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INTRODUCER www.sfintroducer.com
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April 2022
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EDITORIAL
COMMENT
A bridge for any occasion
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Editor Jessica Bird Jessicab@sfintroducer.com Deputy News Editor Jake Carter Jake@mortgageintroducer.com Commercial Director Matt Bond Matt@mortgageintroducer.com Advertising Sales Executive Jordan Ashford Jordan@mortgageintroducer.com Campaign Manager Esha Gossain Esha@mortgageintroducer.com Production Editor Felix Blakeston Felix@mortgageintroducer.com Head of Marketing Robyn Ashman RobynA@mortgageintroducer.com CEDAC Media Ltd Signature Tower 42 25 Old Broad Street London EC2N 1HN
his issue of Bridging Introducer, which sadly will be my last as editor, aims to cover – perhaps not the full gamut – but at least a taste of the broad spectrum of
bridging. From the ways in which short-term finance is helping shape the high streets and city centres of our future through commercial bridging, through to how landlords can utilise this product to prepare for the challenges facing the private rented sector, this issue aims to show that there really is a bridge for every occasion. It can be easy to focus on residential bridging. Indeed, chain-breaks and residential refurbishments are a core – and growing – part of this specialist market. However, let us not forget that bridging holds the key to many different products, industries and sectors. As brokers search for the next big opportunity, the next chance to expand their reach and diversify their business, it might be a good idea to look no further than short-term finance, and consider making inroads into commercial and mixed-use properties, short-term development finance, or bridging for business purposes. That said, this is a complex market, and I cannot emphasise enough the importance of education, understanding and – perhaps most importantly – partnering with experts already within the market. Bridging has come a long way in the past decade, and it is the lenders and intermediaries within it that have done the work to bring it from an expensive last resort to a valuable and well-respected tool, covering an incredible range of uses, and key to the future of the UK property market. B I
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Jessica Bird Jess_JBird
Contents 5 Donna Wells An invaluable part of the toolbox 7 Brian Rubins Retrospective or introspective… 8 Feature: Commercial bridging in the new normal Jessica Bird considers the state of the commercial property market as it emerges from the pandemic, and the role that bridging has to play as it enters the next phase 18 Round-table: Bridging for buy-to-let Bridging Introducer’s latest round-table discussion looks at the role of short-term finance within an evolving buy-to-let market 24 Cover: Lending with confidence Jessica Bird talks to Kara Williams at Together about plans for the future and what can be learned from the past 30 Vic Jannels Understanding the end customer
Fast, flexible bridging loans for can’t miss opportunities. www.sfintroducer.com
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REVIEW REVIEW
MARKET XXXXXXXXX
An invaluable part of the toolbox Donna Wells director, First 4 Bridging
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s we enter Q2, there remains huge optimism around the size and scale of the bridging finance sector in 2022. This optimism comes on the back of a record period for bridging lending in the final quarter of 2021, with completions and applications both reaching an all-time high. The figures, compiled by auditors from data provided by Association of Short Term Lenders (ASTL) members, showed that bridging applications reached a record high of £12.7bn in the quarter ending December 2021 – an increase of 65.4 per cent on the previous quarter, which itself was a record period at the time.
“As a company with over 20 years’ packaging experience, we know how tough this sector can be for advisers” The value of completions increased by 19 per cent in Q4 2021 when compared to Q3, reaching a new record of £1.2bn. This also led to a further rise in the value of loan books – £5.08bn at the end of December, up from £5.07bn. According to the data, average loan-to-values (LTVs) increased slightly from 59.8 per cent in Q3 to 61.2 per cent in Q4. The value of loans in default continued to fall, for the fourth consecutive quarter, showing a decrease of 7.6 per cent over September 2021. In addition, the number of repossessions also fell slightly. As highlighted in the commentary around this data, it represents a clear sign that the bridging sector is becoming ever more established as an invaluable part of a broker’s toolbox. www.sfintroducer.com
Generally speaking, it’s a product that is being more widely viewed as a proactive, viable solution by borrowers and the broker community – a combination that bodes well for the market. BRIDGING BUSINESS IN 2022
From an F4B perspective, this continued shift in perception has translated into heightened enquiry levels in Q1, a trend that is likely to carry on throughout the year. This is evident in a survey from Glenhawk, which highlighted that 84 per cent of brokers expect to write more bridging business this year than in 2021. The research found that there is significant capacity among brokers for more business, with just 14 per cent saying that they had turned away more bridging cases in the past 12 months, compared with 57 per cent who could place more. In terms of ongoing opportunities, despite 74 per cent of brokers believing that Permitted Development (PD) will enable them to arrange more bridging cases, borrowers have been slow to embrace the 2021 changes to PD rights. Nearly three-quarters of brokers said that either less than 25 per cent of their landlord clients (43 per cent), or none (26 per cent), have asked for them to arrange bridging finance relating to PD. More than half of respondents (54 per cent) cited a lack of suitable properties as the main reason for this lack of demand, followed by fluctuating valuations and access to finance. The survey also revealed that lenders are exercising caution, with 60 per cent of brokers citing the placement of higher LTV cases as their biggest challenge, followed by securing finance for foreign nationals (37 per cent). For borrowers and brokers new to the market, how interest is calculated, or repayment terms, is the most confusing area (49 per cent), followed by the legal process (39 per cent) and the application process (32 per cent).
In addition, the results from Knowledge Bank’s latest criteria tracker revealed that ‘regulated bridging’ continues to dominate searches in the bridging sector, with February marking the fourth consecutive month that it was the most-searched term. Outside of regulated searches, for the first-time in four months brokers were searching in numbers for ‘commercial property’. As the needs of the UK workforce change, many business owners are having to adapt commercial spaces, either to accommodate hybrid working or to repurpose a property completely – with bridging loans playing a more prominent role in this modification process. THE ROLE OF THE PACKAGER
All of this makes for an increasingly complex set of borrowing scenarios, especially for those brokers who may not write this type of business on a regular basis or be aware of a range of lending propositions that meet the evershifting demands of business owners, developers, investors, landlords, and residential transactions that benefit from funds being raised quickly. They may also not be able to gain access to all the available products. It’s always been our job to know exactly what types of cases each lender will accept. Only then can we ensure that applications are packaged correctly so they can be processed at the first time of asking and maintain the right levels of ongoing support to ensure they move swiftly to completion. As a company with over 20 years’ packaging experience, we know how tough this sector can be for advisers – but we also appreciate also just how far it has come from a product, criteria, rate, and professional standards perspective. Whilst there is still some room for improvement, it’s a sector that continues to go from strength to strength. B I APRIL 2022 BRIDGING INTRODUCER
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REVIEW REVIEW
COMMERCIAL XXXXXXXXX
Retrospective or introspective… Brian Rubins executive chairman, Alternative Bridging Corporation Limited
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his month, we are celebrating 30 years in bridging and even longer in property finance. So what have we learned, and where to next? Going back to the beginning, bridging was usually the fix when a mainstream lender was slow to meet a deadline – or, worse, made a belated negative decision. Bridging lenders were often called upon to step in and save the day. Our process was not very different from mainstream lending – we just did it more quickly and charged a little more because our funds cost more. We did not have the same bureaucracy, but nonetheless we looked properly at every deal. So how did we do this quickly with limited use of mobile phones, and no email, Zoom meetings, or the web? There was no dual representation or automated valuation models (AVMs) – not even valuation panel providers – but we focused on getting the job done! We met every borrower and visited every property, and then issued terms that were credit-approved and subject only to due diligence. This is not so common now, but if it were, more deals would close more quickly. BRIDGING TODAY
How much easier it is to interpret the valuation or the report on title and make correct lending decisions having seen the asset and discussed the proposal with the borrower. Issues can be identified and resolved in far less time and with more certainty. Now it is often guesswork or gut instinct, with the decision in principle (DiP) based on minimal information, and the hope that assumptions will be confirmed during due diligence. Of course, as experienced lenders we do all www.sfintroducer.com
we can to add certainty, but too often it is not easy to do so. Today bridging is just another source of finance. It is expected to happen more quickly than the mainstream, and often does, but it amazes me just how lethargic borrowers and their solicitors can be after they receive the DiP. Why is that so? There are a dozen different reasons – all avoidable if borrowers and their solicitors prepare in advance and respond when requested. Moving on, bridging business is far better today. This is because of competition and the much wider offering available to brokers and their clients. Interest rates are lower, because lenders rely less on their own limited capital, and instead gear it with bank lines providing a lower, blended cost of funds.
“It is interesting how the business has evolved. Strangely, today the average loan size may be larger, but the number of larger loans of £5m-plus has diminished, and this leaves a hole that brokers and lenders could fill to their financial advantage” The range of products has also vastly expanded, with regulated and non-regulated loans, commercial and residential bridging, development finance and overdrafts. In fact, a diversified bridging lender should be able to meet every short-to-mediumterm property finance requirement, from the smallest loan to at least £10m and perhaps more. It is interesting how the business has evolved. Strangely, today the average loan size may be larger, but the number of larger loans of £5m-plus has diminished, and this leaves a hole that brokers and lenders could fill to their financial advantage. Also, repayment periods have extended from six to 24
months, and there is the availability of interest-only five-year term loans. Originally it was loans secured on private dwellings, some residential investments, the occasional commercial property and – for us – development sites. Fast forward and this includes mixed property portfolios, houses in multiple occupation (HMOs), student housing, residential and commercial developments, retail parks, and shopping centres. Further, we have progressed from static loans drawn down in one tranche to an overdraft arrangement with unlimited drawdowns and repayments with interest only paid on the balance outstanding – liquidity on tap! Loans for refurbishment, including structural alterations, are offered by a number of lenders, and some extend to residential development finance if they are broader-based and have the availability to asset manage the loan. Experienced lenders know how to continue their support, making decisions swiftly with minimal fuss. EXPANDING BORDERS
With the passage of time, a sense of reality has entered the market. It is now recognised that a white elephant will remain so however much money you throw at it. However, this does not mean that the bridging industry will not continue to expand its borders. We and a few others have successfully lent in Scotland, notwithstanding the different legal system, and plan do so more and more. I expect there will be similar progression into both southern and Northern Ireland, and there have been the first rumblings of going farther afield into Europe. However, before this, there is the need to establish distribution routes and understand local markets, different legal processes, and how to deal with problems. So bridging has matured, but there is still a long way to go for both brokers and lenders alike. Where will we be in 30 years’ time? B I APRIL 2022
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FEATURE
COMMERCIAL BRIDGING
COMMERCIAL
BRIDGING IN THE NEW NORMAL
FEATURE REVIEW
COMMERCIAL BRIDGING XXXXXXXXX
Jessica Bird considers the state of the commercial property market as it emerges from the pandemic, and the role that bridging has to play as it enters the next phase
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ollowing a short hiatus at the start of the COVID-19 lockdowns, the residential property market has gone from strength to strength over the course of the past two years. It might be tempting to say that UK property has hardly faltered, but this would risk ignoring that other key section of the market, commercial property. Here, there has been considerable uncertainty and change, without the same surety of pent-up demand to keep things afloat. The leisure and hospitality industries took a particular hit, while retail businesses found themselves having to adapt quickly to a new, more remote way of life. As the country looks to emerge from the pandemic – while still coping with its long-lasting ramifications – now is the time to consider the key trends in commercial property, and more specifically, the role of bridging in keeping this market going. → APRIL 2022 BRIDGING INTRODUCER
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FEATURE REVIEW
COMMERCIAL BRIDGING XXXXXXXXX PANDEMIC PROBLEMS Although the pandemic buoyed the residential mortgage market, creating pent-up demand, fuelled by tax breaks, as people reassessed what they wanted out of their living spaces, the commercial lending market has had a far less positive experience. Luke Egan, director of bridging and development at Truffle Specialist Finance, says, “During COVID, the commercial lending market all but shut down. We’re now almost where we were before COVID, to an extent.” There was a fundamental change during the pandemic, the effects of which will not fade any time soon. Retail, leisure, and hospitality businesses were unable to function under lockdown restrictions, or at
“Investing in any retail or leisure space now comes with the question: What if the worst happens? The country is not out of the grips of COVID-19 yet, and even if the worst is over, the entire population has learned a lesson in fragility – all it might take is another big, unexpected event to shake the commercial market to its core” least not at full capacity, and consumer preferences have started to steer away from the high street. Across the country, the shift to online retail that was already starting pre-pandemic became the norm, with those holdouts who had previously stuck staunchly by their high streets and shopping centres finally having to concede the benefits of a digital approach. Thus, retail giants such as Debenhams and Top Shop closed their doors, either in favour of an online-only approach, or for good. Although pubs and restaurants – with the help of schemes such as Eat Out to Help Out and the general British need for social hubs – returned in force once restrictions started to ease, even these have had to change in many cases. Business owners have been forced to consider whether their spaces can facilitate social distancing while still earning enough to cover rent. Meanwhile, the en masse shift to remote working for those based in offices had its own effect. City centres, particularly the previously bustling financial and professional hubs in London, were suddenly bereft of their main footfall once office workers were forced to set up in their living rooms, while tourist hubs felt sharply the loss of international travel. Although many businesses have chosen to return to the office, a considerable number have not, or have www.sfintroducer.com
realised the benefit of a hybrid approach, meaning traffic in these places may be affected long-term. Nick Jones, sales director at West One, says, “It has been a particularly difficult couple of trading years for businesses, especially hospitality and retail.” TO THE RESCUE Many businesses had to face the final music, but for others, short-term commercial finance might have held the key. Unlocking funds to make refurbishments to an outdoor space, for example, might have made all the difference in those first months when indoor socialising was still off the menu. Meanwhile, retail businesses making the move online could turn to short-term finance in order to secure warehousing, or cover any of the various other costs of making a fundamental change to operations. The lending market was ready to meet these challenges head on, Jones explains. “Commercial bridging is in a much better place than it was maybe 10 years ago. The offering is better, the rates are better, and therefore the opportunity is better.” While all of this sounds like a healthy outcome, the fact remains that commercial lenders are now looking at a market full of uncertainty, no matter how well they might have adapted. Previously, a large retail space with a well-established name such as Debenhams as a long-term tenant might have seemed a relatively low-risk lend; now, however, the definition of what makes a stable tenant has been shaken. Kara Williams, specialist account manager at Together, says, “In terms of commercial property, the pandemic and successive lockdowns sounded the death knell of many high-street retail giants.” However, she also points to the positives, saying, “This has led to more opportunities for investors to repurpose the empty stores left behind, be that converting them into leisure venues, mixed use, or residential accommodation.” Nevertheless, investing in any retail or leisure space now comes with the question: What if the worst happens? The country is not out of the grips of COVID-19 yet, and even if the worst is over, the entire population has learned a lesson in fragility – all it might take is another big, unexpected event to shake the commercial market to its core. Egan says that this uncertainty has also been seen within the market, with “lenders falling out of the market on the term end, and the uncertainty around the high street following COVID.” He adds that even the more positive trends arising now are tinged with mystery, explaining, “It’s now about the redemption, or the return, of the high street. How is that going to go? What’s it going to look like?” Looking ahead, Ludo Mackenzie, head of commercial lending at Octopus Real Estate, cites several key challenges that might continue to make it difficult → APRIL 2022 BRIDGING INTRODUCER
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FEATURE
COMMERCIAL BRIDGING to lend with confidence in this market – namely, market uncertainty, build cost inflation, cost of living increases and rising interest rates. CHASING HIGHER YIELD One of the changes the events of the past two years have wrought, says Williams, is that investors are becoming more creative in terms of the commercial properties they want to take on. She explains: “I think we’ll see more landlords and investors seizing opportunities to acquire property, using bridging finance to expand their portfolios and diversify into different areas of the UK, as well as different asset types. “For example, we could see more investments in HMOs [houses in multiple occupation] near city hospitals or universities, or those taking advantage of the continued popularity of staycations by snapping up sought-after properties in holiday hot spots.” This is also about chasing higher yield, or the security of a diverse rental income. This means that mixed-use properties are becoming more appealing, providing stability whereby – if something were to happen to stop the commercial tenant from continuing to trade – the residential income could still be relied upon. Mackenzie says, “Investor appetites have shifted post-pandemic, and that granularity of income is less risky than having a single commercial tenant. That’s the pattern I’ve seen most of all – pushing money into those areas where the risk is not binary on a single occupier.” Egan agrees that investors are getting increasingly creative in terms of their approach to commercial properties, with Truffle Specialist Finance seeing interest, for example, in deals that would see a conversion from one type of commercial use to another – one that fits better with changing consumer demand. Jones says, “People are looking at the way commercial premises are structured and laid out, and trying to make it a more useful space moving forward, while maximising income and investment value, and bridging can obviously be a big part of that, as it’s flexible in the way it can be used. “This really is a great opportunity for investors to get involved in an area of the property market they might not have been in before.” Roxana Mohammadian-Molina, chief strategy officer at Blend Network, warns that while there can be some lucrative opportunities in this market, these are not to be entered into lightly. For example, she cites complicated planning laws as an issue that faces many developers working in this space, either where a property does not have planning, or needs to change its designated use. “Planning comes up again and again as being one of the main challenges that property developers face,” she continues. “Reducing the red tape and making the process easier would be a huge improvement. Of course, we need to find a balance.” Mackenzie says that this reinforces the need to
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work with the right partners, as the best lender will understand that planning, among other things, can be a key hurdle in this market, and be willing to work alongside the broker and borrower to get the best outcome from a complex case. “You need a lender that doesn’t panic, and also doesn’t seize that as an opportunity to hit you with punitive charges,” he adds. “We view it as keeping good business on the book and supporting our borrowers.” COMMERCIAL TO RESIDENTIAL Another key trend happening in the commercial property market is change of use. A perfect storm comprised of the move away from traditional retail spaces, a more permanent normalisation of home and hybrid working, and ongoing supply issues within the residential market,have caused many to consider whether commercial properties might be better used to boost waning UK housing stock.
“Another key trend happening in the commercial property market is change of use. A perfect storm comprised of the move away from traditional retail spaces, a more permanent normalisation of home and hybrid working, and ongoing supply issues within the residential market have caused many to consider whether commercial properties might be better used to boost waning UK housing stock” Add to this permitted development rules (PDR) that ease the conversion of disused commercial space to residential housing, and the UK may see a fundamental change to the faces of its high streets and city centres, moving toward more hybrid commercial and residential hubs. Once again, short-term finance might be the answer to taking on these projects and giving a much-needed boost to residential housing stock. Mackenzie says: “The PDR change was a really great policy, taking a load of tired office buildings out of circulation and turning them into residential, where we have a shortage.” Mohammadian-Molina says that it is likely this trend will also manifest in co-living and mixed-use spaces, where “people can have a lifestyle” following the isolation of the pandemic. Mackenzie agrees that this could create a “vibrant mixed-use town centre.” Some have also suggested that this might → www.sfintroducer.com
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FEATURE
COMMERCIAL BRIDGING
A new renaissance for the commercial sector? Jason Berry group sales and marketing director, Crystal Specialist Finance
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here’s no denying that the commercial property sector has experienced a tumultuous few years. The earthquake of the pandemic is still being felt by commercial landlords, tenants and investors alike. Even big-name investors have struggled to navigate the impact. However, the sector is seeing green shoots of, not just recovery, but also financial opportunity, leading many to ask the question, are we on the verge of a commercial sector renaissance? There’s no denying the confidence in commercial real estate is ramping up, with wealthy foreign investors expected to spend £1bn-plus this year, undoubtedly targeting office buildings, where performance is predicted to be strong. With this interest in Britain’s commercial sector beginning to soar again, we can perhaps view this as an indication that pentup demand is now being released following the COVID-19 restrictions. This will be encouraging news for many, who spelled doom for the UK’s office market and its surrounding footfall businesses as many companies adopted permanent hybrid working styles. However, this resurgence does not mean it’s smooth sailing for investors and brokers, who still often come up against strict mainstream lending criteria and challenges with valuations.
This is where specialist brokers and lenders have filled the vacuum, offering bespoke financial solutions that consider the challenges of adverse credit, first-time commercial landlords, and the need for projection-based income assessments. One such financial solution enjoying a sudden spike in popularity is commercial bridging loans. WHAT IS A COMMERCIAL BRIDGE? A commercial bridging loan is a short-term loan secured on a commercial property. Working similarly to a residential bridge, this can be utilised for chain breaking, capital raising or for renovations. With all bridging exits, it’s important to have a clear repayment strategy for the loan when it’s due. Exit strategies often include the sale of the property, funds from the business or refinancing to a longer-term of borrowing with a lower interest cost, such as a commercial mortgage. This type of finance has proven useful for investors and brokers who have enjoyed the speed and flexibility it offers, whilst also offering a silver bullet for dealing with a number of scenarios. This can include everything from: An urgent cashflow injection to cover unexpected infrequent expenses, fluctuating wages or to cover a tax bill. Accommodating a speedy move, the purchase of a new property to expand their business or simply as an investment. Perhaps most timely, funding the refurbishment or renovation of a property.
see this country move towards a more ‘European’ model, with town and city centres focusing on providing social, leisure and hospitality spaces to cater for both visiting tourists and local residents. It is not simple, however. In reality, there are few who would look at a Central London office block – for example – and imagine it to be a desirable place to live. On the other end of the scale, a local high street shop front might also need a lot of work to make it habitable, as residential housing has different demands in terms of light, privacy and outdoor space than commercial properties. It is important, especially as we consider the lessons learned during the pandemic about space
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For the latter, once this work has been completed the property should have increased in value and is more likely to meet the criteria of a commercial mortgage lender. This quick way to raise cash for renovation and upgrades is particularly useful as developers utilise the changes in permitted development legislation, or aim to comply with Britain’s tighter green energy regulations. WORKING WITH A SPECIALIST When trying to secure mainstream commercial finance, brokers will find themselves up against a variety of obstacles, especially for more complex planning or change of usage, making it harder for them to secure the funding they need. This is where a specialist can help problem solve and drive your case forward. They can also provide you with access to exclusive or more bespoke products, meaning they can secure an even better deal for a client. But it doesn’t end with monetary value, brokers can also leverage specialist’s expertise and guidance when choosing the best exit strategy and terms for their client. In conclusion, with the reopening of commercial, retail and leisure industries, the developments and decisions made over the next five years will significantly shape the ongoing structure of the commercial property sector. Vital decisions that, if made wisely, can help assure a new greener, reinvigorated and innovating sector – and a commercial renaissance that we are all hoping for.
and the importance of the home, not to force through conversions that ultimately create sub-par residential spaces. Due to the issue of high demand and low supply, these will – at least in the short term – still likely be filled with tenants, but potentially at a cost to quality of life. Meanwhile, many businesses will likely return to the office in some capacity, bringing with them increased commerce in town and city centres, and a return of at least some of the old demand for commercial spaces. This will be hard to meet if every shop or café has been converted into residential housing, especially if said housing is not of a desirable standard. Lenders must take these complex nuances into → www.sfintroducer.com
FEATURE
COMMERCIAL BRIDGING account, in addition to the experience of the investor and developer, and the certainty of the exit once any conversion has been completed. All of these complexities mean that this is a vibrant, evolving market, full of opportunities, but one that needs to be handled with incredible care. FLEXIBLE WHILE CAUTIOUS For Williams, the growing complexity of commercial property investments, either in terms of the type of properties or simply the changing understanding of what makes for a good tenant or a steady industry, means lenders must adapt, while brokers and borrowers must consider all the tools available to them. As a result, she says, commercial bridging will emerge as an even stronger option. “One of the lasting effects will be a greater awareness of bridging as a fast and flexible finance solution,” she says. “Many mainstream lenders toughened their criteria during the uncertainty of the last couple of years and bridging lenders such as Together have stepped into the gap, helping to provide short-term finance for entrepreneurial investors and [small to medium enterprises (SMEs)] with strong business plans and clear exit strategies.
“While flexibility and innovation are important, the other key piece of the puzzle is caution, not least because the market has seen in practice how unpredictable retail can be, for example, and has had to reassess what counts as a stable commercial tenant” “This acceleration has increased bridging finance’s move into the mainstream as complementary type of finance to more traditional options.” Egan says that an agile, flexible approach will also be needed when it comes to embracing change around office space, which the specialist and short-term markets are able to provide. “It’s not just the high street shops that have suffered,” he explains. “We all view the office differently now, and it means different things to different people. Some business might, for example, only want an office now for three days a week. Lenders need to be a little bit more agile, understanding and flexible when looking at this side of the market. For all industries, there’s going to be change.” He adds that Truffle Specialist Finance has seen a number of enquiries for loans relating to offices that fit a new, hybrid approach to working. This might
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also factor in refurbishments of existing office space, such as to move to being more spacious, social and collaborative, instead of simply fitting in as many desks as possible. While flexibility and innovation are important, the other key piece of the puzzle is caution, not least because the market has seen in practice how unpredictable retail can be, for example, and has had to reassess what counts as a stable commercial tenant. “Lenders are now taking what might be seen as a little bit of a more diligent approach up front,” Egan explains. “This has actually helped, as it means looking at the tenants in a bit more detail earlier on, for example.” Mohammadian-Molina agrees: “Commercial property has taken a hit, whether offices or shop space. Lenders are a lot more cautious than they used to be, because we don’t know what it will look like. It’s a difficult one at the moment.” This includes taking a much more in-depth look at the covenants, the strength of the tenancy, ideally favouring long-term relationships over rolling, shortterm lets. Vic Jannels, CEO of the Association of Short Term Lenders (ASTL), says: “One of the things which we’re noticing is the level of scrutiny that all lenders are embarking on in terms of first, ensuring that the customer is who they say they are – which they have been doing for years, of course, but is now much more detailed – second, the source of funding, third, the manner in which they are going to conduct the transaction. “If it’s a development, this means considering the reorganisation or ground-up development of the property, who the builders are and what their history and reputation is. Everything under the sun is becoming far more detailed and inquisitive. “This is not a bad thing – lenders are doing the right thing in order to protect themselves from potential complaints at a later date that they haven’t done their due diligence properly. The majority of – if not all – lenders at the moment are doing reams and reams of additional due diligence.” He explains that this is not just because of the lessons learned about uncertainty over the course of the pandemic, but also because of the “growing risk factor around anti-money laundering [AML].” “Lenders at the moment are really determined and identify historical sources of wealth,” he adds. As these deals are getting increasingly complex, Mackenzie says, lenders must strive to create a direct connection between the decision-makers and the borrower, in addition to fostering a deep market understanding. This means that the commercial bridging market is less likely to be able to rely on technology in order to fuel its decision-making, and will always fall slightly behind the other markets in this regard. “It’s always been impossible to create an www.sfintroducer.com
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COMMERCIAL BRIDGING XXXXXXXXX
The PDR policy allowed tired office blocks to see a new lease of life as residential properties
algorithm for this type of lending, though some banks have tried,” Mackenzie continues. “The things that make for a good loan are hard to quantify, like the quality and integrity of your counterparty, the quality of the asset – these are all things that as a human you can make an assessment about. I don’t think any algorithm is capable of doing that.” PART OF THE TOOLBOX In an environment of constant change – whether in terms of consumer demand and behaviours, shifting risk patterns, or potential uncertainty coming from extramarket forces – commercial bridging is an important part of the wider picture. “With the education going on around bridging, it’s not the last resort any more,” says Williams. “There’s going to be a lot more people looking at commercial bridging, and I think we’re more even more comfortable with the idea of it now.” Beyond refurbishment, development or the conversion of commercial properties, bridging finance can also be used across a variety of business needs. For example, if a business owns its own property, this can be used as a security to gain finance to address cash flow issues, providing a much-needed source of reassurance and support in the face of potential instability. While government schemes have gone some way to help businesses that have been affected by lockdowns and other COVID-19 concerns, the fact remains that with the ramifications of periods of furlough, supply chain issues, the need to pay off emergency loans, and the current issue of rising fuel costs – to name only a few – some businesses will likely need to turn to short-term finance in order to make it through a difficult period. www.sfintroducer.com
In addition, Williams says: “The shortage of decent commercial and residential accommodation will continue to be a challenge, but I’d expect to see the bridging market step up to the plate by providing loans for projects such as property conversions, with clients refinancing onto longer-term buy-to-let or commercial mortgages once they’ve completed their refurbishments. “Access to mainstream finance in the short to medium-term could also be a challenge for commercial clients who want to capital raise, whether that’s for starting up a new venture, buying new equipment for their existing business or expanding their property portfolios. Again, commercial bridging finance could be a viable option for them to realise their ambitions.” Jones says: “There is a growing need for short-term flexible finance, and having commercial bridging as part of your armoury is certainly a good thing. Over the next few years, the biggest growth in bridging lending will be in that commercial area. In any counter-cyclical environment there is opportunity.” He adds that this is not just about addressing challenges, but taking a more positive approach to the future, such as using bridging in order to invest in all-important technological advancement. Mohammadian-Molina concludes that the specialist market is primed and ready to take advantage of new opportunities, and facilitate change across the commercial property market, saying: “Short-term finance is key, because specialist lenders are by nature much more flexible, nimble organisations than the traditional lenders. They are more able to understand the challenges and lend accordingly.” B I APRIL 2022 BRIDGING INTRODUCER
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FOR BUY-TO-LET Jessica Bird outlines Bridging Introducer’s latest round-table discussion, which looked at the role of short-term finance within an evolving buy-to-let market
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he residential buy-to-let (BTL) market has faced a considerable amount of change since BTL mortgage lending became a reality. This evolution was whipped into a frenzy with the events of the past couple of years, with borrowers chasing more diverse portfolios and higher yields, while also facing increased regulation, not to mention the changing demands of tenants. Long-term lending can only do so much in this shifting environment, so Bridging Introducer asked experts from Together, Movin Legal, Shawbrook Bank, SoMo, and Vincent Burch about what role short-term finance plays in keeping this market moving. COMPETING FOR HIGH YIELDS Kara Williams, specialist account manager at Together, says that in today’s market, landlords are diversifying their portfolios, with a view to chasing higher yields. For example, someone who has previously dealt largely with traditional properties might consider entering the holiday let market, which has been buoyed by the rise of ‘staycations’. She adds, “Bridging is a key component of this, especially due to the speed of a transaction that can help a borrower compete, be able to purchase diverse properties for their portfolios, and gain higher yields.” One of the key uses of bridging for a landlord newly entering the holiday let or house in multiple occupation (HMO) market, she continues, is allowing them to build up a solid track record of bookings or secure tenants, and prove financial performance before moving on to a long-term loan. “They have the ability to look at a bridge on a retained
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“[Tech] is about the lender’s ability to help the speed of transaction…but the relationship is key – speaking to an expert to be able to get that speedy transaction” KARA WILLIAMS or a rolled-up basis, and in terms of holiday lets, for example, the ability to build up bookings without actually servicing the loan at that point,” she adds. Jamie Jolly, managing director of SoMo, notes that this diversification is not only being fuelled by the drive to take advantage of growing niche markets, but also makes sense from a risk point of view. “If you’re relying on a model of a single property and a single occupant who is responsible for paying that rent, and they don’t pay, you’ve got an issue,” he explains. “If we look at the opportunities within the HMO space now, say, using a six-to-eight-bed house as an example, because of the low cost of borrowing now, you can effectively run a model of three rooms in order to pay for the mortgage, and then four or five rooms of pure profit. The chances of them all being fully vacant in in our climate, in our market, in the United Kingdom, is zero, effectively.” In order to take advantage of these opportunities and snap them up at a time of high demand and competition in the purchase market, Jolly says bridging finance is a straightforward, quick way to access finance to give a property investor the edge. He adds, “When you’ve got a good understanding of the bridging market, the lenders, and the products, you can gain a bit of a competitive advantage over other people who operate within your space. “It’s really competitive buying properties at the moment – if you can get yourself in a position where you’ve got some leverage because you’ve got the finance and access to the right lenders, then absolutely use it.” Another way in which landlords are potentially able to chase higher yields is by buying properties at auction. During the pandemic, property auctions became – by necessity – much more accessible, shifting online in order to survive, and opening up this avenue to an entirely new group of investors. One side effect of this, however, is that auction purchasing has become quite a congested route to market. This is all the more reason to have bridging as part of a wider toolbox, and to understand which lenders are best placed to provide funds at the speeds needed. Jasdeep Bhogal, senior relationship manager at Shawbrook Bank, says, “Bridging is probably the easiest route to doing an auction purchase, because of the www.sfintroducer.com
speed it provides. You’re more likely to be in a position to act quickly, and you might be able get in at lower than the offer price because you have already got the bridge in place. “Then you can also use a bridge if work needs to be done. It’s a great opportunity to get that work done before you have to think about a term loan. It gives the client that breathing space.” INCREASINGLY COMPLEX However, Williams notes that all this adds a level of complexity. “What they’ve got to be careful of is the running costs and conversion costs. For example, if [you’re] going to purchase a holiday let, you’ve got to run it like your own small business and factor into account things such as cleaning and maintenance. It’s not just the usual standard BTL costs.” Emma Hall, key relationships director at Movin Legal, notes that there are indeed some strict legal considerations, which clients “unfortunately at the moment don’t always understand.” For example, she suggests there is some confusion around which properties need an HMO license, which is causing disagreements among lenders, brokers, and borrowers, to the detriment of some deals. Hall adds, “So the front end of this market is really great, I agree, but the back end at the moment is becoming a lot stricter, and there seems to be less of an appetite to take that risk. We are noticing that we’re getting more of a ‘computer says no’ attitude at the back end. Your front end bit might be really great, but when it gets to the lawyer they could say something completely different about how easy that deal might be.” Jolly says, “What I’m picking up from that is the value of having a good team around you – legal partners, brokers, and lenders, people who understand that marketplace, and ‘I’ve got a good understanding of those rules and regulations’, because they are a bit grey.” Hall agrees, adding that the other side of this is to make sure to have “a sensible conversation,” and for the broker not just to assume a deal is done once that initial box has been ticked. Bhogal notes that the proliferation and growth of this market has added to its complexity. “There’s so many different lenders out there →
“Start educating [landlords about EPCs] now, and you might end up picking up some more business, because you have actually invested in them through no financial gain” EMMA HALL APRIL 2022 BRIDGING INTRODUCER
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“It’s our job to educate brokers as much as it is theirs to support us with business. If you’re not a friend to your client, someone else is going to take that client away from you” JASDEEP BHOGAL now as well, there’s such a variety of different products that are available,” he says. “But there are lenders that do it really well, of course. It’s about understanding those types of securities – for example, as a specialist, we know about HMOs and can give that guidance on Day One to the applicant. “For example, you can give them a heads-up as to whether planning is going to be an issue. When you’ve got that experience, it can make a massive difference.” When bridging comes into play, there can be various moving parts; for example, it might be used to support the borrower during a period of gaining or changing planning permission. This makes it even more important to work with lenders and brokers that understand the nuances. Bhogal adds, “It’s about really trying to understand, not only from the perspective of HMOs and the stuff that everyone is doing a lot of, but also the security and what the client really wants to achieve with the bridge.” Jolly agrees. “Everybody has to have a very clear understanding of what the objective is, the pros and cons, and the worst-case scenario. It’s about making sure that you’re operating with the right people at the end of the day, and being commercially minded, with common sense and a clear objective.” Hall adds that this understanding of the details of the transaction also needs to take into account the all-important issue of exits. “One issue that we’re coming across is moving that security on afterwards,” she explains. “It has to be something sellable to move on, and that’s quite a hard conversation to have with the client. Yes, your local council might say it’s OK, but your lender is looking at it from a completely different viewpoint.” This varies, Bhogal adds, across different security types. For example, smaller HMOs are a relatively safe bet for being marketable at the end of the bridge, so
might be easier to deal with for a less-experienced client, but a lender will look carefully at the expertise of a client applying for finance related to a larger HMO or other complex property type. Even experienced clients, Hall continues, might find themselves faced with a confusing and complex market where each bridging lender has different criteria, or similar properties are subject to varied expectations. Vincent Burch, mortgage director at Vincent Burch Mortgage Services, agrees that from the broker perspective, this can mean being stuck between warring expectations, such as those of a local council and a lender. He adds, “It is about having a personal relationship with a lender that can take a view on the case you are actually writing. If the lender’s never going to accommodate the differences, then it’s going nowhere fast.” AUTOMATION VERSUS RELATIONSHIPS In a market so wholly dependent on relationships, the question arises: Is there a place for tech and automation that does not undermine human conversations? Hall adds that it is important to have a clear point of contact. “Who can we talk to within the lender and the law firm? Can we have a conversation with the person rather than an email conversation? Let’s just try to find someone that we can talk to.” While the ongoing evolution of technology and digitalisation has brought value to this market, making it easier to source and manage data, and creating pathways to connecting with clients, lenders, and intermediaries that do not rely on being in the same place at the same time, it is important to find a balance. This is particularly true in such a subjective market, says Bhogal, while Jolly adds, “We all know there’s value in technology, but we don’t want to go down the route of finding it’s all done via a computer because we need people, characters, personalities. We need individuals to take a step back sometimes. “It’s fair to say that within specialist lending, bridging and commercial, criteria are a guideline at the end of the day; it’s not a hard and fast. We could all be asked to look at an inquiry, and you’d probably get six different answers.” “The speed of transactions has changed with technology,” says Williams. “It’s about the lender’s ability to help the speed of transaction, by using automated valuation models [AVMs], for example. But I do agree
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BUY-TO-LET that the relationship is key – speaking to an expert to be able to get that speedy transaction.” Bhogal adds that the importance of personal conversations also comes into play in terms of keeping clients long-term. “I always encourage brokers to speak to me on Day One and let me check whether we actually have the capacity to ensure we can work to their timescales,” he explains. “If you know you’re not going to be able to meet the timescales, don’t put the client or the broker in that situation, because you’re not going to get the next deal with them.” For Jolly, the pandemic has increased the demand for relationships among borrower, broker, and lender, over and above a fully digitalised approach. He says, “We’ve been around, gathering feedback from borrowers, partners, and introducers, and what the pandemic has highlighted for all of us is the demand for a relationship – someone to talk to. “We were very close, as a lender, to going down more of a platform, computer-focused route. I’m a fan of that, I don’t see an issue with it, but because we stayed open throughout the pandemic, a lot of the feedback of late has been very much that that was a welcome interaction. “People have welcomed an opportunity to speak to us, whether myself or people in sales and underwriting. “What it’s created from a lender’s point of view is a chance to identify what the progression of our business is going to be moving forward, and how we want to engage. At SoMo, our model will be more of a personal one.” Williams adds that this is particularly true following a couple of years of being unable to build face-to-face relationships, instead being “stuck behind emails and stuck indoors.”
“When you’ve got a good understanding of the bridging market, the lenders and the products, you can gain a bit of a competitive advantage over other people in [the BTL] space” JAMIE JOLLY
EMERGING POST-PANDEMIC The past two years have been a tumultuous time for residential landlords, leading Burch to point out that this group has been “busier than ever,” for better or worse. He adds that during the strictest parts of lockdown, this market was stymied, much like other pockets of property finance, by the inability to get surveyors out and keep all the moving parts in place to get the job done. Through all of this, and indeed as the country starts to emerge into something a bit more like normal, it is important to remember the role of bridging in facilitating change. Burch continues, “We can see there’s opportunity with bridging to buy a property and add value. However, you potentially have a lot of novices who don’t want to pay a bridging rate, and just want to pay a BTL rate – they don’t understand the difference, or why they can’t get the term rate. “The reality is, those people aren’t experienced, and they need a bit of help.” Largely, however, residential landlords are well versed in the opportunities available to them post-COVID. The gap to fill is on the commercial and semi-commercial BTL side, though this has its own complications, especially for newer entrants. Burch says, “There are quite a few people thinking ‘I can’t get the properties I want in residential BTL, I don’t want to pay too much, I’m going to go to a semicommercial or commercial opportunity’. But they just don’t have the experience. “It’s so hard to get a red book valuation done on a commercial or mixed-use property, especially in time for an auction purchase. “People don’t see the pitfalls, they just see the pound notes. So, commercial is a great opportunity postCOVID, but it’s got lots of pitfalls and it’s really for the experienced investor.” Bhogal says that with stock concerns in the residential BTL market, investors are having to get creative and “maximise other assets,” which is where there might be an uptick in purchases of commercial properties. For example, in order to create an injection of residential housing stock, investors are considering using permitted development rights (PDR) in order to convert commercial properties into HMOs. “They are trying to create different stock, because the stock within the buy-to-let market is struggling,” Bhogal explains. →
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BUY-TO-LET “Bridging is helping with that, because it creates opportunity – but at the same time, demand for that kind of security is low, which is obviously having an impact on the BTL side of things.” Another trend that has been widely discussed post-pandemic is the increasingly complex nature of borrowers’ finances and histories. Hall warns that the market has yet to see the full fallout of elements such as the furlough scheme and mortgage payment holidays. “We’re not out of the pandemic yet, and we don’t know the outcome,” she explains. “But I think this is a massive opportunity for lenders, because this market is going to be dealing with clients that aren’t what we traditionally would have dealt with before. “They’ve maybe been furloughed, or made redundant, for example, and there’s scope, now that we’re in a completely different scenario to what we were a few years ago, to actually do something niche to pick up those clients whose circumstances are different, through no fault of their own.” GOING GREEN In the race toward net zero, landlords and the PRS in general are under particularly strict scrutiny. The housing market accounts for a significant amount of the UK’s carbon footprint, so is naturally one of the first places to start on the campaign to go green. The government is consulting on the specifics, but ultimately will be bringing in clear regulations around the Energy Performance Certificates (EPCs) of rental properties, likely to hit in two waves in 2025 and 2028. This, the panel warns, is an incredibly tight deadline for landlords whose properties – or whole portfolios – might need considerable work to get up to scratch under the new standards. To this end, bridging might provide a solution. Williams says, “I definitely think we’re going to see an upsurge in bridging because of this, mostly in the second charge bridging market. Historically, second charge bridging may not be as popular, but there’s been an increase in LTVs, and rates are more competitive than ever. It would make commercial sense – if you need to bring your EPC rating up on a buy-to-let, why would you remortgage if you’re already on a lower rate with your lender? Also, you’ve got the early repayment charges (ERCs) to pay. “Positively, if you are making changes to your property, you might make an increase on the valuation as well.”
She says there needs to be a considerable amount of education among brokers, to ensure landlords do not leave this work until the last minute, adding, “Do your research, look into it before that deadline comes and, if you are unsure, speak to a packager, speak to a lender, use your relationships. Speak to an expert.” Shawbrook Bank’s recent research found that one in seven landlords admitted they were not aware of the proposed changes, or the impending deadlines. This is “quite frightening,” according to Bhogal, particularly when considering the number of older properties making up UK housing stock, and the substantial amount of work that will likely be needed in order to bring them up to the proposed C rating. “You’re talking about astronomical costs,” he continues. “People just don’t have that money, and this is where bridging is going to be massive. Even if people do have the money, they don’t want to use all their resources on just doing that work, potentially having nothing left in the pot. “Bridging is going to be massive, but ... [so is] education – educating clients from our perspective, but the government also needs to step up as well.” Hall agrees. “There’s a big point here about how we educate landlords and clients. Is there any education out there? There really isn’t. There’s nothing out there telling people what they should be doing. There are a lot of government plans, and as an industry, we probably need to be more savvy.” She adds, “Go and educate your landlord clients as to why this is happening. It will come around much quicker than we all expect. “Start educating them now, and you might end up picking up some more business out of it, because you have actually invested in them through no financial gain of your own at this point, but you will get that financial gain moving forward.” THE BIGGER PICTURE One of the ways in which this market is evolving is in the emergence of bridge-to-let products, which combine short-term finance and an exit to a term loan into one product. This has many benefits, not least of which, for a lender, is being able to guarantee a continued relationship with the client long-term. Whether through a specific bridge-to-let product or not, there is value in lenders offering a single point of call for both short- and long-term finance in the
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BUY-TO-LET BTL market, which Jolly says reflects the needs of the current market. “A lot of the people who take out bridge finance need to finance long-term, and they might go to other lenders,” Jolly explains. “If you’ve got a bridge-to-let product, long-term you are securing that customer, keeping your balance sheet high.” Shawbrook Bank, for example, is in the position to provide the borrower with a clear path from short- to long-term finance. Bhogal says, “It’s not just for the standard bridge, it could be anything. We’ve done one recently where it was a run-down pub converted to a multi-unit block (MUB) – a heavy refurb. And then we turned it out for them afterwards as well. So you take them through the whole journey. “It’s holistic because the bridge itself is so open to so many different loan purposes, but then ultimately the end game is the term, so to have options available for that is brilliant. “It’s also beneficial for the client because it offers peace of mind on Day One. They’ve gone to a lender that has been able to provide them with the bridge; then they’re not going to have to worry about whether they are going to get it turned out. “The second advantage is that we tend to give them a discount on arrangement fees on the exit, so they’ve saved a bit of money in the long run. “The third benefit is the fact that you get the same valuer assessing the property for the term deal. “So there are benefits for the client, and it’s great if you’re a broker. It’s definitely worth considering that holistic approach.” Burch agrees that having a clear path to a term product can help remove some of the stress and difficulty inherent in this market, particularly considering the kind of complex deals that have become more the norm in BTL, from HMOs and MUBs to commercial to residential conversions. He continues, “Ten or 15 years ago, you might do a bridge, and the client has done the work, and a term lender goes out and values the property and it kills the deal. The client has put blood, sweat, and tears into it, but the deal’s fallen over through no fault of his own. “The fantastic thing about bridge-to-let is that the surveyor on the bridge, from Day One, is valuing it so that – if the borrower does the work they say they’re going to do – they know what they’re going to get at
“People don’t see the pitfalls, they just see the pound notes. So, commercial is a great opportunity post-COVID, but it’s got lots of pitfalls and it’s really for the experienced investor” VINCENT BURCH the other end. It doesn’t mean that the exit is always going to be with the same lender, but at least you know that, typically, if they do what they say and have that property ready for market, then it’s going to match what the surveyors told the bridging lender in the first place.” For Jolly, while SoMo is looking to introduce its own version, this is part of the bigger picture of the bridging market, which is focused on innovating and finding the best solution for the client. “I’m a fan of our industry,” he says. “I don’t bash other businesses, and if I can’t do something, I’ll introduce someone who can. I think [bridge-to-let] is a really good product that reflects our marketplace, and the more products we have that do that, the better for everybody in our industry.” COMMUNICATION KING “There’s no better time to be a customer in the bridging space. The rates are incredibly low and there’s some really good LTVs out there, and with a little bit of initiative, you can find products that make sense for where there’s demand.” Hall agrees. “I do think we’re in a world now where this is the opportunity to be inventive. If we’re not going to do it now, there’s never going to be a time to do it.” Bhogal says that relationships and communication are paramount in such a complex and innovative market, finally adding, “It’s our job to educate brokers as much as it is theirs to support us with business. If you’re not a friend to your client, someone else is going to take that client away from you, and they’re going to give them the whole service. “We need to be in a situation where we’re all helping each other, and brokers need to have a bit more of a holistic approach to the way they offer their clients products as well.” B I
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INTERVIEW
Lending with confidence Jessica Bird talks to Kara Williams, specialist account manager at Together, about plans for the future, and what can be learned from the past
The bridging market reached what felt like
any product enhancements or criteria changes we introduce in the future
At Together, February saw us provide £87m in bridging loans – a record for us in terms of short-term finance in a single month. With property supply being quite scarce, this has given investors the drive to develop or refurbish property and sell quickly – that’s the biggest driving factor, and will be one of the biggest driving factors in 2022 as well, as we’re seeing more and more competition in the market. We’ll see more homebuyers, landlords, investors looking to bridging, because it will help them seize opportunities a lot faster.
Bridging has seen something of a ‘race to the bottom’. Is this likely to correct any time soon, or will we continue in a historically low rate environment?
a fever pitch last year. How does 2022 measure up?
How does Together maintain quality during such unprecedentedly busy times? For Together, we can maintain quality through our strong, long-standing key broker relationships. The pandemic allowed us to take a step back, and we’ve now got just shy of 200 key broker partners on panel, while we also deal with those who aren’t on panel, who can access our products through packagers. Also, from our point of view, we provide an education to the market, on subjects such as packaging quality – which I think is crucial to being able to get the best outcome for the client in the short space of time that you potentially have to complete a bridge. It’s about internal and external relationships as well; for both sales and underwriting, it’s knowing your own criteria and your own products inside out – and relaying that to your packagers and your brokers. It’s about spending time with them, as well. In the pandemic we have been unable to go to see people, relying heavily on technology such as email and Teams. While the enhancements of technology are good, being able to go out and have face-to-face appointments will help increase the quality of business, while allowing us to keep the market informed of
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The health of the housing market has increased competition in the bridging sector, and this has definitely driven rates down to a historic low. It’s now making bridging finance more cost-effective than ever. However, bridging lenders have recognised that the ‘race to the bottom’ can only go so far before the margins on these loans actually become unappealing. If you’re looking for ways to actually stand out from your competition, you need to look at your criteria, and the relationships that you’ve got. What makes you, as a lender, different from all the others? What can you do differently from a lender who’s got the same rate as you to get the best outcome for that client, and to make you more attractive? The perception of bridging has changed significantly in the past decade. Has this progressed even farther as a result of the pandemic? Definitely. Traditionally, bridging finance was probably seen as a last resort – you get your offer, the client looks at the rate, particularly when they’re inexperienced as well, and says, ‘See you later’. But now, the short-term market has definitely become more mainstream. It now sits more alongside traditional bank funding as a complementary product. Historically, bridging has been perceived as expensive, but actually, the cost of short-term funding is often negligible in terms of the benefits of being able to acquire and develop property quickly. It may be the case that a broker client’s chosen property had been deemed ‘unmortgageable’ by mainstream lenders, so bridging can again help an investor purchase a property in a poor state of repair, develop it, sell it, or → www.sfintroducer.com
Kara Williams,
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Kara Williams
MARCH 2022 BRIDGING INTRODUCER
COVER
INTERVIEW rent it out, to exit their bridging loan while still making a decent return on their investment. The pandemic had also made people look differently at what they can do with property. For example, closures of stores on the high street may have led to more commercial-to-residential conversions, which may be too complex for your traditional lenders. So bridging finance is there to help you purchase, get on that property ladder, do that property up, and then you’ve potentially also got a term product at the end of it. Has Together seen a shift in the type of clients using bridging finance over the years, or the way they are using it? There’s been a real shift in the nature of the relationships, and in the kinds of clients who actually use short-term funding. We’ve got a huge number of high net worth (HNW) individuals, property investment companies, and also high street names, and we do expect this to continue in the future. What we have noticed at Together is that developers are taking out bridging loans for longer, or they are using bridging to exit their development facility to give them more time to finish their projects, or market them for the best price. This could be because they’ve faced slight delays with materials being delivered because of the pandemic, or builders may have had to let people down, and so on, but that’s certainly a trend that we have seen here at Together. Recent reports have shown that development exit is one of the top reasons clients take out an unregulated bridging loan, a trend that should continue over the next 12 months. What lessons has Together learned over the course of the past two years, and the events of the pandemic? The surprise performers during the pandemic were the residential and commercial property markets. There was also a huge surge in sales because of stamp duty exemptions, and obviously the government support through furlough and the Mortgage Guarantee Scheme. This support actually created a more buoyant short-term market, which then supported the current demand from customers to have the ability to exit their bridging loans by selling their property. In the residential space, a number of mortgage products with higher loan-to-value (LTV) were launched, giving the customer more options on eventual refinancing. At Together, we have a substantial level of liquidity, and an outstanding track record in this sector, so we’re well prepared for an expected period of growth ahead. I don’t think we’ve seen the last of the pandemic, or
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indeed the rise in the property market, either. The pandemic hit, and we realised nobody had a crystal ball, nobody knew exactly what was going to happen. The pandemic has, for us as a lender, encouraged us to sit back and think about what things we can put in place in case this were to happen again. Because of that, the property market has also evolved. For example, younger people and young professionals who maybe lived on their own now want to go into a house in multiple occupation (HMO), because they want human interaction in case anything like that first lockdown happens again. Looking at other areas enhanced during lockdown, how has Together’s relationship with technology progressed in the past year or two? Automated valuation models (AVMs) are a big one that we are pushing out at the moment. They continue to be as popular as ever – now 70 per cent of our broker cases actually pass on an AVM. We did enhance the criteria for a short period of time last year, but actually, because it’s worked so well, we’ve looked at the book, and it’s now included in the actual criteria, set in stone with higher LTVs. So you are able to look at an AVM for speed and cost as well. People have had to learn to use technology a lot more than they probably would have done in an 18-month period pre-pandemic, just as people’s buying habits have changed. We’ve had to learn to work on Zoom and Teams, not just among our sales force, but we’ve had to educate brokers virtually as well, because you couldn’t go into an office and talk to them on enhanced AVM criteria, so we’ve had to do it with technology. What about the balance between that and the human element? We’re still focusing on tech from a systems point of view. So, using AVMs, having fewer paper applications and forms. But there’s still that personal touch you get in front of a broker. People are all ‘Zoomed out’, and they want a face-toface conversation, but behind the scenes, particularly for bridging, we’re enhancing the technology for the more standard back-office processes to make it a more slick and streamlined journey. Together doubled its BTL lending volumes in 2021. How does this fit with short-term finance to create a holistic proposition? Bridging finance can help landlords who need to carry out refurbishments or renovations, and it’s flexible enough to meet those deadlines. In the long-term view, it will also really help with Energy Performance Certificate (EPC) deadlines as well. The Government www.sfintroducer.com
COVER
INTERVIEW
“You may have really low rates, but what’s the flexibility of your criteria? Sometimes it’s not all about the rates, it’s about the speed. At Together, we have certainty of funding. We’ve been in the market for a very long time, we’ve got strong relationships with our broker partners” has set targets for landlords to improve the energy performance of their properties and, although grants are available, we’d expect that some BTL investors will be looking for extra finance to bring their properties up to the expected standards. A short-term loan may be the perfect solution for this, and once landlords have completed the energy-saving improvements, they can look at taking out longer-term finance. In the same way, you can use the bridge to improve the property if it’s not mortgageable – do those renovations and then come back to Together for the term product at our lowest-ever BTL rate. Our speed of service and flexibility in bridging are key strengths for landlords to take advantage of before they put their properties on a term facility. There’s been a big shift in terms of rates at Together while continuing to focus on how we’re supporting clients over a longer period. Catering for people throughout the life-cycle of their property is one of our big focus areas, certainly over the past 12 months. Our big focus going further into 2022 is customer retention, and to that end we can offer short-term finance and then the client can come back to us for a term facility. We don’t have a product that is specifically interlinked, but I know that is something that we are looking at. What are some of the big trends or challenges facing bridging through the rest of 2022? One of the biggest trends or challenges facing the bridging market in 2022 is probably that ability to embrace technology to make the transaction smoother. We’ve seen that throughout the pandemic. I would also point to speed and transparency of pricing terms. Funding flexibility comes alongside that as well. You may have really low rates, but what’s the flexibility of your criteria? Sometimes it’s not all about the rates, it’s about the speed. At Together, we have certainty of funding. We’ve been in the market for a very long time, we’ve got www.sfintroducer.com
strong relationships with our broker partners. The aftermath of the pandemic has also shown us that buying habits have changed. For example, you’ve now got a lot of landlords and investors buying HMOs and permitted development properties. A lot of people haven’t been able to go abroad, so they fell in love with the UK again, making holiday lets a big trend. Exit certainty has been a big concern during the pandemic. What does the picture look like now? The key to any bridge, which could be a challenge, is the exit. So, depending on what you’re purchasing, do you have the finance to purchase that property, but also to renovate and refurbish it to bring it up to a standard to be able to exit that bridge? From Together’s point of view, it’s about common sense. We always ask ourselves, would you lend your own money on that asset? The pandemic has probably made lenders take a step back, because we’re seeing changes in buyers’ habits, and the different complex commercial transactions and BTL transactions. Lenders are thinking, actually, let’s have a look at our criteria and see how we can help with the exit at the end, from the point of offer. Does Together have any big plans for the next year or so that we should be looking out for? We are working on bespoke delivery for more refurbishment opportunities, and so we’re hoping to be able to further improve our products and service on that side. Our development finance side also continues to grow, and we now have a dedicated development finance team, which includes an in-house valuation team as well for those complex transactions. We are really looking to enhance our use of AVMs, and the criteria around that. This seems to be more popular than ever, and it speeds up the transaction and costs a lot less as well. What we’ve realised is that brokers prefer to talk about bridging enquiries with lenders, rather than having a ‘computer says yes or no’ system, because of the complexity that a bridge can bring, so from this month we are introducing a roaming underwriter team as well, to be able to provide confidence in lending decisions. Finally, what is it that makes Together stand out in this market? It’s our heritage and our common-sense approach, along with speed, flexibility, a can-do attitude, and the willingness to back the ambitions of our clients and brokers for bridging. B I APRIL 2022 BRIDGING INTRODUCER
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ADVERTISEMENT FEATURE
IN OUR OPINION
How can bridging finance help property investors achieve their goals? How tech can transform the bridging market
Kara Williams, specialist account manager at Together, takes a closer look at how bridging finance can provide a fast, reliable solution for a nation of property professionals, and why short-term finance should be part of every broker’s toolkit
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ridging finance can sometimes be overlooked as a tool to help landlords realise their property goals, but often a buy-to-let (BTL) mortgage isn’t the most suitable for their circumstances. The need for fast, flexible finance is becoming increasingly evident, particularly as the property market becomes ever more competitive and flooded with buyers. At Together, we’ve been helping landlords and property businesses grow for almost five decades and use underwriters – not tickboxes – to make common-sense decisions on short timescales. Our team is committed to providing a professional, tailored service, and can be flexible in many different and more complicated situations, deadline-driven or otherwise. That’s why our bridging loans are ideal for a range of common – and uncommon – landlord needs. Often it’s the best opportunities that come with the tightest deadlines. Yet it can take weeks or even
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months to secure a buy-to-let mortgage. If your clients have an opportunity that won’t stick around – perhaps a property being sold at auction for an attractive price – a bridging loan could allow them to act quickly, sometimes in a matter of days. What’s more, your clients could secure the bridging loan against a number of their existing properties, meaning they could borrow more and potentially expand their portfolio more than one asset at a time. Once those properties have been acquired and let out, it could prove easier for your clients to secure a mortgage; they’ll be able to use 100 per cent of their rental income to demonstrate affordability, rather than potentially a lower percentage of their predicted income. Bridging finance can also support landlords carrying out renovations on a new or existing BTL property. Refurbishments could include bringing the property up to date, or making energy efficiency improvements to comply with new Energy Performance Certificate (EPC) rating regulations from April 2025. Investors are often keen to complete work as soon as possible – time the property isn’t being let out equates to a potential loss of income – and a fast, short-term finance solution could let them get started right away. Furthermore, if your clients are purchasing a property that’s uninhabitable – whether it’s in poor condition or fails the minimum EPC rating requirements – it could prove more difficult to mortgage. Bridging finance can allow landlords to make refurbishments first, and, once the property has increased in value, exit the bridging loan and potentially secure a mortgage deal with a lower LTV. www.sfintroducer.com
ADVERTISEMENT FEATURE
IN OUR OPINION
Once again, this would also allow your client to use rental income or projected rental income to prove affordability once the building is habitable. Landlords looking to convert a property into a higher-yielding rental opportunity – such as an HMO, student accommodation, or a holiday let – could use bridging finance in a similar way. Again, time is often of the essence when completing these refits, especially when there are seasonal pressures during spring and summer for holiday lets, and in the run-up to September for student housing. The short-term loan could let your clients buy the building quickly, sometimes securing a better price in being able to do so, and reconfigure it so it’s suitable for tenants or holidaymakers. SHORT-TERM FINANCE SHOULD BE PART OF EVERY BROKER’S AND LANDLORD’S TOOLKIT A buy-to-let mortgage isn’t the only option for landlords, and making sure your customers get the best product for their individual circumstances is essential. With a product that’s so flexible in its uses, bridging finance should be a part of every broker’s toolkit. But it’s important to choose a lender that can work with a diverse range of landlords, property types, and larger loan sizes, and still be able to move quickly. At Together, we’ve helped many entrepreneurial landlords take their first step as investors, diversify their portfolios, and build property empires worth millions. We work with landlords regardless of the size or value of their portfolios; we’ll take into account www.sfintroducer.com
many complicated income sources, lend on properties that are complex in their type or structure, and support them with a variety of opportunities, including houses in multiple occupation (HMOs) or holiday lets. Regardless of the case, you’ll have easy access to our dedicated underwriting team, who’ll look at every case individually and get back to you within 24 hours either with a decision or to request the information they need to make one. So you can get your client’s application moving on the timescales that are right for them. We recently helped a property investor client seize a great opportunity to buy the seaside cottage where he had spent his childhood holidays – in just five days. The client saw the property, which had belonged to his parents over a decade earlier, appear on the market in Cornwall, and had ambitions to acquire it as an investment opportunity. Complicating the situation, however, was the tight deadline – the estate agent told the client the finance would have to be in place in less than a week or he would lose the chance to buy. Having previously been introduced to Together, and knowing our track record for fast, reliable funding, the investor reached out to us to provide the £557,000 commercial bridging loan. We were able to be flexible, and we secured the loan against the Cornish property, two houses, and an office the investor also owned. This allowed him to complete within his given timescale and take advantage of a great personal and business opportunity. The client is now running the cottage as a commercial holiday let as part of his successful property business. B I APRIL 2022 BRIDGING INTRODUCER
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REVIEW
ASTL XXXXXXXXX
Understanding the end customer Vic Jannels CEO, ASTL
S
hort-term property finance is a sector that is primarily dominated by intermediary distribution. This is a good thing. Professional financial advice is something that all customers can benefit from, and bridging and development cases, which can often be complex, particularly require someone who understands the market and the available options. It’s frequently the case that deals are structured for an individual’s requirements, and this is more easily facilitated by someone who has in-depth knowledge of and strong relationships with the available lenders. Any intermediated market, however, faces a challenge in that providers of products and services effectively have two customers – the intermediaries and the end customers. It is important, of course, that they have an in-depth understanding of both, and sometimes it can be easier to develop a more thorough understanding of the more immediate customer, the intermediary. However, the truth is that the end customer must always be at the heart of what we do as an industry, whether as lenders or intermediaries. With this in mind, the ASTL has taken steps to better ensure that we – and our members and associate members – are equipped with a more forensic, datadriven approach to customer behaviour. UNDERSTANDING THE MARKET
In recent months, we have engaged with our members to build a research plan to better analyse consumer understanding and opinion of the bridging market. We collaborated with YouGov in building a survey and gathering results from a demographically representative cross-section of more than 2,000 UK adults.
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The results are in, and we will be using these to produce a White Paper that offers insights into bridging finance for a wide audience, with a view to raising understanding and education within our industry, but also more broadly amongst consumers and journalists. We will be revealing the details of the results within the White Paper and the press releases to support its launch, but at this stage I think it is worth sharing some of the high-level findings. To begin with, it’s worth knowing that most customers have heard of bridging finance. More than two-thirds (67 per cent) say that they are aware of it. However, fewer than half (43 per cent) say they understand how bridging can be used.
“It’s frequently the case that deals are structured for an individual’s requirements, and this is more easily facilitated by someone who has in-depth knowledge of and strong relationships with the available lenders. Any intermediated market, however, faces a challenge in that providers of products and services effectively have two customers – the intermediaries and the end customers” Many within the industry will probably be surprised that this figure is as high as it is, as the sector is relatively small, and certainly specialist. However, dig a bit deeper and it seems this result may only mean that customers have a vague idea about the workings and uses of bridging finance, and lack clarity when it comes to the current market. For example, one of the main reasons
cited by people for not considering bridging finance even if it were appropriate for their requirements was the ‘high rates’. However, more than half of respondent (54 per cent) admit to not knowing how much bridging rates are. It seems clear, from this and some of the other results in the research, that there are myths and preconceptions that need to be addressed. MAKING CHOICES
Professional advice is an excellent way of addressing misunderstanding on an individual level, ensuring that borrowers are kept informed with accurate information. However, worryingly, only 21 per cent said that they would go to a broker for a bridging loan. This is something we need to address as an industry, and as part of our campaign at the ASTL, we not only aim to raise understanding of the bridging market, but also to promote the benefits of financial advice. Look out for this in the coming months. One final result I would like to end on in this piece is that only 17 per cent of those surveyed said that low rates were the most important factor in choosing a bridging lender. This was followed by well-established brand, and recommendation from a broker (both 11 per cent), and then membership of a trade association like the ASTL, which was the fourth most important consideration (nine per cent). This is obviously encouraging, as it demonstrates that there is some recognition of the role of trade associations in ensuring high standards and customer-focused practice. We believe that working with an ASTL member should always be a kitemark of quality, and it seems that at least some customers think that as well. We hope to increase the number of customers who choose to engage with the bridging market and with ASTL members with our upcoming campaign. www.sfintroducer.com
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