contribute towards economic recovery and initiate the next stage of growth for their own businesses. B I

The indicators point to a future of growth

MAY 2020

BRIDGING INTRODUCER

25

REVIEW

MARKET XXXXXXXXX

AVMs: A tale of two crises…

Brian West director, Central Bridging

T

n the wake of the 2007/8 credit crunch, automated valuation models (AVMs) fell spectacularly out of favour.

Whilst there’s little empirical data regarding the number of properties subject to assessment by AVMs which subsequently fell into arrears or possession, the appetite of most lenders for their continued use evaporated almost as quickly as American subprime lenders disappeared back across the Atlantic.

The property market boom of the mid to late noughties had made it difficult for valuers to keep pace with lender demand, and whilst the advent of AVMs saw them deployed initially at the lower end of the risk curve, typically on low loan-to-value (LTV) remortgages, further advances and generic property types in dense urban areas, these boundaries soon came to be stretched.

On specifically selected cases where there was enough data to yield robust results, AVMs worked well; however, the use of this new technology quickly exceeded its limitations. Ultimately, many lenders paid a heavy price for use on properties and in areas where AVMs simply weren’t fit for purpose.

It’s little surprise, then, that AVM systems sat dormant for almost five years, by which time less than half of the pre-2008 surveying workforce remained in place.

Those not lost to redundancy had simply retired, as the industry haemorrhaged talent between 2008 and 2011.

By 2012/13, those ubiquitous green shoots of recovery in the housing market were being frustrated and delayed by, ironically, a severe shortage of experienced valuers.

Against this background, lenders

26

BRIDGING INTRODUCER

MAY 2020

began dusting off their legacy systems… AVMs were finally on their way back.

Over recent years, technology has raced ahead. Proponents of algorithms and pioneers of big data have promised to revolutionise the property valuation business, moving it progressively from an art form to a more purely sciencebased process.

A QUIET REVOLUTION

Blockchain will store the full details of increasing numbers of new-builds, whilst machine learning and artificial intelligence (AI) will provide ever more accurate local data analysis.

In time, drones will almost certainly replace the drive-by with the fly-by, giving external imagery in 3D. A quiet revolution has been taking place.

If the crisis of 2007/8, where liquidity disappeared almost overnight, was almost the death of AVMs, it seems today’s coronavirus pandemic might finally cement their widespread use into the mainstream.

In contrast to the last crisis, a coordinated reduction in world base rates has increased the supply of cheap funding in what was already an extremely liquid market. Although some of the retail and high street lenders seem to have been afflicted by a similar paralysis to that which they encountered in 2008, liquidity is not the issue this time.

Unlike in 2008, there is now a strong and established specialist sector of niche lenders and challenger banks. At the core of many of these organisations is a willingness to embrace new technology or, in the case of AVMs, enhance and improve old technology.

The current lockdown, with its strict social distancing requirements, has seen more and more lenders looking to deploy AVMs. What is particularly heartening is that their implementation is being governed, in most instances, by a large dose of pragmatism.

Unlike the pre-credit crunch boom, when some viewed AVMs as a sort of nirvana, specialist lenders today can see

the limitations, and have restructured their products accordingly.

Currently, the increased risk of an AVM as opposed to a full internal inspection by a valuer is being mitigated, to an extent, by relatively low LTV ratios.

In the bridging sector, post-lockdown maximum LTVs are typically (at the time of writing) topping out around the 60% mark, and sometimes also require the back up of a drive-by.

“Poineers of big data have promised to revolutionise the property valuation business, moving it progressively from an art form to a more purely science-based process” Anything that keeps the market moving is extremely welcome in these challenging times.

However, as the lockdown gradually eases in the weeks and months ahead, lenders will need to keep in mind that the intrinsic issue with AVMs in the last decade was not the product itself, but its flawed deployment.

No AVM is ever going to give an insight into the mind of a potential borrower or, on a more basic level, detect and document obvious internal defects such as dry rot, wiring issues or the structural damage wrought by an over enthusiastic DIY fan removing a load bearing wall.

Equally, they will struggle with commercial and more unusual residential properties, for which data points may be scarce.

Comprehensive valuations will always rely on judgement as well as scientific method.

The overall worth of AVMs will only be entirely proven over the full economic cycle, but right now they are a vital weapon in the more limited armoury of lenders. As a close industry friend said to me recently, “anything to keep stuff moving.” B I www.mortgageintroducer.com

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