ISSUE 15 MAY/JUNE 2021
+ The lender filling the ‘micro niche’ p22
Solutions from our specialist finance team Our experienced specialist finance account managers could provide the bridging finance, refurbishment buy to let or second charge loan solution your customer needs. Speak to them today to find out more about the following products.
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Acknowledgments Editor-in-chief Beth Fisher firstname.lastname@example.org Creative direction Beth Fisher Caron Schreuder Sub editor Andrea Johnson Contributors Anthony Beachey Christopher Morris Illustration Amanda Hutt Sales and marketing Caron Schreuder email@example.com Special thanks Sarah Findlay, Dynamo Patrick Davies, Rostrum Agency Mark Sowersby, Thissaway Jeremy Stevens, Castle Trust Bank Alan Margolis, Masthaven Isabelle Colla and Rosie Tricks, Ashurst Andrew Bullock, Hampshire Trust Bank Cat Barrett and Sam Salehi, Octopus Real Estate Jason Wyer-Smith, 42 PR Printing The Magazine Printing Company Design and image editing Russ Thirkettle, Carbide Finger Ltd Bridging & Commercial Magazine is published by Medianett Ltd Managing director Caron Schreuder firstname.lastname@example.org 3rd Floor, 71 Gloucester Place London W1U 8JW 0203 818 0160 Follow us:Twitter @BandCNews | Instagram @BridgingCommercialMagazine
hat I’ve learnt of late is that nothing can get in your way if you are determined and committed. I saw this during May’s four-week washout when coronavirus rules dictated that people could only drink at pubs if they were seated outside. I felt a sense of pride seeing clusters of punters in their local beer gardens drinking and eating amid 65mph winds and torrential rain, completely unbothered. You can’t stop a Brit from enjoying a pint. Caron and I had a similar experience during a lunch meeting when the sodden outdoor canopy started leaking right onto our plates. It had been months since I had eaten anything other than my own cooking, and a wet alfresco lunch did nothing to dampen the mood. Now that the glorious summer sunshine has finally arrived and we edge closer to the roadmap’s finish line of 21st June, there is an even stronger sense of optimism and positivity across the country and, in particular, the property sector. According to the latest Nationwide House Price Index, annual growth hit double digits in May—the highest level in almost seven years. This illuminates just how far the market has come in terms of adapting to its circumstances, considering that a year ago, activity had all but collapsed in the wake of the first lockdown. While the stamp duty holiday is clearly accelerating the spike of transactions, 68% of homeowners surveyed at the end of April confirmed they would have moved regardless of the initiative being extended, highlighting the colossal shift in attitudes towards living standards and the persistent ‘race for space’. While the future is far from certain, I expect the specialist finance industry will continue to keenly cater to surging demands, making up for lost business during 2020. “Whatever comes at us, as businesses and as an industry, I feel we’re in a different headspace now,” comments one broker in this issue’s cover story [p30]. We dissect how loan performance has fared over the past 12 months; how better quality borrowers are contributing to this; and whether the emergence of new, inexperienced brokers in bridging could steer us off track. One thing that was agreed by the majority was that lenders are applying more due diligence than they were pre-Covid—deals are being entered into with the entire process, strategy and exit as clear as the skies of June. An area of the market which has been getting a lot of airtime of late is holiday lets. With the recent reopening of hotels and B&Bs, along with the rising temperatures, the demand for UK staycations is expected to soar. On p14, we set out what you need to advise your clients when investing in the coast and country. As always, we have a plethora of interviews to ensure you are ahead of the curve. Hampshire Trust Bank talks about lending on breweries, barbers and ‘hipster’ shops [p22], Octopus Real Estate hits the £5bn lending milestone [p8], and Jackson Cohen and Ashurst make some interesting observations about regulation and M&A [p58]. We also get an exclusive first glimpse at new bridging lender Tenn Capital’s offering—and yes, it is actually bringing something new to the space [p46]. While finance providers are lending with their eyes wide open, my ear will be firmly to the ground while I start to see more of you in the following months for what is certain to be the great British catch-up—I just need to find some outfits first.
Beth Fisher Editor-in-chief
3 May/June 2021
8 14 22 30 40 50 58 72 78 This is about empowering and giving the control back to the broker p22 4 Bridging & Commercial
News Zeitgeist Exclusive Cover story Feature Explained Interview View Series Octopus Real Estate/Nivo
Investing in the great British holiday
Solving deals of the convoluted kind
Nine brokers tell us how the market’s performed
United Trust Bank/Tenn Capital
Putting store in logistics
Ashurst & Jackson Cohen
Belt and braces
From awareness to action
Wish you were here? How InterBay Commercial could make your customers’ holiday let dreams a reality Adrian Moloney
Fortunately, InterBay Commercial is perfectly placed to help. We’ve got a vast amount of experience in providing bespoke solutions, and can offer products specifically designed to meet the needs of investors looking to buy a holiday let property.
Group Sales Director, InterBay Commercial
Our new holiday let proposition is aimed at personal ownership and limited company landlords looking to let out properties on a short-term holiday basis.
With lockdown restrictions finally starting to be eased and the weather getting warmer, lots of us may soon be heading off for our annual holidays. Except this year many will be holidaying in Cornwall instead of Crete, Dorset instead of the Dordogne and the Isle of Wight instead of the islands of Greece. One of the unexpected consequences of the COVID-19 pandemic has been a boom in demand for staycations. With people still understandably unsure about taking a holiday abroad, holidays in the UK are suddenly back in fashion. There’s been a huge increase in the number of people booking staycations in the UK1, with Hoseasons reporting a 215% increase in bookings compared to 2020 and Cottages.com seeing a 210% rise in bookings compared to this time last year.
Investors can choose from either two or five year fixed rate products, with LTVs of up to 70% available. Plus they can borrow between £50,000 and £1 million, with no maximum property value*. What’s more, to assist with affordability we calculate rent based on a letting period of 30 weeks a year at an average of the low, mid and high season rates. It’s all supported by our in-house teams, including our specialist finance account managers, real estate, completions and underwriting, who work closely together to support clients with their lending goals. If you need some support with a case you think could be difficult to place, why not get in contact with your local specialist finance account manager today? Their expertise in our broader criteria could assist you in finding the best way to handle your most challenging and complex cases. *Product information correct at time of print (20/05/2021)
The increase in demand for staycations has led to a corresponding increase in interest by people looking to buy a property to holiday in themselves or to let out. In fact, demand is so great at the moment that a beach hut in Mudeford, Dorset, recently sold for a staggering £325,000, according to estate agents Denisons2. So with more people looking at staycations as a result of the pandemic, this could be the ideal time to invest in a holiday let property. It’s no surprise that demand for holiday let accommodation is soaring at the moment. Not only does a holiday let property have the potential to earn as much rental income in a single week during peak season as you would for a whole month with a standard buy to let property3, the extended Stamp Duty holiday period means investors could save thousands of pounds in tax. The problem investors have always faced, however, is finding a suitable mortgage to fund the purchase of a target property. Many lenders are reluctant to lend due to the way they calculate rental cover, with affordability for most buy to let mortgages determined by an annual rental figure based on a property being let for 12 months of the year. The problem with holiday lets is that they’re rented out for weeks, rather than months, and the income often fluctuates throughout the year.
Visit interbay.co.uk or call 01634 835006 for more information
Sources: 1 https://www.thisismoney.co.uk/money/holidays/article-9520609/Holidaymakers-stick-staycations-summer-demand-200.html 2 https://www.telegraph.co.uk/property/buy/beach-hut-sells-325k-demand-soarsahead-staycation-summer/ 3 https://www.schofields.ltd.uk/blog/5636/investing/
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Octopus Real Estate celebrates £5bn of business WORDS BY BETH FISHER
The specialist finance provider— which has been operating for over a decade—has officially reached the £5bn lending milestone, having advanced more than 3,800 loans across residential, development and commercial projects
he deal that tipped Octopus Real Estate over the line was a ground-up development of two Leicester city centre PBSA buildings, with a GDV of just under £10m, which aim to improve the living environment for future generations of students in the area. The announcement follows some notable deals over the past year, including an £18.3m facility secured against a former National Grid site in York to build 607 homes. Contributing to the £5bn achievement has been the bolstering of its regional presence, including further focus in the North and East, such as Norfolk, Suffolk, Essex and the surrounding areas. Consequently, its amount of lending outside London and the South East has surged by 58% in the past 18 months, and now represents nearly one-third of its business. This has also been driven by the opening of its Manchester office during the same period, which it plans to expand later this year. Benjamin Davis, CEO at Octopus Real Estate, shares that much of its lending has been to repeat customers as a result of strong, long-term relationships with brokers and borrowers. “Our success has always been down to our people; we pride ourselves on being fast, flexible and delivering true to our word.” Benjamin previously headed up Octopus Healthcare— an investor, developer and manager of care homes and retirement communities in the UK—before it merged with residential, commercial and development funder Octopus Property in 2019 to form the business in its current guise. The aim of coming together was to capitalise on the lending, investment and development expertise of both companies under one roof, putting it in a stronger position. “It continues to be one of the best decisions we’ve ever made,” Benjamin imparts. Its care homes team—which recently employed a new senior fund manager—currently manages a portfolio of 77 modern, purpose-built homes, including 13 properties under construction, with a market value of more than £900m. Across the entire Octopus Real Estate brand (including property lending and healthcare assets), it now has funds under management of approximately £2.4bn. Notwithstanding its lending landmark, the business, like many others, had to make a series of challenging choices regarding its attitude to risk over the past year. While it remained active, it temporarily reduced its maximum LTV in the commercial sector to 55%. This has been upped to 65% as the economy has been coming back to life, and Benjamin confirms that it will return to 70% in due course. “In terms of appetite, we have continued to write loans on land with planning for residential or purpose-built student accommodation. Hotels remain difficult, and retail is virtually unfinanceable, but we’re confident both markets will turn a corner and we will be keen to see opportunities to lend off rebased valuations.” In March 2020, Octopus Real Estate also stopped lending in the BTL space. After months of collecting feedback from the broker community on what they want from a specialist lender, the business re-entered the arena 12 months later with a new residential product designed to navigate complex cases that often fall outside mainstream lending criteria. It also doesn’t require a minimum income. The move follows a surge of opportunity as more property investors search beyond the urban hubs to suburban areas as a result of people rethinking their working and living arrangements. “It was always our intention to return to BTL as soon as
we could,” Benjamin says. “We believe the opportunities for specialist BTL lenders are vast, with mainstream providers unable to assist high-quality borrowers who do not fit strict rules and criteria. The flexibility and service we look to provide should mean that demand for what we do continues to increase. Our ambitions for this product are huge and we aim to re-establish ourselves as the ‘go-to’ specialist BTL lender in the market.” He believes that several new considerations are emerging as residential trends and tastes adjust. “For instance, there is an increase in expectation for space inside a residential property, and outdoor space, too. We also expect to see more homeowners applying for refurb loans to enhance their WFH environment.” Adding value to property in this way is currently the most popular reason for customers taking out bridging finance with Octopus Real Estate. Benjamin emphasises the lender is equally focused on maintaining its position in the bridging market, an area it has occupied for over 10 years. “Our product set has recently been refreshed and is proving more popular than ever,” he states. When it comes to commercial property, he thinks that specific locations will be impacted in different ways. “We’re starting to see how the office market is adjusting to an increase in WFH culture, which looks set to stay in some respects, and what the future of retail surrounding these offices might look like. We anticipate there to be continued demand for quality retirement and residential developments, which may tie into the repurposing of some commercial buildings.” Ahead of the curve, the company has recently completed a series of significant deals in the burgeoning retirement space, including the formation of a major joint venture between them, Schroders Real Estate and Elysian Residences to bring forward retirement communities targeted to generate close to £200m GDV. It also has an equity investment in a partnership with Audley Group and Schroders Real Estate for the development of four retirement villages with over 500 units altogether, representing a total value of £400m, its latest being a 74-apartment scheme in Surrey. According to the finance provider’s recent report, ‘Unlocking the Retirement Opportunity in a Post-PandemicWorld’, it is estimated that there could be as many as 2.5 million UK retirees who may desire retirement properties, bringing considerable prospects for developers, operators and investors. It approximates that there will be 7.5 million UK residents aged 65 and over by 2069 and, at present, fewer than 1% of UK retirees live in retirement communities.This compares with around 6% of populations in more mature markets in the US and Australasia.While the survey indicates that this gap will close, there is still a significant 21% of respondents who falsely believe that a retirement community is similar to a care home. Consequently, the lender urges the industry to work together to raise awareness and address the sector’s glaring misconceptions. Looking ahead, the business—which recently achieved B Corp status, meaning that it is legally required to consider the impact of its decisions not only on its shareholders, but also on its employees, customers, the community and the environment—will also be launching more initiatives in the environmental, social and governance arena in the near future, and is focusing on the challenges and opportunities a post-Covid world produces for real estate. 9 May/June 2021
BREAKING THROUGH THE LENDER-BROKER COMMUNICATION BARRIER
If there’s one tech company that’s made the headlines since last March, it’s Nivo. But the best is yet to come, as it prepares to hit big with a new B2B platform— Nivo for Intermediaries—specifically designed to connect brokers and lenders more effectively. To learn more, I spoke to sales lead Polly Taylor-Pullen
echnology has been making its way into our lives for many years but, in the bridging finance market, it wasn’t until the pandemic struck that fintech went from being an ‘add-on’ to a necessity. Since the lockdowns restricted the industry from office-based working, face-to-face meetings and regular dayto-day activities, we’ve seen more and more lenders jump on the tech bandwagon in order to adapt to the new reality and not only keep their businesses going, but also amend their systems to provide a better service to customers. However, there is one area where fintech hasn’t quite reached its full potential—the ability to streamline communication between lenders and brokers, especially for non-linear cases. That is what Nivo is trying to fix and what it has been working on for the past few months: its new B2B proposition, Nivo for Intermediaries, which is set to launch at the end of June. The proposition aims to make it easier for lenders and brokers to talk to each other and manage cases more effectively after the point of submission. The idea for this was sparked last summer, when the company hosted a lender steering committee to better understand which aspects of finance provision were still draining resource or slowing down deals. “Overwhelmingly, the response was that the biggest area in need of addressing was the handover and subsequent communication between brokers, lenders and conveyancers,” Polly reveals. While fintech can offer significant advantages to borrowers, including the convenience of completing their application via an app, there are still bottlenecks when that document is shared with third parties, she explains. “Some of the feedback we heard from lenders was that tech is great for the initial submission, but then the deal falls apart. Brokers value the dialogue with the lender the most, yet communication is still unstructured and hard to follow. These are precisely the issues we’re looking to tackle with the new offering.”
Nivo intends to provide a better end-toend experience for all of those involved. “We decided to invest not only in our B2C app channel for borrowers, but also the B2B agent console—a desktop version of Nivo—to facilitate brokerlender-conveyancer communication and transactions. We were confident this would help improve transparency, as well as save the borrower time and the need to repeat basic tasks, such as ID checks.” After months of beta testing and client feedback, the company has been able to optimise the solution for its upcoming release to the wider market. To help brokers do business with lenders, it has introduced new features around case management, such as a deal dashboard, auto-assignment and checklists, and has extended its ID passporting facility to have secure two-way conversations with any other provider on its network. All email exchanges are moved onto the platform, Polly explains, which mitigates security threats and streamlines the lending operation by having one channel of communication. And it certainly seems to be working. Polly tells me that Nivo has seen a 50% reduction in processing time (approximately three to six days saved per case), slashing all that painful backand-forth correspondence and smoothing the overall deal flow. “If we can help to reduce the sheer volume of emails sent and received for every case, as well as increasing transparency and security in sharing sensitive, personal information, then we’ll have made an impact.” Being able to safeguard your compliance is also a huge driving force behind investing in fintech. “It’s not the sexiest reason, and will never dominate headlines like speed and customer experience will, but it should always be a key consideration.” And the increase in people working from home and the absence of face-to-face meetings have made this feature more popular among bridging lenders, with many of them turning away from email to more secure networks to avoid the risk of cyber crime. With its tailored solutions, it’s hard to deny the benefits that Nivo’s technology
brings to the table. According to Polly, the company’s existing clients have seen quicker borrower responses, a significantly reduced risk of data breaches, improved data accuracy and less time spent rekeying information—amounting to, on average, half a day saved per case. Polly states that lenders that invest in tech can see clear, measurable advantages for their intermediaries. “A customer is three times more likely to complete a mobile journey compared with a web form, and advisers are able to spend 80% more time on value-add tasks instead of chasing the customer to upload documents or sign forms.” In addition to mitigating delays in lending, fintech can also simplify tasks (for example, reducing the need for the customer to print, sign and scan documents) and create a “more memorable experience” for borrowers by allowing them to complete all the necessary steps via an app rather than by post and email. This leads to the improved customer journey that many lenders crave and lowers the number of borrowers dropping out during the onboarding process. “In a highly competitive market, companies are investing in tech not just to make it easier for the borrower to do business with them, but also to increase the chances of them returning,” Polly says. With a new platform set to enhance the broker-lender relationship joining the myriad tech offerings available, are these the first steps towards a fully automated lending path? While there’s no crystal ball to tell us what the future holds, Polly feels confident that full automation or the digitalisation of every aspect of the process is not the solution, as customers need to receive advice and understand the options available to them, especially with regard to complex cases. “SME banking saw the transition from a dedicated bank manager in a physical branch to an anonymous call centre, and now relationship banking is having a comeback (albeit without the branches). Bridging finance can learn similar lessons: maintaining the fundamental expert advice while modernising and streamlining the administrative tasks through technology.”
11 May/June 2021
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HIGH SEASON FOR HOLIDAY LETS An asset class set for post-pandemic growth and that has garnered plenty of attention of late is holiday lets. Promises of a healthy return on investment, the revival of the great British holiday, and a shift in the traditional work base have all led to its rise in popularity. However, as overseas travel is beginning to be ‘green lit’, what are the long-term prospects for this market? Whether you are content with the idea of a seaside cottage in St Ives or just can’t forgo the lure of that villa in Fuerteventura, we’ve gathered the information you need to advise your clients—or, indeed, take the plunge yourself
THE RISING DEMAND
In mid-May, I spoke to Luke Hansford, UK sales director at Awaze, which represents some of the largest holiday lettings brands, including Cottages.com and Hoseasons.
In order to assess its longevity, it is important to consider all the factors contributing to the growth of this part of the industry. The pandemic and associated travel restrictions have had a resounding impact, but how long the ripple effects will last is up for debate. Although the experts I spoke to leaned towards ‘old habits die hard’ and that our desire for more predictable weather abroad will likely again become the norm, there is a strong argument for why the current sentiment could linger indefinitely.
“Traction we’ve had over the last five months has been phenomenal,” he reports. “Bookings are up significantly year-on-year.” Historically popular locations, such as Devon and Cornwall, are already 70-80% occupied and, encouragingly, bookings have more than doubled for September and October. Furthermore, reservations for 2022 have risen by 134%, signaling that the staycation buzz might not be a flash in the pan.
“EVEN IF WE CAN TRAVEL SOONER, IT WILL LIKELY BE UNDER RESTRICTIONS SUCH AS TESTING AND PERIODS OF QUARANTINE, WHICH MANY MAY DECIDE IS NOT WORTH THE EFFORT”
Cottages.com has ‘recruited’ 74% more properties onto its platform, compared with this time in 2021; Wales is up 117%. “Investors need to look beyond the traditional hotspots and consider natural beauty spots, like the coast, or historic towns and areas of natural appeal,” Luke imparts. “There are great figures at the moment for properties in central England, places which are less popular for tourism but more convenient for guests to travel.”
“Even when restrictions are eventually lifted, I expect a certain amount of nervousness will remain around foreign travel, so the trend we’re seeing at the moment could continue into the medium to long term,” suggests Sundeep Patel, director of sales at Together.
Widely viewed as top of the list of desirable safe havens for investment, UK property remains a good bet for those wishing to make a solid return, both in yield and capital appreciation—a fact that hasn’t been dampened by the health crisis. But increased taxation on BTL landlords has meant they are seeking to maximise income—and diversifying into holiday lets presents an opportunity to do just that.
Self-contained holiday accommodation officially reopened its doors on 12th April as part of the UK’s roadmap out of lockdown, but interest in the sector predates this, with investors having had their eye on its potential for months. In July last year, estate agents in tourist hotspots reported soaring levels of enquiries as buyers rushed to take advantage of the stamp duty savings and money to be made from domestic travel. However, this was before house prices started to shoot up; according to Leeds Building Society, holiday homes are fetching up to 40% more in 2021 than the average value this time last year.
Considering the hassle and expense typically involved in venturing abroad (especially with a family), as well as the prospect of Covid-related measures when you land, it makes practical sense to presume that appetite for UK-based travel may hang around even after borders are fully opened. With the media’s focus on the concept of staycations, James Enos, business development manager at Hodge Bank, believes that “even if we can travel sooner, it will likely be under restrictions such as testing and periods of quarantine, which many may decide is not worth the effort”.
In March, a survey conducted by the Short Term Accommodation Association of its members indicated that 60% of operators were anticipating a swift recovery after reopening. Regarding the outlook for the rest of 2021, a confidence rating of 69% was recorded, a figure that rose to 89% for 2022.
WHAT ABOUT BREXIT?
Amid the pandemic, it’s been easy to forget about the implications of the UK leaving the
16 Bridging & Commercial
EU. But could fluctuating exchange rates and increased red-tape affect overseas interest in owning holiday lets in this country?
Hardwick, managing director at Charleston Financial, to ask: “Why wouldn’t people look to their own doorstep and jump in a car to their next holiday home?”
“In recent years, a lack of clarity over Brexit has put downward pressure on the pound, making UK property more affordable, but, with an agreement now in place, sterling could regain some of its lost value and, in turn, increase the value of any investment,” states Rob Oliver, sales director at Castle Trust Bank. “This could be an incentive to buy sooner rather than later.”
FINANCING THE BOOM
So, we’ve identified that it’s a market to watch, but what sort of finance is out there to support this surge in interest? It appears that providers are indeed waking up to the opportunities in what I am told is a historically neglected space.
“WHY WOULDN’T PEOPLE LOOK TO THEIR OWN DOORSTEP AND JUMP IN A CAR TO THEIR NEXT HOLIDAY HOME?”
Given that the exact directives around how Brexit will impose itself on travel and other areas of our lives are yet to be fully established, we’re back to that buzzword of the past five years: uncertainty. “There is an element of being in limbo,” comments Simon Lindley, chief development officer at Cambridge & Counties Bank. “However, any restrictions placed on Brits travelling abroad will have a direct impact on EU countries’ economies, therefore, we do not feel that they will want to be too restrictive as it isn’t in their interests. We may see a short-term impact on Brits buying abroad, but I suspect this will recover as European governments encourage property purchases to help support the tourist industry.”
Hodge Bank claims an overall rise of 12% in the volume of holiday let purchases between October 2020 and March 2021, and a 30% jump in holiday let mortgage applications in the six months to March 2021; Leeds Building Society experienced its biggest-ever month for holiday let purchase applications last September, leading to an extension of its product range; InterBay Commercial is heavily promoting its new offering in this area, with LTVs up to 70% and rates from 3.84%; and Castle Trust Bank’s enquiries for these mortgages shot up by 57% from February to May 2021, alongside a notable spike in the number of intermediaries submitting applications of this type.
Sundeep anticipates a limit being applied to the number of days British nationals can spend in Europe in a given period, which could see holiday homeowners shift their investments to the UK. “Any additional barriers to travel, such as queues at air or ferry ports, as well as anti-EU sentiment, may encourage UK investors who would have previously bought holiday lets in Europe to consider looking closer to home,” he adds.
“This is a sector that has been traditionally underserved and misunderstood by lenders,” shares James. “However, we have seen a continuing positive trend in providers identifying that holiday lets are widely expected to become the next logical choice for many landlords who may have previously been reluctant to venture into this market due to the lack of funding.”
Mark Stallard, director and adviser at House & Holiday Home Mortgages, offers this view: “If people perceive that the UK is being punished by Europe, I imagine this will harden attitudes and more will wish to spend their holiday pound in the UK— advantaging existing and new holiday let owners.” Conversely, he makes an interesting point about a possible shortage of available labour following Brexit, given the workforce required to run this type of accommodation, which he doubts will be plugged by efforts to get more Brits into these types of jobs.
Part of the reason why it hasn’t been favoured is down to the relative complexity of underwriting compared with a standard BTL. Holiday lets used to be underwritten as a ‘trading business’ proposition. This means they either fell into the realm of commercial mortgage lending, or the increased income was disregarded and loans were assessed against an assumed AST yield which, with tighter debt service coverage
The likely consequences of Brexit on border control (think queues, extra documentation and delays), and a possible rise in the cost of flights and accommodation, leads James
17 May/June 2021
ratio (DSCR), often came up short for clients. James credits the emergence of more specialist lenders in the space with the overall improved understanding of it.
AST income that the property will generate versus the ones that assess it on past/forecast holiday let income.” He would like to see more lenders take the view that holiday let income could far outweigh AST income and therefore open up more options to borrowers.
Yet, Tony Field, mortgage sales director at Dynamo, maintains that several lenders are still making their assessments based on AST, which restricts avenues for borrowers.
InterBay Commercial is one provider that does employ a “holistic approach”, according to its head of specialist finance, Emily Machin. It assesses the rent based on an average of the low-, mid- and high-season rates, with a DSCR of 140%—including an allowance for service/management costs. “When it comes to underwriting, holiday lets are generally one of the easiest asset classes for us to process,” she expands. “The main thing we’re looking for is that the property is a genuine holiday let; as long as we can establish that, the rest is fairly straightforward. Of course, if we’re talking about a multi-unit property, or if there’s a commercial element, the underwriting will be more in-depth.”
“GENERALLY, LENDERS ARE MORE ACCEPTING AND UNDERSTANDING AND RECOGNISE THAT THERE IS A MARKET TO FILL, BUT THERE IS STILL A SPLIT BETWEEN THOSE THAT WILL BASE SERVICEABILITY ON THE AST INCOME THAT THE PROPERTY WILL GENERATE VERSUS THE ONES THAT ASSESS IT ON PAST/FORECAST HOLIDAY LET INCOME”
Typical LTV is currently at 75%, with rates around 3.25–4.25% pa, depending on two key factors: whether clients are homeowners or not—if they are, then the lower rates may apply; and if the property is being purchased in a personal or limited company name, with the higher rate more likely to apply to the latter.
GOING FROM BTL TO HOLIDAY LET
The headline attraction is that holiday let yields—depending on location—will, on average, exceed those of a standard BTL, predominantly due to the seasonal and length-of-stay premiums charged. Although this income uplift usually outweighs any downside, there are additional layers to the commitment involved that prospective investors should take heed of.
“Mortgages below £250,000 are relatively easy to fund, but over £250,000 at 75% LTV is challenging in most cases,” he remarks, adding that there is even less choice and more constraints when trying to place Airbnb and multi-unit holiday lets.
“We recommend that customers base any decision on the profit and loss for the holiday let and not just the headline rental income,” Mark Jerman imparts. Operating expenses that apply to these 2–14 night rentals include those for cleaning, advertising, management, agency fees, utility bills, insurance, repairs, council tax and property rates. In addition, holiday lets attract more void periods than a traditional BTL and are subject to cancellations.
I ask why this method of using the AST, as opposed to one that takes into consideration the more complex nature of this type of income, is still common. One possible reason is tied to the fact that a holiday let property, when assessed as such, can be limiting if a lender needs to repossess. “Re-saleability is better if a property could be a residential, BTL or holiday let,” Tony explains. “Generally, lenders are more accepting and understanding and recognise that there is a market to fill,” says Mark Jerman, senior commercial manager at Watts Commercial Finance. “But there is still a split between those that will base serviceability on the
“Holiday let owners need to be careful with council tax versus business rates as some areas are seeing a 50-100% increase in council tax rates for second homes,” advises Mark Jerman. This enlarged levy taking hold in
18 Bridging & Commercial
“AT THE MOMENT, WE’RE SEEING MORE FIRST-TIME LANDLORDS BUYING HOLIDAY LETS COMPARED WITH EXPERIENCED LANDLORDS”
parts of the UK is in response to councils in popular holiday locations wanting to curb the number of second homes being incorrectly registered as businesses in order to take advantage of the tax loophole. Keeping up with visitors’ tastes and demands, and ensuring your property is ‘best in class’, also requires time and money, he adds. “We’ve all become more discerning in recent years, so guests expect quality fixtures and fittings and all the comforts of home—or better.”
current higher risk presented by the wider economy, and that financing options have slimmed over the past 12 months as a result of wariness about income stability.
On the plus side, because holiday lets are treated more like businesses, there are tax breaks to be had; capital expenditure may be deductible from pre-tax profits, for example.
Are there worries about the influx of new landlords to this area of the market? “With any business proposition, there is always the risk that inexperience will lead to a badly run property,” James comments. “But with the presence of a good holiday letting agent, a knowledgeable mortgage intermediary and a solid business plan, there is no reason for any elevated levels of concern.”
When it comes to underwriting, BTL experience is desirable for those seeking financing for a holiday let. Applicants will also likely need to demonstrate additional income. “Most lenders want their customers to be experienced residential owners who are used to failing boilers and monthly mortgage commitments,” Mark Stallard says.
AN OWNER-OCCUPIED FUTURE?
Given the unusual trading environment over the past year or so, lenders are basing decisions on forecasts provided by specialists. “In this instance, the key requirement for funding a holiday let is a letter from a local or national holiday letting agent, such as Sykes, to confirm the low-, medium- and high-season rates, projected occupancy and projected 12-month income,” explains Mark Jerman. “In the absence of past financial accounts, some lenders will rely on this independent commentary.”
The pandemic has rewritten the rule book on our requirement to be in a traditional office and sparked conversation about our lifestyle choices. This has led to holiday let investments doubling up as a possible retirement plan or, indeed, a semi-regular base for owners seeking to take advantage of its scenic location. “At the moment, we’re seeing more first-time landlords buying holiday lets compared with experienced landlords,” says Tony. “It is more likely that someone will invest in an area they plan to retire in or invest for a rental income but also for their own family use. We’ve had an increase in enquiries about holiday let purchases with a request for owners to be able to use it themselves when not let.”
I ask Luke more about how a company like Awaze can assist. “We like to be engaged as early as possible,” he comments. “We provide projections over a three-year period, as some properties will take this length of time to reach their maturity, so it’s important we show investors that through our financial modelling.”
Although around 10% of Mark Stallard’s borrowers have the prospect of eventually occupying their holiday let in mind, he advises that “a good holiday let is not necessarily the same as a good final home”. He believes that part of owning a holiday rental is planning ahead—especially when the current boom subsides. “I think when the Covid crisis is over, many old and set habits will return; people will start travelling abroad again. This will mean that the holiday lets purchased in this last 12 months will have to be well managed, maintained and let, otherwise they may lie empty longer than is ideal for their owners.”
Being a national company, Awaze has a bird’s eye view of the market, and can spot patterns across the whole of the UK. “We go through a rigorous process to establish where the property is located, the number of bedrooms and the USPs—all of which shape the algorithm that is rolled out to ascertain the earning potential of an investment,” he explains. “It’s a scientific exercise.” Tony tells me that providers are using a stricter stress test to account for the
19 May/June 2021
Specialists in Buy to Let We specialise in all types of Buy to Let property loans including holiday lets, HMOs and residential Buy to Let. Our BTL TermTen structured product offers up to 75% LTV with fixed rates for the initial 2, 3 or 5 years, and our BDMs can offer instant terms up to £500,000. Our bridging products offer up to 80% gross day one LTV, with rolled-up or serviced interest options and a guaranteed exit underwritten as part of the bridge. We’ll consider applications from: • Experienced landlords and first-time landlords • Limited companies, SPVs and offshore companies • Ex-pats and foreign nationals
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The lender filling the ‘micro niche’ Hampshire Trust Bank is in a growth phase. Over the past year, its specialist mortgages division has made a raft of hires as it doubled down on talent and enhanced its processes in a move to better showcase to brokers its bespoke approach to lending Words by
t had been a while since I’d sat down with the specialist mortgages team at Hampshire Trust Bank (HTB), so I was eager to ask its managing director, Charles McDowell, and sales director, Marcus Dussard, how the business is continuing to evolve amid the madness of the past year and what brokers can expect from it in the months ahead. Naturally—although begrudgingly—our conversation kicked off on the subject of Covid. The pair talk me through how they’ve approached lending during the pandemic and how they had to quickly adapt. In the early months, when so much was unknown, senior members of the bank re-reviewed the pipeline, evaluating each case individually. “Lenders can get a bad rap over how they react during times of uncertainty,” Charles says. “This was about making sure that we provided solutions to clients so that they weren’t walking into any difficult situations.” In fact, going through this challenging cycle has resulted in the bank coming out stronger, which has been acknowledged by shareholders, staff and broker partners alike, Marcus states. “It changed us in a positive way.” While HTB decided to pull out of the development exit and PBSA markets last year, it was pleased with its overall lending numbers through what was an arduous time for the sector. Looking at it in more detail, while lending figures are lower, the make-up of the book remains fairly similar year-on-year. The bulk—some 60% of it— is in BTL, circa 25% in semi-commercial, with the rest in short-term lending. The bank’s unwavering confidence in the BTL market was displayed by its commitment to provide new offerings to the broker community over the past 12 months, including a five-year fixed-rate product for loans over £1m, and the option for borrowers to wrap up a light refurbishment into their normal term arrangement. Its BTL business has also been amplified by its adept way of looking at holiday lets. “We will find out what the average occupancy is for that type of property, what the high, medium and low seasons are, and work out the affordability over the whole year, including what the costs are to service and manage it,” Charles details. This fresh thinking towards the less vanilla asset class is truly part of the company’s ethos; it lives for the ‘micro niche’, as Charles puts it, with almost every case it does falling into this category. For example, it can lend to non-UK residents and foreign nationals from more than 150 countries, expats, and clients from offshore countries. While this isn’t exactly groundbreaking, what HTB does well is layer these niches on top of each other, providing a more
tailor-made solution to complex cases. “Lots of lenders do expat, MUFBs and top slicing,” Marcus notes, “but not many do top slicing on an MUFB deal to an expat via an offshore trust. That’s the beauty of having experts throughout the team— we can be flexible and adapt to every circumstance which is presented to us.” He goes on to explain that, with the UK property lending market dominated by banks with lower capital requirements and costs of funds and better operational leverage, a major threat to any specialist lender is that one or more of these goliaths will turn their attention to the segment you trade in and attempt to take over. “To protect yourself from this, you need to operate in areas that the bigger players don’t, hence the focus on identifying those micro niches. If you add up a lot of these, you can get a sizeable, addressable market.” Other nooks of the specialist lending sector the bank is occupying are in the semi-commercial market. While this has changed significantly over the past year as a consequence of trading restrictions for many businesses, Charles divulges that its semicommercial portfolio has performed really well. Takeaway restaurants have become the go-to asset to lend against, whereas quality retail units in prime areas in central London have naturally struggled and been largely shunned by finance providers. This revelation would have been a shock preCovid. “You would never have been able to predict that if you’d gone back 15 months.” Considering commercial property is based on the stream of income, as soon as that flow drops, so does the value. “You need to make sure a borrower isn’t selecting a product that is going to become unaffordable quite quickly,” Charles explains. However, that’s easier said than done. “Currently, it’s difficult to assess what a good commercial unit or tenant is.” Charles gives an example of a shopping centre he knows of in a great location that was valued at £40m five years ago, yet recently sold at auction for 24
Bridging & Commercial
less than £5m, all because the income had dried up. “You couldn’t even buy the bricks to build it for £5m,” he points out. HTB will look at every semi-commercial deal on a case-by-case basis (including ‘hipster’ shops, breweries and barbers) and has lent against underserved property types. such as pubs, nightclubs, betting and fried chicken shops and owner-occupier restaurants. This year, I am told the lender has “very ambitious” targets. It recently reentered the development exit finance space, offering developers more flexibility, and is currently working on its PBSA offering after finding the latest numbers from UCAS “very positive”. While the business doesn’t have any new product offerings up its sleeve at present, Charles tells me that innovation will come through combining products, highlighting its stride into ‘lifecycle lending’, a trend that’s emerged in the specialist lending sphere. Brokers can expect the merging of offerings to help fund refurbs and redevelopments, in addition to securing the exit or providing support for borrowers to hold and move on. To assist in these areas, while some lenders were making redundancies, HTB boosted its team by 25% over the past 12 months—including 10 new people in the specialist mortgages division. And it seems staff are eager to get back to the office. Marcus, who joined the company in March 2020, listed integrating new staff into the HTB culture and discussing complex cases in a remote environment as the top two hurdles he faced. “Not being in the office is a challenge. We’re always about being open and transparent and saying the things that people don’t want to say,” he imparts. “You also get a real buzz when we’re all together. When we complete on a £5m loan, for example, that feeling reverberates all around. Currently, I give a lot of fist bumps in my front room, but that’s about as far as it goes.” He believes that ultimately, they are not as good when they’re apart, but that most people are afraid to admit that. Fully aware of the skills shortage across the industry, the company is keen to develop talent internally, offering opportunities to staff to showcase their capabilities; standing still is not an option. “We’ve got lending managers who’ve become underwriters— the skill set is similar,” Marcus observes. “Many times, individuals have shown the right attitude and ability and we’ve developed and pushed them forward,” Charles adds. A recent example is the former specialist mortgages commercial director, Alex Upton, moving to the development finance division to bring fresh ideas to a different facet of the bank’s activities.
HTB will also be launching its inaugural graduate scheme this year. Marcus, who is a mentor himself, emphasises that it’s about giving people an opportunity. Last year, the business—which has historically focused on DA intermediaries— grew its distribution a lot quicker than it had expected, fundamentally because, as a bank, it was able to stay open. By the end of Q2 2020, it had already hit its target for the whole year after enlarging its broker panel by 40%. It recently hired Scott Phillips as a national account manager to extend its proposition and reach via networks and mortgage clubs over the coming months. “It’s the next evolution in our growth phase,” Marcus shares.
“We’re never going to be a big volume lender,” Charles states. He stresses that the bank is keen to maintain what he believes is a relatively small broker panel, and that its discussions with networks are about an “incremental” boost to its offering, rather than a volume play. During these taxing months, the bank has invested in the creation of a bespoke broker portal that aims to make the entire lending process—internally and externally—more efficient. Introducers will be able to see where they are throughout the lifecycle of a case, meaning they don’t need to make calls to chase progress. “Everything’s in one place,” Marcus says. He also believes it will encourage teams to be more proactive if
information is provided to them piecemeal. “Ultimately, this is about empowering and giving the control back to the broker to do what they need to do and work how they want to work,” Charles points out. While it is currently in pilot phase with around 50 brokers, the portal—which was developed in-house—has received glowing feedback so far. With its first case having progressed to offer stage and successfully gone through the loan application lifecycle, the offering is set to be launched to the wider market imminently, making it even more accessible for introducers to secure and monitor funding for their cases—especially those of the more convoluted kind.
25 May/June 2021
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BEAT THE OPEN BANKING PRIVACY PARADOX AND WIN AT MORTGAGE LENDING If you are an average consumer, you probably agree with these two statements: 1. I would be concerned to share my personal financial data with third parties. 2. I would like to get the best mortgage deal I can tailored to my personal financial data. This is known as the privacy paradox – the discrepancy between how people feel about the abstract idea of sharing their data, compared to how they behave if the right incentives and safeguards are in place.
THE PRIVACY PARADOX AND OPEN BANKING By now you are probably familiar with the concept of open banking, but just to briefly recap, the principle is that banks must – if requested and with consent - share account data with third parties such as lenders. For innovative mortgage lenders, this offers a ground-breaking advantage. With access to your applicants’ financial data, you can instantly build an accurate, detailed, up-todate financial profile, free of manual processes, unstructured data, and human error. Sounds good, right? But to do it properly, you need to be mindful of the privacy paradox. Luckily, there are a couple of things that can help you.
REGULATIONS ARE YOUR ALLY With regards to security, it is to your advantage as a lender that open banking is a highly regulated field, diametrically opposed to the data wild west of social media or other online tools. Among other things, to use open banking the following are required:
• • •
The UK Open Banking standard is based on a key principle that customers using open banking services will never have to share their online or mobile banking credentials (such as username or password) with any third party. Third party providers (TPPs), which provide access to open banking data, must be licensed by the FCA under strict regulations including the risk of heavy fines. Data collection methods are API-based and at the highest level of security.
TRANSPARENCY AND COMMUNICATION ARE YOUR FRIENDS As a lender you can be confident in the knowledge that open banking is a secure way to understand and provide better service to your applicants. But your applicants need to be just as confident as you. People want to get the best mortgage deal they can, so by communicating the benefits and being transparent around security, you will have a high chance of your applicant sharing their data and both you and your applicant benefitting from the outcome.
MORE WAYS FOR MORTGAGE LENDERS TO WIN WITH OPEN BANKING Besides the benefits above, the accuracy and speed of working with open banking allows you to do the following.
• • • •
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BETH FISHER Illustration by
32 Bridging & Commercial
he bridging cases that have been successful during the pandemic have something in common: the lenders, brokers and borrowers entered into them with a clear view of the entire process, strategy and exit
Last year, Bridging & Commercial wrote about how the health crisis could positively recalibrate the sector and help reset the balance for a sustainable future following a surge of new entrants, a race to the bottom on rates, and a climb up the risk curve in recent years. A theme that ran through was that, while the people working in this space were expected to come out changed and probably a little bruised, they would ultimately be stronger. As it’s been over a year since that article was published and the first lockdown occurred, we thought it was an ideal time to round up a group of prominent brokers in the bridging finance market to get their opinions on how loan performance has fared over the past 12 months and whether lessons have really been learned.
A ROCKY START
It is common knowledge that bridging loans completed prior to the pandemic and coming to an end during the first lockdown faced the biggest complications.
This period, when many lenders had their doors closed to new transactions, was described by one broker as the “peak of pain”. Incoming business was tabled and exit plans no longer stacked up after LTVs and risk appetite plummeted across the board. Some borrowers who weren’t supported with loan extensions and had nowhere else to turn were slapped with eye-watering monthly charges. “It was a real struggle to find exits that could redeem the whole loan,” shares Kim McGinley, managing director at VIBE Finance. “There were really awkward conversations going on around that time.” We saw refurbishments—a regular use of bridging finance—grind to a halt due to supply chain issues and a lack of builders on-site. Those that took out finance on hotels, pubs and B&Bs were also heavily impacted by the multiple restrictions and subsequent lack of income, negatively affecting their ability to obtain new loans, or refinance or extend existing ones. Hold-ups in planning departments and
local authorities also gave rise to decisions taking up to an extra six months, causing tension for property developers that had taken out bridging loans to purchase sites or property to redevelop. “We’ve had section 73 minor amendments that would usually take eight to 12 weeks come back in 24 to 30 weeks,” reveals Martyn Pollock, director at Hallcroft Finance. With bridging lenders having pulled their higher LTV products off the shelves, it was challenging for brokers to refinance facilities that were already stretched to 70% or more.
Covid-19 pushed Simon Das, managing director at 978 Bridging, to refresh his arsenal of lenders and build new relationships. “It was a really valuable exercise, in that we actually found a number that weren’t charging any default interest or extension fees,” he says. While those companies became popular on account of their flexibility, he admits a bottleneck ensued. “We got some great
33 May/June 2021
“We got some great terms offered early on in the pandemic that didn’t come to fruition because these lenders were snowed under; they’d suddenly gone from being a smaller player to having swathes of business”
terms offered early on in the pandemic that didn’t come to fruition because these lenders were snowed under; they’d suddenly gone from being a smaller player to having swathes of business.” This was particularly the case for those that were busy offering CBILS facilities, too. However, Simon believes lenders have really looked to protect their newfound broker relationships as they “don’t want us all going back to those we used before, [now that] we’ve opened up this new avenue of business for them”.
BETTER QUALITY BORROWERS
It is argued that, over the past year, the bridging market focused more of its attention on professional borrowers who have experience of taking out finance in previous recessions. This is possibly due to less experienced applicants having fewer options and lenders asking more questions than usual. Practiced investors “knew what they were doing and were coming up with a well-structured purchase and plan,” Alasdair McPherson, investor at Rangewell, divulges. Accordingly, loans to these borrowers are said to be doing well. Interestingly, it was illuminated that conversations brokers were having with their clients 18 months ago were often focussed on maximum LTVs, yet, when lenders pulled back on these, borrowers were still able to proceed with the leverage secured and were just happy to get finance at all. “Ask any client how much money they could put into a deal, and they would always say, ‘As minimal as we possibly can,’” remarks Michelle Dean, senior relationship manager at Peritus Corporate Finance. Kim adds that the minute finance providers started going back to 70–75% LTV, that’s what the clients wanted. Nonetheless, the continuing race to the bottom on price in bridging is considered more of an issue than the level of gearing. “We just want to have a really strong service from our funders that are supportive to our clients and can deliver on their promises,” comments Martyn. “If they’re constantly pushing that price down, it’s only going to hammer their bottom line and make it harder for them to offer high-quality service. It’s a big concern for us at the moment.”
THE EMERGENCE OF NEW BROKERS
As high street lenders withdrew products and borrowers no longer fit the moulds of their restrictive criteria, it’s no mystery that more mainstream mortgage brokers started to look towards the bridging
sector for solutions. “There are a lot of new brokers in our market, and we welcome them—the more competition, the better,” states Matthew Yassin, director of structured finance at Arc & Co. However, it is a leap for mortgage brokers from dealing with high street banks to working with specialist bridging lenders. “This is not something they can just do overnight; they will learn the hard way if they try to do that,” stresses Dale Jannels, managing director at Impact Specialist Finance. He extends the same viewpoint to lenders and lawyers: “Some of the building societies are all of a sudden starting to offer bridging loans, but they don’t really understand it.” Advice needs to be right, and a lack of experience could negatively impact the way loans perform. Matthew adds that there is naivety entering the sector—he references the scenario of CBILS being falsely marketed as ‘free money’ by some. On the topic of whether introducers that are green to bridging present a risk to clients in this product area, Miranda Khadr, CEO at Yellow Stone Finance, emphasises that mortgage brokers are from a highly regulated background and well versed in TCF and dealing with vulnerable people. “The question is whether they’re a good mortgage broker or a bad one,” she points out. It also depends on why they decided to enter the sector and if it’s just a fleeting add-on in a bid to make more money. “If it’s a case that their business has started drying up so they fancied a flutter in bridging because they think there are opportunities there, that’s very different to an established mortgage broker who is looking for growth,” Simon explains. He is concerned that if brokers whose businesses have suffered through the pandemic because their relationships and client base weren’t strong enough decide to venture into the bridging arena, it could open the doors to “weakness within the industry”. The acceleration of fintech is also expected to drive more mortgage customers direct to lender, potentially resulting in more advisers looking at different revenue options. A new generation of bridging brokers is inevitable, and it can be said that they have to learn somewhere. As Kim states, gaining this experience is a case of trial and error. “New bridging lenders that are entering the market say they offer great rates and speed. They say that they’ve got the whole package,” she notes. However, brokers will only learn which finance providers really cut the mustard once deals are put in motion.
“I’m not too sure a lot of the lenders like the fact that there are many new brokers coming into the sector,” suggests Alasdair. “They’re having to educate a lot of them who are only going to introduce a handful of deals a year.” During a time when lending capacity is constricted and delays are rife, this isn’t the most efficient way for them to spend their time. Limited knowledge could also result in bridging loans needing to be rebridged later down the line. All you need to do is look back at why the loan was granted in the first place, whether the advice was correct, and if the exit was scrutinised correctly—or if it should have been a bridge at all. Alasdair claims that brokers who often arrange bridging finance and help their customers properly tend to avoid rebridging situations. “We’ve had quite a lot of people contacting us for rebridging where we didn’t do the original loan,” he says, suggesting a root cause of insufficient guidance. “The volume of inbound new relationships looking for re-bridging has definitely increased.” Dale concurs that those brokers didn’t have a proper exit planned, or even a route to one. “When they hit June, July, August, there was no way they were going to sell a property to refinance it. They were the only reasons we’ve had to refinance a bridge on a bridge.”
According to ASTL data, the value of bridging loans in default in Q4 2020 grew by almost 24% year-on-year, reflecting the effects of the economic slowdown. According to EY’s 2021 ‘Bridging Finance Market Survey’ 60% of respondents had seen a surge in borrower default rates. It would be safe to say that lenders are applying more due diligence now than they were pre-Covid. For borrowers who took out bridging loans during the pandemic, Martyn believes there is “much less pressure” on the client as the facilities agreed at more sensible LTVs have been easier to refinance. Lending on property in the hospitality space, such as pubs and hotels, is, however, expected to continue to struggle. Out of 20 lenders that were contacted for a pub that had been successful before lockdown, Michelle received terms from only two. “It’s just not their bag currently,” she tells us. “I think it will take them a bit of time to gain confidence in lending on those asset classes again, in case we go into another lockdown later in the year.” Bridging lenders that are looking at the more underserved sectors definitely
35 May/June 2021
have their eye on the exit, and whether the term lenders that typically refinance these deals will be there in the future and in the event of further Covid restrictions. They are also regarding the value of these assets differently. Traditionally, providers would assess ‘turnkey value’, which looks at year one, year two and mature value on a net operating income asset, such as a hotel. “Lenders are not concentrating on those investment or commercial values any more—they’re considering vacant possession or distressed values,” Matthew explains. Another potential hurdle is 180-day valuations on some commercial property being replaced with vacant bricks and mortar valuations. Therefore, a key question brokers need to be asking lenders is what they are basing theirs on. Still, it is expected that criteria will soften slightly in the bridging market, especially as things get closer to normal, with lawyers and planning departments working back at full strength and teams heading back to their offices. While Simon confirms that bridging loans completed over the past year have performed well through more due diligence and lower gearing, he observes that loans have typically been taken out for longer and, therefore, any upshots of lenders’ elevated scrutiny in terms of a lower default rate may not be evidenced for some time yet. “Realistically, the lenders that wrote loans over the past 12 months knew that there may or may not be a discrepancy at the end,” imparts Matthew. He claims that many added a six-month term at the back end in anticipation of an extension. “We’re not seeing any sort of distressed assets, and the fact that they were underwritten during the pandemic means that they were heavily scrutinised and the underwriting applied was correct,” he adds. “We did a lot of six-month bridges 18 months ago. Now, they tend to be eight or nine as a minimum,” Simon illuminates. “If there’s refurb involved, we don’t tend to look at anything less than 12 months.” While this isn’t enforced by lenders, it’s often a mutual decision between the borrower and the lender to include that breathing space. “They’re generally going for a 12-month term as standard, and just trying to pay back a little bit early.” With still less choice from high street lenders in terms of refinance options, discussions around the exit have been noticeably more “rigorous”, according to Alasdair, who clarifies that cases that were structured in a way that considered the abnormal
environment are now successfully coming to the end of their terms. Because lenders have been putting more focus on the exit risk, Auxilium Real Estate hasn’t had to explore extensions or loan increase options, reports its associate director, Abbie Ward-Corderoy. Despite this, Kim reiterates the need for educating clients that while today’s exit plan works, it might not by the time the loan comes to maturity. “It’s about keeping very close to them throughout the whole loan, more so than we probably would have done in normal bridging times.”
A PERMANENT CHANGE IN BEHAVIOUR?
The market is likely to become more transparent as a result of heightened communication and the need to think about transactions more critically, especially considering the pivotal role reputation has played during the health crisis. Kim divulges that brokers have been “very vocal” about their dissatisfaction six to 12 months ago, and this has thrown a spotlight on which lenders are doing well now. “Default fees have been interesting over the last 12 months, from where they were maybe a year prior,” she adds. The increasing competition in the bridging market is improving lenders’ flexibility and where they stand on elements such as default charges and extensions. “They know that there are other lenders that may be able to do better than what they’ve offered,” Abbie underlines. “Some of the first questions we address with the lender and the borrower are, ‘What is a default, and when and how is it going to be triggered?’ If you’re not asking that, then lenders will just continue to make more and more hay,” states Alasdair. “If they know that smart brokers are coming to them and asking, ‘What’s your headline rate? What’s your default rate? What’s this? What’s that?’ then that becomes an area of competition.” With the rise of bridging lenders attracting institutional capital, many of them avoid getting into a situation where they have to report defaults to their funding lines by offering extensions—albeit with a fee—or building it in at the outset. “If their loan books aren’t at a certain level, they might lose their funding line,” explains Matthew. “Lenders are aware of the competition, so they want to preserve their loan books. This means that instead of applying default fees, which 36
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would, in some cases, put the project in serious trouble, they’ll extend it.” The built-in extension seems to be the best option as borrowers are able to repay earlier if their plans go accordingly. By extending later down the line, you may need to revalue the asset if things have changed, and the sentiment of the market may also have altered since taking out the original loan. Matthew adds that a lot of bridging lenders have started to come out with 18-month terms to facilitate this. “By applying the additional six months at the outset, although giving the net loan a slightly lower position, it provides the comfort that it will be repaid on time, and they can report back to their investors accordingly.” However, it’s important to remember that bridging finance is, by definition, short term. “What’s quite sad is the borrowers who took out bridging loans that were originally 12 months, and now have got to take another 12 months, and then maybe do it again. This is so expensive for what should be a really short-term loan,” Michelle warns.
FUTURE LOAN PERFORMANCE
EY’s report found that 65% of bridging lender and broker respondents expect foreclosures on properties to increase within the next year. However, this is more likely to be due to the backlog of possession claims (with the process reaching an average of 26 weeks, according to Brightstone Law) that arose during the “peak of pain”, the closure of the courts and the government’s eviction ban. Martyn believes that if the cost of funds remains low and there’s a solid housing market, residential bridging will experience “really strong loan performance” over the coming year. Commercial bridging, on the other hand, may unfold differently. One of the biggest challenges for brokers going forward is likely to be around keeping up to date and finding the best products for their clients as a consequence of numerous moving parts. “I think lots of criteria from almost all lenders are going to change over the next two or three months,” predicts Alasdair. The most pivotal thing to remember is the resilience that the past year has built in everyone. As Kim concludes: “Whatever comes at us, as businesses and as an industry, I feel we’re in a different headspace now.”
“I’m not too sure a lot of the lenders like the fact that there are many new brokers coming into the sector. They’re having to educate a lot of them who are only going to introduce a handful of deals a year”
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fter more than two decades of leadership, Noel Meredith has stepped down from his role as executive director and head of United Trust Bank’s property development division, paving the way for successor Adam Bovingdon to make his mark
On 31st March, Noel retired, taking up a consultancy role with the bank. He started at UTB in 1999, when it had a mere 10 employees and a loan book of £9.9m, comprised entirely of development finance loans. Since then, he has played an instrumental role in its growth, joining the board of directors in 2010 and working closely with deputy chairman Graham Davin and CEO Harley Kagan to build a development book of circa £1bn. Most recently, he oversaw the creation and launch of the £250m Housing Accelerator Fund—a five-year alliance between Homes England and UTB that aims to support SME housebuilders and developers—and has left the department in great shape, having posted a record-breaking year in 2020. Adam, the bank’s former head of originations—who describes Noel as an “excellent mentor”—has spent the past 15 years working in the property finance sector, nurturing and managing a range of clients. Having joined the business in 2014 to oversee the development finance originations team, he will now be heading up the division with an ambition to become the first-choice specialist lender for housebuilders, developers and introducers. Bridging & Commercial speaks with both Noel and Adam about their achievements, memories and future goals.
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baton 41 May/June 2021
What has been your biggest achievement while working at UTB? I’ve thoroughly enjoyed the past 21 years and would say my biggest and most rewarding achievement has been building and working with a team of dedicated and talented people with the ability to create and manage over £1bn of development finance lending commitments. I’m also very proud to have been a member of the UTB board and to have played a part in shaping the bank into the successful and respected specialist lender it is today. How has the bank evolved since you joined in 1999? When I joined UTB, it was largely unknown; it had a handful of staff and a very modest balance sheet. Today, it is an influential and highly regarded part of the specialist banking sector, with around 250 employees and a balance sheet of approximately £1.7bn. One can’t talk about change without highlighting the impact technology has had on the way we operate. In 1999, the internet was in its infancy. Google had been founded the year before and Rightmove wouldn’t appear until 2000. Fast forward to today, and we are still negotiating the challenges brought about by the pandemic, many of which were only overcome by the swift development and implementation of technology. Throughout most of 2020, around 90% of our staff were working from home for the majority—if not all—of the time, and travel was severely restricted. Despite this, the development finance team and the bank as a whole posted a record year for new lending. The staff adapted incredibly well and we made the technology work for us, rather than being slaves to it. I maintain that for all technology can do, there’s no replacement for personal service. Our customers choose us because they know exactly who they’re dealing with.
They know they can talk to experienced and knowledgeable people if they have a problem or a change of plan, and that we’ll offer the kind of pragmatic and flexible help you can’t get from an algorithm.
What has been your most memorable time in the industry, and greatest lesson learned? The financial crisis of 2008 and the years immediately afterwards stand out as a really interesting period. Banks tend to be pro-cyclical in their approach to risk, but this led to enormous losses for many lenders following the collapse of the USA’s collateralised sub-prime mortgage market. Very few people saw that or the resulting global shockwaves coming, but UTB was able to ride out the storm and place itself in an excellent position to get back into the lending market early. By 2009, UTB’s balance sheet had grown tenfold to £100m—mostly in development lending. From then, we were able to continue supporting our existing customers as they seized opportunities, and attracted a lot of new borrowers who were finding that their usual lenders, including the highstreet banks, had either withdrawn from the market or were being far more cautious. What followed was a period of significant growth and set us on the path to the £1bn development finance book we have today. The biggest lesson I learned is to be prepared for the unexpected. One shouldn’t be afraid of uncertainty or risk but should always be mindful that what happens in July may not happen again in August. In early 2020, the world changed dramatically in just a few weeks and, although none of us saw Covid-19 coming, UTB was prepared for something to happen so, when it did, we weren’t taken by surprise. How did the £250m Housing Accelerator Fund come to fruition and what does it mean for specialist finance in the wider property development market? Specialist banks play a vital role in underpinning the health and growth of UK PLC, and it’s important that they 42
Bridging & Commercial
engage with the government through its relevant agencies to ensure that available support reaches the right places. We understand the challenges faced by SME housebuilders and developers, particularly around securing higher levels of gearing competitively. We saw an opportunity to address this at the smaller end of the SME sector and help many companies access the kind of funding that was already available to larger-volume businesses. First, I had to convince the bank that it was a good opportunity so that I could pitch the idea to Homes England. Then, I had to build the case for UTB being the best partner to provide the funding. Finally, I had to create the proposition. All in all, it took around two years from the inception of the idea to the delivery of the product. However, the response from the market was immediate. We only launched the fund in March, but we’re already looking at projects requiring around £100m of funding collectively. From a market perspective, it means that we can consider qualifying schemes up to 70% of GDV, which is pushing into lower mezzanine finance territory, making it very competitive and keeping all the funding under one roof.
What has Noel taught you that will stand you in good stead in your new role? Noel has a huge amount of knowledge and experience, as you’d expect from someone who has spent their entire career in banking and real estate finance.You don’t find many people with that kind of track record and it’s been a privilege to work with him. He’s also very technically strong across all elements of development lending—planning, construction, risk, legal, and the market economy. He’s coached me in all areas and encouraged me to challenge what is presented to me and to structure and mitigate risk accordingly. In 2020, UTB’s development finance division had a record-breaking year. How much did you lend and what was key to its success? Last year, we lent in excess of £600m of residential and commercial development funding and UTB as a whole lent £1.3bn— records for both. We were fortunate in that, for the previous two years, the bank had invested in new systems and technology that would enable us to operate effectively if we were unable to be in the office. These measures were implemented to improve customer journeys and make it easier for them and brokers to transact with us by digitising certain processes. Our staff were fantastic in how quickly they adapted to the new way of working. We communicated regularly with each other, brokers and customers via Zoom, and our credit committee met ‘virtually’ every weekday to discuss proposals and make lending decisions. I’m not surprised many finance providers withdrew or scaled back their lending during the pandemic. Although we had prepared for a completely different threat (such as cyber attacks and situations which might stop the bank from having physical access to our offices, eg fire, flood or power failures), we were nonetheless set up for disruption, and that investment proved to be crucial.
What changes would you like to bring in now that you’re heading up the department? I would like to build on marrying the knowledge and expertise we have in our team with technological solutions that improve the client and broker experience as well as our efficiency. The bank is already using app-based biometric ID verification and secure instant messaging, and we’ve recently collaborated with digital platform Aprao. Its software produces accurate, standardised development appraisals that we can accept and consider; it saves time for the customer and the bank, and we expect it to speed up our decision-making. We’ll also continue to develop the team to increase our coverage of England and Wales, enabling us to support even more SME housebuilders and developers. What is your biggest goal for this year? We’ve grown the team by 50% in the past 15 months. Most of them joined when we were working remotely and were inducted over Zoom—some have never been to our office! My biggest goal this year is to connect the whole team so we can benefit from idea sharing and collaboration and, ultimately, succeed. Most of our staff have adapted well to remote working. Some of our sales team operating far from London have done it for years, and it’s no surprise that many people want to retain some of the flexibility and lifestyle benefits that not commuting to the office five days a week brings. As such, UTB is introducing a flexible working policy that will apply once Covid restrictions are lifted, whereby staff can work some of the time from home. I want to find a way for us to operate more effectively together, apart. How will the £250m Housing Accelerator Fund help to support more SME developers? The increased level of gearing it offers reduces the capital requirements of the housebuilder, easing the financial burden and helping them to deliver much needed new housing. Funding is available for new builds as well as the conversion of existing
buildings. There has been a huge amount of interest since the scheme launched in March, and we’re about to approve the funding for the first development to benefit from it. While this fund is keeping us very busy, we’re not resting on our laurels; we have some other exciting collaborations in the pipeline. We recently announced that UTB secured the first ENABLE Build guarantee from the British Business Bank, meaning that we can support even more SME housebuilders.
What new areas will you be looking at that can assist a wider range of property developers? MMC presents the greatest opportunity as well as the greatest risk for development finance providers. There are some exciting new construction techniques being developed that can deliver better and more energy-efficient homes, quicker. However, the funding of projects where a significant part of the build can be completed offsite demands a different approach to underwriting and structuring. Off-site manufacturers typically require upwards of 30% of the construction costs to be paid upfront, and one of the risks to funders is in the ability to step in and replicate or finish outstanding units in the event of supplier failure. More standardisation across the finance market would help to alleviate this concern, but I expect that it will require some brave decisions and something of a leap of faith initially. Lenders will also benefit from establishing a deeper knowledge and understanding of the sector. I believe this will happen as MMC can and should play a significant role in the creation of high-quality and affordable homes. UTB has experience of funding fully modular and panel-style construction schemes and I would like to see this form a greater proportion of our lending going forward.
43 May/June 2021
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Bridging & Commercial
ENNESS FOUNDERS LAUNCH NEW BRIDGING LENDER TO PLUG INTERNATIONAL GAP Words by
THE TEAM BEHIND HNW BROKERAGE ENNESS GLOBAL MORTGAGES HAS UNVEILED TENN CAPITAL TO THE MARKET, A BRIDGING LENDER THAT AIMS TO FOCUS ON COMPLEX AND MULTIJURISDICTIONAL DEALS
he Guernsey-based international bridging finance provider—which is named after the sum of numbers from the address of Enness’s first office (352 Battersea Road)—opened its doors this June with the intent to bring new funding options to an untapped area of the competitive UK market and overseas. While Enness co-founders Islay Robinson and Hugh Wade-Jones (and non-executive chairman Nigel Le Quesne) are shareholders and will be supporting the business, Islay and Hugh will continue in their current roles as brokers, having brought in Tenn Capital CEO Matt Watson to run the show. Matt joins the lender from alternative financier Sancus, where he was the managing director for its Guernsey operations for almost five years. Throughout his career, he has been involved in scaling startup businesses. “Building something from scratch is hard; it takes parts of you along the journey with it,” he states. “I do enjoy seeing things go from idea stage to something that is real and creates value.”
47 May/June 2021
YOU CAN COUNT ON ONE HAND THE NUMBER OF PEOPLE THAT WILL LEND INTERNATIONALLY ON BRIDGING”
ON WHY THEY DECIDED TO LAUNCH A BRIDGING LENDER While it may be news to some, the team at Enness have been lending their own money for a while, as and when the need from their key clients has arisen. “It’s always been an ambition of ours to set up something in this sector,” Islay divulges. “We’re very good at originating deals, so I think it’s a natural extension.” Nigel—who has taken Enness to the next phase with his skill set—will also use his expertise to Tenn’s advantage. “He brings a difference perspective based on his decades of experience working within the financial services industry, so all the pieces came together at the same time,” Islay says. Hugh and Islay have also known Matt for a long time and worked together on many international deals while he was at Sancus. “The chance to create something with people like Hugh and Islay doesn’t come around that often—they’re a pretty big reason why I joined,” Matt shares. The bridging market has become increasingly saturated in recent years; so much so that it is now challenging for anyone to launch with a genuine USP. Matt claims that while many new lenders entered the arena post2008, a lot of them have struggled with longevity as a result of “trying to do too much”. To that point, he thinks there’s a huge opening for specialist lenders that have a highvalue service to deliver and are able to outperform by concentrating on one particular area. “We’re not going to start drifting into doing lots of different things; we’re going to focus on one and do it really well.” ON WHAT THEY WILL BE OFFERING THAT’S NEW Looking at the UK bridging market from Enness’s perspective, it saw a gap for facilitating high-end, complicated deals with international borrowers who have significant assets offshore and are in need of short-term finance, but for whom ‘binary underwriting’ isn’t providing the LTVs they need. “That service doesn’t really exist,” Islay comments. “There are a couple of great lenders, but they’ve got limited funding lines and an abundance of opportunities— that’s a supply and demand issue right there.” He adds that being able to move on deals at pace requires
control over the funding line and process, and truly understanding the marketplace and landscape. “You can count on one hand the number of people that will lend internationally on bridging,” Hugh observes, noting the disparity between the UK bridging market, where the product is ubiquitous, and the Continent, where it’s “virtually unattainable”. “We decided very long ago that just hanging around in the UK and trying to compete is a pointless exercise.” Despite this, he highlights that there are few that can actually perform in this complex lending space domestically. “Huge amounts of my days are spent securing funding for trophy homes for international clients in the UK market, and I’m dealing with the same three or four lenders day in, day out.” Consequently, Tenn will be filling the voids where these lenders can’t help on challenging deals across the UK that need to be unpicked, but its niche will be well founded overseas— predominantly in the Channel Islands, Portugal, Monaco and Switzerland. Leveraging the team’s existing acquaintance with international borrowers, the lender will be supporting HNW individuals that have more complex trust and company structures. “Some of the lending that we see calls for lots of experience, understanding and access to high-quality people to work out a way to do it, rather than lend fast and cheap,” Islay says. “At Enness, we sell ease, speed and certainty, and I believe that is what Tenn will become known for.” The company’s head of credit, Mike Starkey, a former director of Lloyds in the Channel Islands, has worked offshore for 30 years and managed an international billion-pound loan book. Its chief operations and financial officer—incidentally named Nick Diligent—has previously worked at Amberton Asset Management and Investec in similar roles. “We don’t have a product sheet. It’s very unlikely we will ever have one,” Matt expresses. Its appetite for lending will mainly be dictated by a great asset or borrower—ideally both—and it will use the knowledge of the customer or the asset to lend more or give quicker decisions than other providers can. “We’re
48 Bridging & Commercial
not going to be providing finance in a specific LTV level or anything else geographically. This is true client-driven lending via service.” As Tenn doesn’t believe it will be directly competing with the majority of the bridging market, it also feels comfortable working alongside finance providers that are offering lower LTVs than normal due to the pandemic, in order to structure a deal that offers the client more through either mezzanine or ‘top-up’ finance. ON HOW IT’S FUNDED Tenn is a new business, but the people behind it have years of experience and a significant track record in the sector. While it is privately funded and has launched with a number of capital providers, it will be bringing in more funding in the near future, which is anticipated to include a number of institutional investors and family offices. “We are going to have multiple levels that will be able to fund different loans; we strongly believe that there is an excess of capital in the UK and around the world in general,” Matt states. “What that capital is actually looking for is a targeted risk vs reward that it can deliver to its base—whether that’s insurance money looking for above inflation, pension money searching for inflation plus two, or longterm asset management wanting fixed income. I think that with the type of deals we plan to offer, each of those is incredibly attractive.” Islay references the trend that’s emerged of a large number of bridging lenders having secured funding lines from a shallow pool of institutional funders. “We will manage that money rather than agreeing to do a deal and then running around to find it.” Some recent transactions in its sights are in the Caribbean and Portugal. “It’s simply down to an UHNW family office who has a particular interest in that area,” Hugh adds. “That allows us to move faster— when you’re looking internationally, local knowledge is key.” ON TENN’S RELATIONSHIP WITH ENNESS Having the experience of creating a lender with a broking background offers a privileged view of the funding landscape from every product angle
and price point—including what’s missing. “The UK lending market is the best in the world—and we can say that because we’re very busy in France and Spain and are beginning in North America . . . those lending markets are nowhere near as evolved as the UK is. So that level of insight is going to be valuable in developing what Tenn does,” Islay comments. While this offers it a unique perspective, lenders born out of brokerages often prompt questions around the direction of enquiry flow and a potential conflict of interest. Enness generates £500m of mortgage enquiries per month and works with 500 lenders globally, including bridging providers, private banks, building societies and mutuals. “Tenn will be lender 501 as far as Enness is concerned,” Islay emphasises. “They’re separate businesses and have their own purposes. Enness is regulated and doing very well off its own back; Tenn is something distinct that Hugh and I are involved in. What we don’t want is people thinking the whole Enness funnel is just going to dump on Matt’s desk. Firstly, we don’t want to do that. Secondly, most of the business that Enness generates isn’t appropriate for Tenn.” ON ITS DISTRIBUTION MODEL In its first year of trading, Tenn plans to ‘cap’ its lending at £100m so that it can focus on building its operational foundations at the same time. Consequently, the lender’s distribution will be quiet while it builds its presence in Guernsey; after this, it will look to grow its personnel in the UK, although it doesn’t plan to open offices here. “We don’t want to do anything too fast without building the business the correct way,” Matt states. While Tenn is keen to work with UK brokers, it expects only a select few will have the labyrinthine business the company is seeking. “I don’t think this is going to be a particularly mass-market thing,” Islay admits. However, the team stresses that complex doesn’t mean a bad deal that no one will do; it generally means that there are multiple layers to it. Matt concludes that if a broker has an intricate case like this that they are finding difficult to place, Tenn is likely to be the right avenue to go to for help.
WE’RE NOT GOING TO BE PROVIDING FINANCE IN A SPECIFIC LTV LEVEL OR ANYTHING ELSE GEOGRAPHICALLY. THIS IS TRUE LENDING VIA SERVICE”
49 May/June 2021
TRENDS TO BE AWARE OF DURING THE LOGISTICS BOOM
ovid-19 has accelerated the shift to online shopping, compressing a change that could have taken four or five years into the space of 12 months. In the UK, the proportion of retail sales made online rose to 36% in February, the highest on record, up from 20% in the same month of 2020. This has placed enormous pressure on the logistics sector, which is
responsible for supplying warehouses and delivering orders to customers, and has created a surge in demand for the facilities that companies such as Amazon rely on to store goods. Unsurprisingly, warehouses are currently very popular with lenders and investors. Analysis published in March from Link Asset Services reports a “noticeable drop in availability of loans” across all
but one sector: industrial and logistics. Given this background, Bridging & Commercial spoke to lenders, brokers, valuers and property consultants to identify the main trends, challenges and opportunities that lie ahead with regard to the purchase and development of this asset class.
#1 THE PANDEMIC SPARKS A SCRAMBLE FOR WAREHOUSING AND LAND
Online sales have actually begun to slip as restrictions are lifted and people return to retail outlets. This trend will “undoubtedly” continue over the rest of the year, with non-essential shops now open and the vaccine rollout progressing, according to Knight Frank’s latest ‘UK Logistics Market Dashboard’. However, the demand for warehouse space shows no sign of abating as occupiers are increasingly looking past the immediate impacts of the pandemic and planning their supply chains, distribution models and warehousing requirements for the longer term. David Cran, director at Bradley Hall, a property consultancy based in the North of England, confirms the continuing appetite for warehousing, claiming that major retailers are “absolutely desperate” for space. He cites a 250,000 sq ft site in North Yorkshire that has six potential occupiers battling for it, adding that investors, including private equity, are piling into the sector. There are also quite a few retailers playing catch-up in terms of online operations. “They are entering the market while the rise in online sales is fuelling demand for giant warehousing, or ‘supersheds’ as they are known.”
#2 E-COMMERCE EVOLVES INTO Q-COMMERCE
As online buying becomes the norm, consumers are increasingly demanding and now expect almost instant deliveries. This is giving rise to ‘quick commerce’, or q-commerce, and the emergence of companies such as Jiffy, which launched in London in April and aims to get goods to the customer within 15 minutes of the order being placed. The likes of Jiffy, Gorillas and Getir are investing heavily in relatively small warehouses in city centres to serve the vicinity. These buildings are known as ‘last-mile’ warehouses or micro-fulfilment centres and can significantly cut delivery times. Phil Green, senior manager at YBS Commercial Mortgages, anticipates more operators entering food-anddrink e-commerce niches to meet the increasing desire for quick home deliveries. This could drive up demand for smaller units serving local areas. His view is echoed by Shane Ryan, relationship manager at Investec, who reports a growing interest for local depots from parcel operators among others to serve last-mile fulfilment. “The M1 corridor has proven particularly competitive, with land values very punchy due to high investor demand.” Eamon Kennedy, executive partner and head of agency and business development at Kirkby Diamond, observes the largest companies in particular snapping up properties they wouldn’t have considered a few years ago. “These sites might be compromised in terms of access, but can deliver up to 30,000 homes.”
#3 THE SURGE IN LIQUIDITY
There is increasing willingness to lend on logistics properties, according to all of the real estate participants we spoke to. Eamon reports the market began to open up from Q2 last year after initially freezing following the Covid outbreak in Q1. Investec turned its attention to new transactions as spring turned into summer, and the retrenchment of traditional high-street lenders has opened up new opportunities to land clients. What his company looks for in a borrower has not changed, explains Shane, “but the importance we place on certain factors has increased”. Borrowers need to have a strong track record, in-house expertise, robust financials, and a pipeline that remains core to requirements. Meanwhile, Phil Gray, managing director at Watts Commercial Finance, finds that lenders are keen to provide funding given the never-ending stream of tenants seeking these properties. “As a broker, we would look very favourably on any clients approaching us for finance to fund the construction or purchase of a warehouse.” As the investment market for these assets has increased competition among lenders, it has helped to drive rates down, notes Nick Lake, asset team leader at MCR Property Group. “We also expect it to result in improvements in contractual terms regarding LTV, entry/ exit fees and guarantee requirements, so we anticipate a very attractive lending environment to develop this year.”
#4 SPECIALIST LENDER AWARENESS
While non-mainstream lenders generally charge a premium for their services, they offer benefits over using high-street banks. Chris Stalley, sales director at Renaissance Asset Finance, argues that it can be more creative in its underwriting and assess the situation based on the business, requirement and use of the asset. “We offer the ability to refinance owned equipment, as well as restructure agreements and assets over a further lending period at primary agreement termination.” Nick states that specialist lenders will be “more prepared to buy into a project based on the way a market is evolving, even if the circumstances aren’t perfect right now,” adding that all of MCR’s multi-let schemes that would have once fit that description are 95%-plus occupied. “High-street lenders would not have funded these, due to a perceived letting risk but, where the scheme is well located and new supply is so constrained, this risk is minimal.” According to Phil Gray, specialist finance providers have increased the choice available to borrowers, particularly when high-street banks were grappling with the complexities of the government’s loan schemes. Consequently, their current appetite to lend is said to not be as high as it was in January last year. “We have seen rates from high-street lenders range between the mid-2s and high-2s above base rate, while the rates from non-high street lenders and challenger banks range from mid-3s to 5.75% over base rate, depending on the
loan value and asset quality,” he says. Gavin Seaholme, head of sales at Shawbrook Bank, remarks that mainstream banks generally offer lower LTVs for warehousing and industrial but will insist on amortisation as standard. They also tend to work on applications from operating or property companies, rather than the pure investment opportunities that specialist lenders are better versed in. “Investec can increase LTV by offering stretched senior debt to around 70–75% LTV, normally mitigated by an element of capital recourse and a borrower’s strong balance sheet,” Shane shares. Chris Oatway, owner and director at LDNfinance, comments that in terms of development, the warehouse and logistics sector is “hugely underserved” by finance providers. “These structures are vast and built very quickly, so it is crucial to have a lender who understands the particulars of the construction and can also release funds at speed.” He references the specialists’ nimble approach to that of their traditional counterparts, “which can often make the process more cumbersome, take longer to advance funds and restrict leverage due to their risk-averse nature”. He adds that it is vital to understand that a pre-let needs to be secured prior to construction, with details of who they are and their financials, and that the huge amount of risk wrapped up in this part of the sector means it’s impossible to obtain finance unless an end user is in place from the start to provide an exit strategy.
#5 IS THERE A RISK OF OVERPAYING?
As prices for warehouses rise, yields could fall; Phil Green reveals there is evidence that yields for prime industrial investment assets have already reached very low levels. So, there is always a risk of some yield correction, particularly if interest rates rise, as this will erode the base rate/ yield differential. However, location will always form a major factor in determining rental growth prospects, with variations expected in some regional and sub-sectors, driven by the lack of available space. “If demand remains constant for the land, then there’s no reason to suggest prices will drop,” Phil Gray remarks, adding that there appears to be “a dramatic shortage of land or buildings” across the UK. He cites historically low vacancy rates (down to 5.2% in Q1 2021, from 15.4% a decade ago, according to Knight Frank’s report). Until recently, nobody wanted warehouses; they were converted into flats or demolished. David tells us anyone investing in industrial land in the North of England over the past decade would have seen excellent returns. The best plots with planning would have gone for £200,000–250,000 per acre around 10 years ago; “now we know of online transactions at £750,000–800,000 per acre”. This price is said to be for land that has detailed planning approval but no occupiers, and covers an area of 40–45 acres. “However, the developers know that, as soon as the site is marketed, they can sell 50% of the space overnight. Where there are pre-agreements to lease developments to national and multinationals over 20 years or so, that price is reaching £1m per acre, and is accelerating.” This growth of 400% for the largest warehouses over 10 years, compared with around 10–20% for residential land, may look like bubble territory, David acknowledges, but it is underpinned by strong demand. Unlike in the residential and office sectors, which are likely to be hit by changes in the way people work, he doesn’t expect any let-up in the foreseeable future.
#6 WHERE ARE THE INVESTMENT FUNDS COMING FROM?
Investment in logistics hit a record high last year, reaching £4.7bn, according to Savills— up 25% on the previous year and £500m more than the prior record set in 2014. Overseas investors accounted for 52% of the transaction volumes, equalling 2017 as the joint highest proportion ever reported. Luke Tillison, head of agency for Milton Keynes at Kirkby Diamond, confirms that there is great demand from institutional investors and private individuals. Money is flowing into the sector from the US, Canada, the Middle East and the Far East as investors chase yield in a world of low returns on bonds and equities. There is strong interest from China, too, with much of it from private investors, reflecting the country’s recent success in generating new billionaires. Investors, Luke says, regard logistics in the UK as a “safe area” and less volatile than shares and bonds. His colleague Eamon agrees that yield compression is taking place, with 4% now considered a reasonable return, whereas the figure would once have been between 5–6%. Stephen Todd, co-founder of VAS Group, concurs that the space is very desirable for investors and “there is a large weight of money pushing [into] this sector and new developments”.
#7 THE STRUGGLE TO FIND SUITABLE LAND The lack of available land is one of the main difficulties in the warehousing sector. Craig Wilson, partner on the Knight Frank debt advisory team, details: “Our analysis shows that for every £1bn of online sales, approximately 1.36 million square feet of warehouse space is required. With UK online sales forecast to rise by up to £67bn over the next five years, we could see e-commerce drive additional warehousing requirements of 92 million square feet by 2024.” He expands that supply is very constrained in and around major UK cities, and the availability of land continues to be a challenge that developers need to overcome. “For example, investors may explore opportunities to purchase well-connected retail parks in city locations and repurpose them into high-value last-mile logistics assets.” Craig adds that lenders will still require schemes to demonstrate a profit on cost of approximately 20%, so increased land prices will undoubtedly put pressure on the viability of these in the more sought-after areas of the country.
CASE STUDY “ASPEN LENDS £620K ON COMPLEX MIXED COMMERCIAL PROPERTY USING DESKTOP VALUATION” Aspen Bridging has taken the pragmatic approach of using a desktop valuation to lend against a prime six storey commercial property in Moorgate comprising of both offices undergoing substantial works and a ground floor restaurant. The decision to value it remotely, despite the complexity of the asset, was taken to limit costs and help the applicant enable a quick completion to avoid costly penalty charges. Following their Rapid Desktop process the lender instructed both the desktop valuation with VAS Group and legals within hours of being approached. - Flat Rate of 0.89% for £620k - No exit fees on an 18-month term! Jack Coombs: “This deal was enabled by our confidence in our professional partners and our asset team, who visited the property themselves. Aspen completed as required for the client with minimum hassle.”
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ur sector is rebuilding and entering a new phase, ripe for investment and opportunity. It stands to reason, therefore, that its backing, potential for M&A, and regulation are all timely topics for conversation, and I could think of no one better to dive into them with than long-time Bridging & Commercial friend Ray Cohen, director at Jackson Cohen, and new friends Lee Doyle, partner, and Matt Pentecost, counsel, at law firm Ashurst. Ray has held several positions in the bridging space on behalf of lenders and associations and is widely considered the industry’s go-to consultant for regulatory matters. As well as acting as a conduit between the FCA and Treasury and the bridging world, he has been instrumental in assisting several well-known specialist finance providers, including Masthaven, Octane Capital and Market Financial Solutions, get things right. For the past few years, Ashurst—which has been involved in numerous high-profile transactions in the wider banking arena—has increasingly worked with bridging and commercial lenders, specialising in funding arrangements, risk and portfolio management. Upon first meeting Lee and Matt, it is clear that they have a passion for the future of this industry and the shape of things to come. And, tasked with advising on lenders’ loan books, they have a unique perspective on what is going on under the hood.
58 Bridging & Commercial
Cohen Ashurst in conversation Words by
59 May/June 2021
The sector has shown itself to be resilient, which is important, because you need to go through downturns and difficulties for lenders and investors to realise a model that’s sustainable”
Lee Doyle: I’m a partner at Ashurst, where I’ve been for just over 11 years. Prior to that, I was in-house counsel at the Royal Bank of Scotland. In my last four or five years there, I was general counsel of the corporate commercial banks and, for the last two or three, attendee to the UK board. This was after the problems started, not before—I always try to make that clear. My time in the bridging and commercial space really started then. I had certain credit committee attendance rights, some watch committee rights, and focused on the fund finance—what we call ‘specfin’ in the broader sector. When I went back to private practice, it felt natural to move into that space. I worked with the likes of Norton and Octopus then. I did my first few deals as a private practice lawyer around 10 years ago, and I’ve stayed active ever since. Although, realistically, we’ve had a significant uptick in this sector in the past four to five years. Matt Pentecost: I’m a counsel in the loans team with a focus on the speciality finance sector, and that goes across the real estate branches, such as bridging and commercial, and asset and car finance as well. We are in the sector precisely because we didn’t think there was a law firm that considered the needs of the market participants in the very holistic way we can. So, we obviously handle lenders’ funding lines, but we also advise them on equity raises, investor instruments and their corporate documentation. We have a very strong regulatory team, including consumer credit, so we can take care of all their regulatory needs. We also look at their tax structuring and work very closely with our capital markets team. A lot of your readers will, at some stage, be seeking to access the capital markets. Lee and I specifically bring all those pieces together. Ray Cohen: Jackson Cohen has been going since 2004, when mortgage regulation first came in. We specialise in mortgage lenders; we don’t deal with brokers—it’s not our scene. We’ve been heavily involved with Caron over the years, dating back to the Association of Bridging Professionals. I have been the retained adviser for the Association of Short-Term Lenders (ASTL) since we first started talking to the FCA. I got them to actually meet with a regulator, because they didn’t want to do that in the first place. [laughter] I said, “No, you have to have interaction.” I go to 60
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all their meetings with the regulator and the Treasury, and draft their responses to consultations. And I now sit on the committee of the NACFB on the bridging side of things. We do compliance work for lenders, getting them regulated through to helping keep them on the straight and narrow. In addition, we do a lot with unregulated lenders, particularly around what is and isn’t regulated, money laundering and data protection etc. Funnily enough, we also provide a bit of advice to solicitors that struggle sometimes with the complexities of the legislation and whether loans are regulated or not, because it’s very poorly drafted. LD: We’re not going to disagree with you on that one. [laughter] Caron Schreuder: We’re on the cusp of being in a post-pandemic world, we all hope. So shall we kick off our conversation with some of the after-effects our industry may be facing as we’re easing out of lockdown? Where do you think we’re going to feel the pressure and challenges in the next few months? LD: I’ll start. Ray, you can then point out where I’ve got it horribly wrong. Looking back at it as a whole, I think the sector has excelled through the pandemic. Obviously, it’s been a terrible time, so trying to find any positive is rife with challenges, but I believe the good lenders have done well. The sector has shown itself to be resilient, which is important, because you need to go through downturns and difficulties for lenders and investors to realise a model that’s sustainable— and I believe they’ve found that. So, I’ll begin with that as my overarching piece: the sector has proven itself and come out stronger. It’s set up for a very interesting 12-24 months ahead. RC: Yes, that’s fair. You’ve got a mix of lenders, some that just pulled out initially and others that lent through it—sometimes, though, to their own detriment, because they then got swamped with business and their service levels dropped. Then, some came back in and picked up on that. As with the crash in 2008, bridging was the area where people kept lending. The big thing that’s probably going to affect some lenders is the cases which are long in default that haven’t been able to go to court, with LTVs that could now be getting to the stage where they may lose money.
MP: Yes, I’d echo all those comments. In particular, we saw a diversity of approach when the pandemic hit. Some bridging lenders didn’t shut their doors, but certainly didn’t actively seek out business, while others saw that as a huge opportunity and were doing their best to hoover up the deals out there. Another thing we witnessed was that some institutions we advised saw this downtime as a real opportunity to get their house in order and refinance some of their debt, and review their corporate structuring, thinking that this is not going to last forever—and it hasn’t. I have a strong suspicion that those that used the past 15 months to do that are going to come out flying once the markets open up more, and that those that haven’t are probably going to play a bit of catch-up.
happening. Certainly, there are going to be great opportunities for business. We’ve had a lot of traditional regulated bridging business recently; people are desperate to get a house because of the stamp duty relief. There’s huge demand out there and house prices are shooting up. There’s a lot of competition for it. I don’t think that will necessarily be sustained at the same rate going forward, because it’s been a real spike and, once the stamp duty push disappears, it may well drop. On the other hand, brokers that perhaps haven’t seen as much of that sort of thing in the past, may decide there is an opportunity to discuss it more in the future. I’d say the development of new-build stuff, particularly converting offices, that’s going to be big, and I expect the development side of bridging will be much more popular.
LD: Taking that forward, Matt, it seems to me that the sector’s in good stead for growth over the next 18 months.
LD: Ray, because you’re closer to the underlying assets and deals, and based on the conversion of office space into domestic or residential, are you noticing a greater desire outside London for a different quality of residential?
MP: Yes. LD: When you look at the bridging and commercial lenders, you can see some very clear demand increases there, maybe even spikes on certain occasions. And at the same time, big bank, if I can refer to them as that, still probably don’t have the same appetite for moving into the sector. They still have an awful lot of regulatory constraints and are going to be hugely distracted by all this LIBOR noise and other major regulatory projects. Consequently, while I believe demand will increase, I don’t think big bank is going to be there to fill that gap. So there’s still significant opportunity for the existing providers in that market to increase their books—at a time when the investor community and investment banks are probably regarding the sector, ironically, in a more positive light than they have for some time, because of the resilience it’s shown. RC: You’re right. There’s no doubt that they’ve done well. During that downtime, effort has also been spent on systems. LD: Yes, good point. RC: Some lenders have used that period to go over how they do what they do, and they’ve done some training, which will act in their favour. Whereas those that have traded all the way through maybe haven’t had that focus, so they could well have to catch up. I see that
RC: We’re seeing that push, and I think that it will grow. I’m curious about what will happen in London, because converting offices there to residential might have been attractive a while back.
I have a strong suspicion that those that used the past 18 months to get their house in order are going to come out flying once the markets open up more, and that those that haven’t are probably going to play a bit of catch-up”
LD: A while ago, yes. RC: But, who wants to live in London?! [laughter] LD: Exactly. RC: And that’s going to be a challenge, although I’m sure there are plenty of people who will want to live in the Capital. Whether they can afford the properties is another thing. If you’re asking what the people want to buy, a lot more obviously want houses rather than flats. They want a bit of land. It’s cheaper to do that when you’re not in central London, but converting offices into that doesn’t really work so well. The opportunity for a really good developer is to consider, ‘If people are going to buy a flat, what do they want it to be?’ Because it’s not a traditional new build. You want it to be a decent size, with a proper living area, as well as your kitchen/diner and an office, and some grounds where you can sit out in, even if it’s shared. You wouldn’t necessarily make the same amount of profit, because you’re not squeezing so much in, but I feel that’s an opportunity 63 May/June 2021
for developers to set themselves apart, and for bridgers to fund that. Will it happen? I’m not so convinced. LD: The new normal, lifestyles, and the work-life balance, have got to make a significant change—if not immediately, certainly over time. But what you’ve just described, Ray, the residential demand and what it looks and feels like, and obviously lending into the sector to meet that demand, will be interesting. RC: Intriguingly, on local high streets, which you’d think are dying a death, there are quite a few small places opening up. People starting local businesses, not mass-chain stuff, and breathing a bit of life back into it, which you wouldn’t have expected. LD: Everyone thought the high street was dead, but you’re right, it’s not dead, it’s different. I guess if everybody’s not getting stuck in the centre, there are more people living locally, so the high street’s got more footfall, hasn’t it? RC: Yes, a lot more restaurants and cafés and boutique-y shops opening up. Hopefully they’ll survive. CS: This might be a result of changing values, because there was a move to support local and independent businesses throughout the pandemic, which perhaps is driving a bit of demand. And if you can set up a business in what we went through last year, then surely you’ve got something to add to the landscape. Lee, you highlighted that the sector’s gone through a stress test and proven that it can sustain itself and that this should lead to more investors and funds looking at it. I’m aware that Ashurst forecasts more M&A in this space—let’s chat about that. LD: If I may, there are two topics there: you’ve got your investor appetite, which I’ll come to now; and you’ve got what is normally expected after any market turmoil—some form of consolidation. Ashurst has been truly active in this space since 2014 and we’ve observed a different investor base coming into the sector. Previously, it was high-energy, committed entrepreneurs—who deserve a huge amount of credit for building up their businesses by themselves—mainly backed by a family office or managing to raise money in a few different formats, with some good commercial lenders putting a very traditional revolving facility in there and they just worked bloody hard. Following those successes,
people saw that there was money to be made. Wherever good money’s made, you’re going to get an investor pool. And so, you’re obviously seeing more family offices supporting that, but now private equity houses are also coming in and taking small stocks of companies. The minute private equity gets interested, the rest of the world does, too—there’s no doubt about that. And, suddenly, investment banks are also getting involved. The likes of Glenhawk and MT Finance have been able to tap into very sophisticated financial products, backed by major US banks. It’s now not unusual to find JP Morgan, Goldman and Deutsche lending in a sector that 15 years ago, frankly wouldn’t have gone anywhere near, but now really value. They are making a range of different facilities available. Based on the arrival of investors, capital and debt providers, liquidity has really grown, which is making the product more available. As a result, demand has increased. It’s been a very self-sustaining cycle. RC: You’re spot on with that. The number of lenders just keeps growing, and you keep thinking, ‘How many more can come in?’ It seems to be selffulfilling. They used to find difficulty getting funding. They would start up, get to a book of somewhere around £5m–6m, which they might have cobbled together with family money, then they’d want to borrow. They’d have trouble finding backing because they sought, say, £5m–10m and they didn’t have the facility to lend more than that; they didn’t think they could do the business. Sometimes they’d want £20m, but banks didn’t get out of bed for less than £50m. Going from £5m to £50m—they couldn’t do it. Now you’ve got a whole variety—those which will buy just a portion of your book, others will give you £5m or £10m, and some £50m. Some will give you £100m, and the world’s your oyster. It’s very different. So, it supports people coming in and starting their business. It’ll be interesting when we talk about M&A; how many people would want to sell? LD: Yes, that’s a really good question. Matt, you’ve been heavily involved in an awful lot of forward flow of late. MP: Yes. The financial crash saw arguably the leading retail bank leave the market, and it never really came back. That gap was filled with the likes of Paragon and Shawbrook, which were able to bridge the gap between 64
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£5m and £15m. At that stage, there was a relatively well-trodden path: it was investor, family money, or similar, which would get you that initial seed book. You would then try to go out to one of the retail banks to get a small warehouse facility. But now there are much broader funding options available. You can put in place a forward-flow arrangement, which we’ve done a lot of and for which we’ve seen a significant uptick in interest, both from funders, ie purchasing those assets under those arrangements, and from sellers—the corporates/bridging lenders. And the range within that is quite broad as well, depending on the sophistication and the desires of those two counterparties. This leaves a bridging lender, if it’s advanced enough, in a decent position to go out to a much wider range of investors or funders and look at what they offer and their cost of capital and how that works with their business. One thing most of the bigger or more sophisticated ones have come to realise is that it’s not an either/or decision. You have pots of assets which you can fund in different ways, and you can have those all sitting alongside one another and working well. In fact, a lot of the investors like that; if they don’t want to be exposed to a certain concentration or type of lending, but the lender wants to do that, they can go and get that funding elsewhere. We’re seeing many businesses which have, in effect, set up distinct vehicles; for example, you may have a regionally targeted entity that’s planning to lend only in the North. We’re talking to a company right now that is simply putting different LTVs into baskets and structuring it in that way. It’s giving the lender the ability to move sideways from any glass ceilings that appear. Because if a certain sector slows down, they’re not completely committed to just that avenue. Some smart lenders are creating different funding programmes to back slightly different asset classes—often all within bridging and commercial, but with pricing that truly reflects the appetite of the underlying investor. RC: Some of the lenders just need a bit of help and support about who to go to and where to get the money from. MP: Absolutely. LD: You’re right. They’ll speak to a few people but, because they don’t go to the right funder for the right asset, they think they’re not interested. But quite often that funder just needs the
asset tweaked slightly. The amount of investors who simply want access to this risk because they expect there’s a good return on it right now is significant. RC: I agree with that. MP: And I suppose that’s a really good point in this particular asset class; because of the returns, you may open yourself up to a wider community of investors. Global debt funds are looking at this because they know that it’s commensurate with their cost of capital, whereas on some of the resi, they wouldn’t be able to get anywhere near it because the returns aren’t high enough. RC: There’s a space for someone to market themselves as, ‘We can help you get the funds’. Because the broking of the funds, and finding who to speak to and how to present it, that’s a gap for some of the lenders. LD: I think you’re right, Ray, because, at the larger end of the debt scale, there’s a number of players—EY are out there— but for those who perhaps aren’t quite at that level, and frankly don’t want to pay that advisory cheque from day one, there probably is a paucity of advice. They should speak to Ray. I reckon he knows everybody. But Matt’s also someone they can certainly speak to.
One of the challenges behind consolidation, particularly in bridging is, what have you got to sell? The assets themselves are short term in nature”
RC: I don’t do that side of it.
an entity finding a way to access those assets, when it hasn’t got the ability to build the model to reach all the brokers. It can just pump money straight into one of these other specialist lenders and give them its balance sheet. One of the challenges behind consolidation, particularly in bridging is, what have you got to sell? The assets themselves are short term in nature. If it was a retail, mortgage or credit card book, the assets would be two- to 15-years long. You can package them up, put a big bow on them, and sell them quite easily. We’ve done dozens of those. So, the very nature of the corporate’s activity, if you like, is something you have to take into account and realise is probably more sophisticated than people give it credit for. Consolidation in bridging will involve buying platforms and credit processes, getting access to that broker network, possibly through a forward flow arrangement, as opposed to a more traditional M&A piece. CS: Can we deduce that there may be more mergers then? We saw it recently with LendInvest taking on an entire development finance team, not just the loan portfolio. Because, to your point, if we’re looking at relatively short-term portfolio assets, then you actually want the team’s expertise, the processes and the contacts. The distribution is the big one, isn’t it? LD: I’d say that’s right. Which is always, of course, a large amount of risk, because one of your problems with any merger is you can merge names and buy the corporate shell, but are the people going to come with you? That will be something to watch. Again, you look at TML; there was a forward flow put in place with Shawbrook, a small equity stake taken, and two-and-a-half or so years later, they were acquired.
LD: I know you don’t, but you should [laughter]. Set up a subsidiary. Shall we move on to the consolidation point? After any turmoil in the market, you see consolidation, don’t you? You see the strong survivor, standing there with a degree of balance sheet and investor support. And you’ve got those that, for whatever reason, found it harder. Whenever there’s a boom in a sector, it’ll always pause at a certain point for consolidation. I’d say just from almost a general economic cycle perspective, you’re going to get some consolidation. But big bank is also starting to eye it. And we all know that the challenger banks are struggling to get assets on their books at the moment. If anything, the assets are coming off quicker than they’re coming on, so they’re trying to find ways to retain them—they’ve got to to get their return on capital. Therefore, they’re considering other good platforms that they can access, which will happen either through M&A or consolidation. To an extent, forward flow can be seen as consolidation, because that is
And maybe there will be more of this type of partnering, where they get to know each other, figure out how things work, share balance sheets, then a little bit further down the line, decide whether to make it more of a traditional corporate merger. MP: Forward flow is used for a whole bunch of reasons, but a lot of canny investors use it as a try-before-youbuy model. Particularly if you’re investing in a young specialist lender, you’ll want a degree of corporate recourse and information. And, actually, you’ll find out more about 65 May/June 2021
One of the things about coming out of the EU was that we wouldn’t have so much regulation, so the last thing Boris wants is more of it” Ray Cohen
whether you like that asset class, how well the market’s performing, and ultimately, how much you like the lender as well. It’s a dynamic that can be very beneficial to both parties. RC: The part investor, rather than the full merger or acquisition, has been around a long time—you can go back to the likes of Masthaven with The William Pears Group. They came in, funded the business and took an interest, but sat back and allowed the firm to run it, because they were the specialists and had the skill sets to do that. They haven’t got the time to do it. Even though they lend in the same space themselves, they haven’t got enough people and they can’t manage. LD: The models just don’t fit any more, do they? RC: No, they don’t. And so they’ve done funding lines, other ways in which they could get closer to making it happen. And then, as you say, it’s all about the people, isn’t it? LD: Yes. RC: And if you acquire and lose the people, then you’ve got nothing. LD: You’ve bought an expensive shell, haven’t you? RC: Yes, and the book itself runs off so quickly. You can buy bridging 66 Bridging & Commercial
books, and it has happened, but by the time you’ve done the due diligence, the book’s already disappeared. And you’re obviously going to want to pay less than the full value, because that’s where you’re going to make your money, running it off. So, it’s never been a great option for businesses that do well. It’s a notable viewpoint, but I don’t think you’ll see it in the traditional sense, as you said. LD: Agreed. CS: Ray, you’ve mentioned that you were slightly doubtful, because the market is doing well and people are making money, about what’s going to encourage or incentivise people to sell. RC: If you’ve set up your lender, done well and expanded but want to do more—why would you want to get out of the market, unless you’re planning to retire? There might be a few people around that have given it some thought. So, do they want to pass it on to somebody else, or do they just want to sell, take the money and run? CS: Perhaps we’re at the stage, because a lot of the people who run these lenders are edging on 15 years in it, when is it natural to start thinking about that? RC: The thing is, do you step back from the duties and allow other people to run it, and just take profit, or do you consider selling
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out? One option gives you a very long-term income, one doesn’t. LD: You’re right, Caron; most are 10 to 15 years in this, but we’re probably still a good 10, 15 years away from most wanting to exit. You’ve still got, in a really good way, a relatively young group of CEOs. CS: In fact, we’ve agreed that we’re heading into a period of growth and opportunity, with the market taking a turn in terms of who it’s attracting and how it’s levelling up. So, indeed, why would you leave at this very exciting junction in its history? LD: If there is a challenge ahead, it’s regulation. My view is that the regulator hasn’t quite decided how it wants to operate in this sector and what it thinks of it. They’ve battered big bank over the past few years, probably because it was required, and there are some who believe that the regulator is going to move its focus in the next 18 months to two years and, if it does, there’s one major sector I believe will be in its sights: challenger banks and specialist lenders. There has been such growth that they must now be perceived to be a key component of the lending community within the UK and therefore bring some degree of systemic risk, ie, if they started to fall over, there would be an impact. These bridging and commercial lending books are now becoming quite significant and I find we’re getting a bit of a different message from the FCA around how they’re going to look at this. In certain aspects, they’re encouraging lenders to become banks—the New Bank Start-Up Unit that’s been set up is interesting. Ray, you’ve got your big sign up, Regulation made easy, so I’m going to give you a call every day from now on. [laughter] What’s your view on all of that?
The way a lot of these businesses expand is by going into regulated lending; as more and more lenders become regulated, the systemic risk will increase. The larger that subsegment of the market becomes, the more scrutiny it will attract”
LD: Matt, what are your views? MP: No one wants to stifle a market that appears to be a part of a period of recovery, and I think that’s been made quite clear. The comment Ray made about the unregulated lenders having to look at how the regulated entities conduct themselves is quite a shrewd move, because it means they don’t really need to do a huge amount extra, yet they’ve almost put the onus on those unregulated businesses to do more. In addition, the way a lot of these businesses expand is by going into regulated lending; as more and more lenders become regulated, the systemic risk will increase. The larger that subsegment of the market becomes, the more scrutiny it will attract. LD: We touched upon the change in the investor base and the access to the capital markets and lending lines. What lenders have to be ready for, when they make that shift, is the diligence that the US banks or the capital market requires is certainly greater than it would have been from a commercial/retail bank in the past. So, it’s certainly not regulation, but to tackle those lines, they’ll look at your structure and, on occasion, at your licencing in a bit more detail. We’ve certainly come across certain circumstances where the entities weren’t quite perfectly aligned. They absolutely worked and weren’t noncompliant, but seen by an investor through a different filter…If you want to access capital markets, then there is a need to prepare yourself; you want a clean back book for a period of time, instead of just trying to be clean for one day.
RC: Andrew Bailey made no bones about the fact that he thought all of the mortgage market should be regulated. Whether that was a political play before he got his job, I can’t tell. But the government had no interest in it; they don’t want expansion of regulation. We [the ASTL] spoke to the Treasury several times, and they said, “Not on the agenda”, so I don’t see it happening. At the moment, the regulator’s got a lot more on its plate to worry about than specialist lending, although it is an area which it does have concerns about, and it has indicated in the past that it would like to regulate more of 68 Bridging & Commercial
it. It has concerns about some lenders; as always, a few give a bad name to everybody else. What was illuminating was the approach with the payment holiday and not being able to take people to court, because the regulator made it very clear that unregulated lenders should pay attention to what they’re recommending and requiring regulated lenders to do. If you were not going to follow that guidance, and you ever asked to become regulated, the FCA would take that into account. So that was a warning shot across the bow. But, as I said, the FCA has got a job to convince the government. One of the things about coming out of the EU was that we wouldn’t have so much regulation, so the last thing Boris wants is more of it.
RC: I think in the past many lenders wanted to become regulated because they thought it would help them get access to more funds. It gives them that air of respectability, because you have to follow certain structures and processes. When investors come in, particularly in the capital markets, they want to find some structure. They want you to have a proper policy and some procedures that they can follow. Often, when you’re a small unregulated lender, you don’t have all of that. Actually, it’s good business practice because it captures knowledge. MP: Yes, absolutely. LD: The main thing we’ve seen is the need for CEOs to bring in stronger people around them. The really successful lenders in this market have been those who’ve invested in people, quality and experience. If there’s a step change in an organisation, I believe it is when that happens. RC: Yes, it is. It’s much different from when you’ve got a small team of five to 10 people and then suddenly you’ve got 40 or 50, and you can’t be taking every decision. Going back to the regulatory bit, the FCA and the PRA pay a great deal of attention to asset class. So, from that perspective, it’s not such an issue, because they are already turning the screws. How do you understand your risk? What’s your risk weighting? What’s your propensity for loss in this type of business as opposed to this bit? So, they go through the hoops on a lender’s unregulated lending, as much as they do on their regulated. CS: There’s a lot of pressure on the market at the moment. It is doing well, of course, as we’ve established, but it’s extremely competitive and there are people employing different methods to get the edge, if you like. Third parties, of which you both form a part, are coming under a lot of scrutiny as well, as lenders want more from you. They demand a lot. I’d like to get your views on whether we have enough specialist resource to cater for the growing market. LD: How much do we make this into a picture, Ray, about how important you and I are to this? [laughter] RC: We talk about regulation and new stuff, but actually quite a few people don’t do the existing things. There are a large number of unregulated bridging
lenders that haven’t registered with the FCA for money laundering supervision— something they’re supposed to do. They don’t understand the AML requirements, so they think all they need to do is check identity and possibly the source of funds. But, actually, their legal obligations are much more than that. LD: Ray’s got it dead right. It was actually what I was alluding to when I mentioned lenders moving from one funding line to another and having different people looking at their business and realising things. That is to say, the operational model is still working, but it’s working almost despite certain aspects—not because it’s aligned properly. Your point’s quite well made, Caron. There is a need for good third-party advisers. A lot more is required now. It often does take time for the adviser community to grow around that because, candidly, and Ray’s the obvious exception, all other advisers are parasites. We just take from the businesses. Lawyers are the biggest parasites in the world. We wait for people to be big enough to pay our fees, and then we arrive. CS: You said it. [laughter] LD: I said it; you can print it. So I think there is always a time in a growing market when the advisers are playing catch-up, because it’s not been sustainable before. It is a pitch line, but Ashurst moved into this market because no one really was considering it holistically, from understanding assets to regulatory environments, as well as commercial lending and access to capital markets. We’re not alone, but we’re one of the few that view it from end to end. There are certainly not many people like Ray in the market, who can take a small lender through what is a bit of a minefield. As a lawyer, I’m probably slightly more conservative than Ray is about how I think the regulator may be indirectly getting involved in the sector. I’d advise people to be making sure their book is clean as soon as possible and that they’re not in breach of anything. MP: It’s growing pains, isn’t it? LD: Growing pains is the right way of describing it, yes. MP: These businesses are great. There’s no two ways about it; they’re very successful and driven by hugely entrepreneurial, determined people,
generally speaking. They also need to have a sense of what they don’t know, so they can go to Ray or us or whoever it may be, and say, ‘We’ve got to this point, now we want to go to next stage. How do we do that?’ Often we find that these companies are growing with good, but limited, advisers, who eventually cap out. LD: And what I would say to your readers, Caron, is don’t necessarily come to Ashurst; go to anyone that you want to do it—but the sooner you get those structuring issues right, the less it’s going to cost you further down the line. I don’t think anyone expected to see the capital markets open up the way they have. So, there is absolutely no criticism to anyone who, four years ago, didn’t structure their business to access them. But if there’s anything they should be doing now, if they’ve got the aspirations and want to bring in the more sophisticated investors: get your structure right, or as best as you can, to save you the pain in two or three years’ time when you want to tap into that. RC: Because actually, if your structure and registrations are looking right and you’ve got your ducks in a row, they feel much more comfortable lending you money. MP: Absolutely. 100% agree. RC: I wish that a lot more people would come to you, Lee, in the first place, because, unfortunately, they’re using solicitors, and some of them are very good in terms of setting up their documentation for lending and advising, but they don’t understand the regulatory part. LD: There are cost implications, and it’s difficult for everybody to do it. RC: Yes. LD: But when they can, they should try to get that advice and work out where they want to be, rather than just where they are today. CS: I’m pretty taken aback by some of this, because when new lenders come and chat to us, I always give them Ray’s details! LD: And so you should. [laughter]
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THE GROWING PRESENCE OF TITLE INSURANCE Words by Christopher morris
72 Bridging & Commercial
The impact of Covid-19 continues to be felt in many areas of our lives, and the bridging space is no exception. As the pandemic and lockdowns have forced all manner of industries to reorganise, finance providers are turning to alternative approaches to ensure the cogs of their operations keep whirring. One such option open to lenders is title insurance—a form of indemnity that protects them from potential losses related to the title of a property. It is by no means a new invention, but has provided a failsafe recourse from delays during unprecedented disruption
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ny form of bridging loan calls for title investigation, which requires a number of local searches to be carried out. This can be both costly and time-consuming, with the latter drawback having been magnified by Covid. Title insurance, quite simply, enables financiers to circumnavigate this whole process, ensuring funds and deals can be accessed and completed more swiftly. Alan Margolis, director of bridging at Masthaven Bank, confirms that this type of cover migrated to these shores from the US some years ago, and that he “has been using it since 1999”. Similarly, Matt Chappell, a director at Lime Risk Agency—one of the major firms that provides this indemnity— states that the company has “lenders title schemes going back 15-plus years”. Title insurance tends to be involved with relatively low-risk investments, although this is the prerogative of the insurer. Alan remarks that it offers a “very neat and tidy” solution when attempting to deal with what can be protracted lending issues. There’s a propensity to use it in the residential market; indeed, Liam Keighley, director at Halcyon Capital, divulges that it utilises title insurance for all residential loans under £750,000 for speed. “It allows us to pay out in less than a week.” Lime Risk is a specialist insurance MGA offering a range of lender insurance solutions for varying risks in both the residential and commercial arena, and Matt confirms that, while there can be an element of mixed commercial and agricultural use, most applicants in the bridging and shortterm lending sector are using title insurance for either residential or BTL cases. Haste is the primary reason that lenders will opt for it when appropriate, which is not in every case. Alan opines that many finance providers are “not comfortable about lending a large sum of money without having a formal title investigation”. And, on occasion, solicitors will effectively veto its use. While it is intended to replace the need for Local Authority and related searches, which frequently hold up proceedings, a solicitor may deem the searches essential in certain cases. This may be related to rising numbers of disputes—Titlesolv data compiled in 2019 found that the number of short-term and bridging lender claims had risen 24% in just three years. But when title insurance is available, many lenders will choose it. Jason Berry, group sales and marketing director at Crystal Specialist Finance, reiterates that it can assist with the acceleration of
operational processes. “For short-term finance where deadlines are important, we would always encourage title insurance to be part of the solution,” he says. Mint Property Finance concurs that the advantages lie in the efficiencies that it brings, and the significant reduction in the number of enquiries that need to be raised. Another key way in which this form of indemnity can facilitate bridging is in preventing disputes over searches and titles, and lessening the reliance on solicitors. “Title insurance helps to avoid conflict and delays, and unnecessary hurdles for our borrowers,” Liam reveals. From the clients’ perspective, the arguments for opting for this cover are often compelling. Several aspects of the bridging process can be complex and contentious and planning applications can be long and arduous. This can be problematic, and is another reason that lenders often turn to title insurance. For example, local planning authorities used to issue documents to confirm the ‘established use’ of that particular building. Established use can become relevant when a property has been registered with the authorities with a certain use in mind, but this has changed over time for some reason. For instance, a house that has been subdivided into flats. The Town and Country Planning Act 1990 would deem this to be a material change in the use of a building, and this could then potentially cause issues with local authorities. This established use certificate (EUC) outlined the intended use of the premises and attested that this could not be subjected to any form of legal challenge. However, since July 1992, this process has changed, and now certificates of lawfulness of existing use or development (CLEUD) are provided instead. Nonetheless, while they are almost 30 years out of date, EUCs retain their validity, even though there is a formalised process for converting an EUC into a CLEUD. This means that the existence of an EUC can be of central relevance to the property buyer and the sort of hitch that can have a ruinous impact on a deal at the eleventh hour. It is precisely in this type of situation that title insurance can come in handy, effectively acting as an indemnity policy against such issues. It can also sidestep a lingering EUC. “Anything that assists the customer experience and speed is to be embraced,” says Jason. He also explains that although title insurance is typically associated with increased expenses, there can sometimes be cost advantages associated with title insurance, depending on the lender involved. “Some lenders will include title 74
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insurance as part of their legal costs, and cover this.” Laura Carr, head of underwriting at Hope Capital, imparts that title insurance can help lenders by removing the need for indemnities for discoverable defects, such as defective leases and an array of other issues that may be otherwise difficult to anticipate, from fraud to forgery. “It reduces what the acting solicitor needs to produce for the lender and offers greater protection than a solicitor’s certificate of title,” she says. The “operational efficiency” and “streamlined due diligence process” of which Matt speaks are obvious plus points for the industry, especially as insurers are not always inclined to pay out in complex cases. Having the cover in place can be a reliable means to increase the appeal of a lender’s case. So, with the multiple benefits of title insurance for bridging lenders, is there any reason why they would opt against using it? Certainly, there can be contexts in which it is deemed inappropriate or inadequate. Josh Mendez, broker at Newable Finance, states that this is ultimately down to the lender: “Some allow it and some don’t. Some will instead insist on full searches.” There can also be technical reasons why this type of cover may be sidelined. “Commercial properties generally won’t allow indemnity insurance, or if searches haven’t been done for a while,” he explains. Laura agrees that title insurance is always assessed on a case-by-case basis and that, in her experience, solicitors prefer not to have search indemnity, based on the fact that “if they report on certain matters then this can invalidate the policy”. She adds this this type of insurance is “traditionally not used in the first instance, but we have the option should it be deemed necessary.” The expense involved may be a factor for clients, as this will be charged back to them, and can be “quite substantial” according to Laura. However, if speed is the priority, this often outweighs the cost. Title insurance is also aimed at the simpler end of the market, meaning that any lending that involves insoluble complexity (including commercial lending) would tend to be ruled out. Alan cites the example of large country homes and estates, which may have extensive grounds, workers’ cottages and other untypical features. In addition, fraud can be a major issue in bridging, and title insurance helps to mitigate against this. The picture that emerges is of a highly useful and multifaceted mechanism, which is becoming a fixture in the industry. But is that impression correct, and has the challenging climate of the pandemic resulted in a rise in its use? Josh has certainly noticed an upturn. “There seems to have been an increase, especially during the pandemic,
particularly as local searches were taking so long to come back at the height of Covid last year.” He discloses that searches were taking six to eight weeks and resulted in bottlenecks in the system. Liam has also seen incidences of title insurance rise in the past 12 months, but doesn’t think a lot of lenders necessarily use it properly. Expanding on this, he points out that the fundamental purpose of the cover is to insure against anything that might potentially be defective. So, if you’ve initiated this approach, you have to have confidence in the policy, because as soon as you start looking at it, and become aware of potential defects, you then “can’t take that policy out, because you’re insuring against something you already know about”. In his experience, many lenders use title insurance, but still ask lots of questions about the title. “[This] defeats the object of taking that policy out in the first place! You’re doing a full investigation, but still charging the borrower for the insurance—it makes no sense!” This view is somewhat echoed by Laura, who indicates that, with time being of the essence, “some bridging lenders are using this as a belt and braces approach on every loan”. It is therefore feasible that solicitors acting on behalf of borrowers could also object, as in some cases borrowers are effectively being asked to meet an additional cost when a process of title investigation is being undertaken anyway. It seems that the growing prevalence of title insurance has come about due to the increasing competition in the space. This is incentivising more bridging lenders to use this type of policy during a time that has been defined by the greatest disruption in post-war British history. Whether this trend will continue as Covid abates remains to be seen, but considering the uncertainty ahead, it wouldn’t be surprising to see title insurance remain a popular option in bridging for the foreseeable future.
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Diversity & Inclusion Series: Words by
Master Private Finance Two hours fly by when you’re talking to Aaron Noone and Alison Houghton-Corfield. They’re my favourite type of people: animated, engaged and excited about progress. We’ve met to discuss the barriers to positive change that exist in our market and, boy, is there a lot to work with
“THE NECESSITY FOR D&I IS AKIN TO WHEN TCF ARRIVED IN THE MORTGAGE MARKET: IT HAS TO BE CENTRAL TO YOUR BEHAVIOUR AS A FIRM”
aron, sales and operations director, and Alison, national relationship director, both at packager Master Private Finance (MPF)—describe themselves as allies in the fight to create equality in the industry and are proud of the work they’ve done to advance the cause of under-represented groups within their firm. As a gay man and a black woman, Aaron and Alison have individual and shared experiences based on their time working in financial services that point to the need for the continued examination of how we embrace diversity and inclusion (D&I). Bridging & Commercial began the conversation last December with a feature that highlighted the voices of three BAME professionals working in specialist finance. We’re continuing it by showcasing the companies in our sector that are getting it right—or are at least on the correct path—with a view to galvanising more firms to move from awareness to action. This is what we learned from Aaron and Alison. RECOGNISING WHERE YOU ARE “We ask everyone who is leading a business, or is part of a team, to look out over your office floor, or at your total number of employees. If you have a predominantly male adviser/ sales team and a predominantly female support/admin team, does this feel like an equal playing field?” Aaron begins. Thinking back on their experience in the early days of taking a long, hard look at MPF, Aaron recalls that Sebastian Murphy and Rory Joseph, founders of principal network JLM, were “ahead of the curve”. “They recruited us—as the best people for the job, but also as those who had the ability to increase the diversity of MPF. They wanted a brokerage that is moral, diverse and reflective of UK society.” With that mandate, Aaron and Alison began the transformation with the recruitment of three women. “One of my main concerns was that for administrative roles, most—if not all—of the applications were from women,” Alison shares. Recognising this, the pair felt it pertinent to address the fact that there are people in these functions that have the drive to become advisers—and MPF can provide the necessary guidance and upskilling. “With that in mind, we can focus on the recruitment of the right people, while also giving support to grow and support underrepresented groups by placing them on a 80
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12-month programme to learn the support role and then navigate into the adviser field.” The packager advocates for a positive working environment from the moment someone applies to join the team. Aaron and Alison seek out those whose attitudes and behaviours correlate with the culture they’re trying to instil. “As Alison and I are known to be advocates of diversity in the industry, we give confidence to those from minority groups who might otherwise feel less comfortable in a standard recruitment process, to make contact with us,” Aaron states. The firm is currently in the process of updating its job advertisements for new advisers and managers. “Our new job specifications will make clear the values and behaviours of MPF—what we stand for and the material fact that we support and inspire minority groups to join our team, safe in the knowledge that their specific needs have been considered in advance.” Individuals from under-represented groups are offered the opportunity to enrol in MPF’s internal adviser training programme, should they wish to move from mortgage support to an adviser role. “The best applicants and employees are recognised and supported regardless of their specific grouping. Equality means creating an even playing field for all and, on occasion, an employer should be open to the need to give additional support or help to ensure that everyone can perform equally.” A perfect example of this requirement is evidenced in industry-specific data: just 17% of approved persons are female, a figure which has remained relatively unchanged since 2005. “We believe we have a role to play in balancing that number, in the form of education, development and support for more women who want to achieve regulatory approval.” Aaron and Alison are firm believers that businesses must adapt to more accurately reflect the demographic and customer base they seek to entice—and that the events of 2020 have provided opportunity to further this. “We recognise that with new flexible working and WFH becoming the norm and increasingly desirable to the potential talent pool,” Aaron comments. “If we adapt, we can diversify our make-up.” Remembering the welcome and support she received when joining MPF, Alison says: “I was appointed to the role purely based on skills and experience, as it should be with
any individual, irrelevant of any minority element, and it has been refreshing, inspiring and empowering. It was the first interview I had in which I felt I could be my authentic self. This highlighted how ahead of the game MPF is and how much work might be needed at some other firms.” “Having previously worked with men who struggle to understand or speak to gay men, inadvertently offending with stereotypes or treating you differently than your counterparts, working here at MPF and the JLM network has been the best choice of my career,” Aaron comments. “The environment is welcoming, understanding and, most importantly, feels like home.” Importantly, D&I has recently appeared on the regulator’s agenda. “All firms should be prepared to evidence to the FCA the robust policies and procedures you have in place. Remember, the FCA always looks at your culture before how you run your business,” claims Aaron. MAKE IT CULTURAL The next phase is to put D&I processes and policies into action and embed them in the culture of your business. Employing a diverse range of people is a step in the right direction, but is the company hospitable? What is retention like? “List what you need to do and implement with your management teams—and remember to include your workforce,” urges Alison. Aaron likens the necessity for these changes to when TCF arrived in the mortgage market. “It has to be central to your behaviour as a firm,” he says.
Leaders that face D&I openly and discuss the myriad aspects within it will encourage staff to speak freely about challenges they are experiencing, thereby contributing to a stronger policy through fluid communication with those groups—team engagement is essential. Alison dissuades business leaders from shying away from conversations about being black, gay, or a woman, as sharing helps to foster a culture of inclusion. Having said that, office ‘banter’ should be monitored for micro and macro aggressions that can have the opposite effect and alienate certain people and groups. Responsibility and accountability for one’s words and actions should be integral to a D&I policy. In that same vein, company days out and incentives should not only appeal to the proclivities of some individuals. For example, does everyone (anyone) enjoy golf? Is it ultimately beneficial, or inclusive, to send the women off to the spa or for high tea while the men putt about on the green? Might it make more sense to conjure a new theme that creates genuine bonding and that doesn’t ‘other’ those who aren’t into the main event? Effective D&I takes a professional approach, not least of all because it
makes good business sense to prioritise it. Change benefits all parties. Aaron and Alison ask you to consider that D&I become part of your firm’s overall compliance monitoring, alongside other measures of the business, such as AML and vulnerability policies. MPF operates an alternative approach to targets that it believes gets the most out of people. “We do not currently target on volume and monetary value; we target on client feedback and service,” Alison explains. “This removes the barriers that some, such as those who work part time, might face. They achieve through excellent service, so those who may have previously struggled can perform equally, under one key metric. In addition, removing monetary and volume targets ensures a measured and balanced approach to every client, regardless of their income potential to the business.” At the core of MPF’s ethos is the fact that great service relies on having the best workforce possible—one that relates to the most possible customers and clients. As the economy comes back to life, now is the perfect opportunity to make the right choices to gain a competitive advantage and increase your distribution.
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For the first instalment of our diversity and inclusion series, we have asked two specialist consultancies to share their best practice tips and methods for incorporating D&I into your business How do successful D&I programmes start, and what are the most important changes to lead with?
LB: Developing successful D&I programmes takes time and requires genuine investment and commitment from the executive level. Meaningful change, however, is hard to achieve without the participation of all employees.
Corine Sheratte is a senior consultant, diversity, inclusion, culture and ethics (DICE) practice at Green Park, a multi-award winning executive recruitment, diversity and leadership consultancy
There isn’t a one-size-fits-all way to proceed. Organisations should complete a diagnostic exercise that takes a strategic approach to D&I. For true impact and longevity, the strategy should also be aligned with the objectives of the business.
CS: Listen to your people; organisations that fail to do so often stumble at the first hurdle. Although many companies turn to best practice and research when developing D&I programmes—which is insightful and valuable—if they don’t take the time to also explore the lived experiences of the workforce, especially their diversity networks (if set up) and what they require by way of organisational improvement, any scheme is likely to stall in its success. Additionally, any initiative should be piloted prior to wider rollout to obtain feedback and ensure sustainability and employee trust from the outset. There is also the need for clear, consistent communication of the D&I rationale. Companies might focus on specific areas and not on others to avoid potential internal backlash and scepticism; to underpin this, I often recommend they widely explain why certain diversity strands have been prioritised within strategic objectives. To build trust that actions are being taken following feedback, multiple channels should be used to communicate, on a quarterly basis, which activities are in place and the reasons for doing so, and to showcase any successes against D&I milestones. Last, but certainly not least, evaluating the success of programmes is vital; ultimately, what gets measured, gets done. We advise using key impact metrics when it comes to assessing cultural change—these could be participant attendance, (diverse) employee engagement, and promotion rates upon completion. Analysing promotion rates by diversity is crucial to ensuring effective diverse succession planning processes.
Lisa Bell is an HR expert and founder of Tell Jane, a consultancy specialising in supporting businesses in tackling toxic workplace behaviour
Building on the importance of involving employees, should it be a collective process? Is it more impactful for it to be led from the top, or should employees drive it? CS: While companies should approach D&I programmes with a collective mindset, they must ensure the tone is set and led from the top, demonstrating commitment and a requirement to recognise employees’ needs by engaging with them to understand their lived experiences. We find that there is often a noticeable disconnect between the two. As such, engaging the workforce and empowering a callout culture is key to the success of any D&I programme. I highly recommend the establishment of employee/business resource groups (E/BRGs), also known as diversity networks. If developed and driven correctly, E/BRGs are an invaluable source of insight and a powerful influence in a company. They exist to provide support for employees and raise awareness of challenges faced, and as a mode of employee engagement; they help businesses understand relevant issues and positively influence their diversity and inclusion strategy. But for E/BRGs to have a lasting impact, they must be designed correctly, led by confident individuals, communicated clearly, and be more than just a social group—they need to be the origin of positive cultural change. Support from an effective and visible executive sponsorship structure is also needed to help champion each E/BRG’s vision at a senior level. However, to avoid potential dilution, and to ensure all key stakeholders involved in the D&I governance process remain connected and supportive of a shared vision, it is essential to have a common golden thread running
through all messaging disseminated by these stakeholders. This will gradually eliminate silo working in relation to D&I, as all inclusion stakeholders will be speaking with one voice. Therefore, whilst it is essential to listen to employees when implementing a D&I programme to ensure diversity of thought and that actions have their needs in mind, to avoid diluting the focus of the agenda and potential silo working, companies should invest in a D&I function to lead on key action plans, with the required support and buy-in from senior tiers to ensure coherent one voice messaging across the organisation.
Our clients are now considering how to go beyond written policy and are starting to understand that what is perhaps more constructive than an established policy is its consistent application in the workplace. I observe numerous gaps in how managers and leaders apply these, with many feeling overwhelmed by some of the complexities and sensitivities of D&I. Education and awareness are needed to support and drive capability, and build management confidence to ensure that accountability can be evidenced.
LB: It’s virtually hopeless to try to implement a productive and impactful D&I strategy without organisations listening to their employees. Commitment from the executive team isn’t enough; they also need to drive it and, to do so, they need to understand what employees value.
LB: Organisations that have identified their motivations clearly and formed a strong ‘why’ for D&I are far more likely to make long-lasting, positive and effective change. Often you see organisations reacting to movements— such as George Floyd, Reclaim the Streets and MeToo— instead of taking a more proactive approach.
Millennials, for instance, want tangible opportunities for equality and an outward commitment to diversity from their workplace—a D&I policy published on the intranet or company website simply isn’t going to cut it.
D&I efforts without a ‘why’ have a tendency to look performative and serve as a tick-box exercise rather than making deep cultural or organisational change. The ‘why’ will differ from organisation to organisation.
D&I isn’t just an issue for large-scale corporate organisations or for those who can afford to employ a diversity manager. It is a mindset and underpins the culture of your organisation, no matter the size.
In your experience, what obstacles do firms face when trying to spur themselves into action? CS: The culture and inclusion audits my team frequently carries out often show firms experiencing hurdles when it comes to taking visible accountability for D&I. We therefore encourage leaders to transition from being committed and interested in D&I to being accountable for it, enabling a mindset shift and for them to not see this as an issue that HR needs to address. Targets should be tied to executive compensation and go beyond the number of people by looking at inclusion factors such as satisfaction and attrition.
Are there common mistakes made by businesses that are attempting to improve D&I, but struggling to have any sort of lasting impact? CS: Two errors firms make is having poor or no mechanisms in place to obtain a diversity data baseline prior to setting diversity targets, and inadequately communicating the rationale for focusing on certain diversity strands in strategic D&I objectives. While many organisations are driven to move the diversity dial at a faster pace, an ineffective approach to diversity target setting can damage employee trust and brand reputation. For example, when it comes to increasing black representation, many organisations have been spurred into action by the social uprising of the Black Lives Matter (BLM) movement last year and have worked with haste to set race and ethnicity targets, often without adequately considering the D&I maturity level of their organisational culture.
Consequently, and through our audits with several organisations cross-sector, we have seen confusion between positive action and positive discrimination. Not only is positive discrimination unlawful, but it can have detrimental consequences for both internal organisational cultures and brand reputation, thus preventing sustainable progression against the D&I agenda long-term. Another mistake is an over-reliance on unconscious bias training to help mitigate biases long-term. We have seen the implementation of this type of training fail in its impact for a number of years, which has led us to develop our Cultural Intelligence (CQ) development programmes. In contrast to unconscious bias training, our CQ programmes explore what firms can do to help drive conscious D&I competence in the workplace to ensure all diversity and cultural difference is intentionally included by senior leaders and managers. We supplement our programme with accountability workshops to ensure they are sustainable and that key milestones are met to achieve tangible D&I change. LB: D&I should be something that runs through everything organisations do—from the interview and selection process, to training and development, right through the entirety of the employee lifecycle. They often tend to forget this and assume a training day here and there on unconscious bias, for instance, will be sufficient. D&I needs to be embedded throughout the company, not just as an HR project. Those thinking they can just hire more diversity are mistaken. The fact is, if you don’t build an inclusive culture, employees will leave.
How are D&I and company culture linked and how does this impact on retention rates when employing people from a variety of backgrounds and, consequently, a company’s ability to attract those people on an ongoing basis? CS: Socially, the world is continuously changing. We can see this with the MeToo movement, BLM and generational changes brought about through the millennial and Gen Z era. As society evolves, so do our perceptions of how our increasingly globalised and diverse surroundings should be, as well as our expectations of workplaces. If companies want to attract and retain diverse talent, they will need to authentically reflect a diverse workforce and an inclusive working environment. As a result, those that embrace D&I are likely to see better than average profits. D&I and the creation of a sense of belonging are intrinsic to an inclusive culture. We see first-hand that when an organisation focuses solely on getting diversity without ensuring it also creates an inclusive environment with inclusive leaders, the benefits of a diverse workforce are not brought to bear. We also know that without the mix of diversity and inclusion, they will not create a sense of belonging; this will affect an individual’s morale and their ability to perform at their best, and this ultimately impacts retention rates. Much of our analysis supports that attrition rates are higher for diverse talent.
Companies that invest in D&I often experience the following benefits (not an exhaustive list): Innovation Companies that have a diverse workforce see an increase in innovation. The coming together of various ideas opens space for creativity. Diverse teams contribute towards productive debate because their life experiences, education and perspectives differ, boosting the cultural agility and intelligence within the team, leading to advantageous outcomes for business. Better risk management A lack of diversity is often seen as a cause of poor decisionmaking and governance, homogenous management teams and uninformed risk taking. Customers and regulators are now closely scrutinising the diversity make-up of boards as a measurement of confidence. Performance In line with research by McKinsey & Company, businesses that increase gender diversity are 25% more likely to outperform those that do not; and those that increase ethnic diversity are 36% more likely to outperform those that fail to do so. Psychological safety Where attraction and retention of diverse talent are concerned, it is not enough just to increase diverse representation to reap the benefits of D&I. Employers must simultaneously create an environment where difference is accepted in an inclusive working culture. An individual’s perception of the consequences of taking risks in the workplace is often determined by how inclusive or ‘psychologically safe’ the working culture is. A working environment with high psychological safety encourages employees to feel confident in the decisions they make, as they will be less likely to anticipate embarrassment or punishment from potential mistakes. As diversity of thought and a degree of risk-taking contribute to sustaining competitive advantage, it is important that employers build employee confidence. This can be achieved by upskilling leaders through inclusive leadership and CQ training, which can in turn alleviate any feelings of selfdoubt on the part of under-represented diverse talent. Brand reputation In a survey by PwC, over 80% of participants said that an employer’s policy on diversity, equity and workforce inclusion is a significant factor when deciding whether they wish to work for them. This will not only help broaden the talent pool, but it will help companies to build a workforce that more closely reflects a diverse customer base. LB: D&I and company culture are inseparable. Inclusion cultivates a culture that embraces and promotes diversity and, in turn, fosters a community that employees from different backgrounds can feel a part of. Employees seek out organisations that foster an inclusive work environment. If the inclusion piece is right, this will create a sense of belonging and loyalty among staff. Simply hiring diversity won’t work if the company culture does not practise inclusion. Instead, it appears performative and any efforts undertaken are short-lived.
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In this issue of Bridging & Commercial Magazine, we dissect how loan performance has fared over the past 12 months; how better quality borro...
Published on Jun 17, 2021
In this issue of Bridging & Commercial Magazine, we dissect how loan performance has fared over the past 12 months; how better quality borro...