Bridging & Commercial Magazine — The Development Issue

ISSUE 21 MAY/JUNE 2022

THE DEVELOPMENT ISSUE

ISSUE 21 MAY/JUNE 2022

+ Dissecting an unusual deal p28

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Acknowledgments Editor-in-chief Beth Fisher Creative direction Beth Fisher Caron Schreuder Sub editor Andrea Johnson Senior reporter Andreea Dulgheru Contributor Jon Yarker Joe McGrath Christopher Marchant Sales and marketing Beth Fisher beth@medianett.co.uk Special thanks Katrina Hindley, TAB James Staunton, Air Cover PR Anna Geffert, HERA Communication Strategies Amy Vickers, OSB Group Jim Baker, Spring Finance Haley McPherson, Enra Specialist Finance Melanie Willis, MW PR Printing The Magazine Printing Company Design and image editing Russ Thirkettle, Carbide Finger Ltd Bridging & Commercial Magazine is published by Medianett Publishing Ltd Managing director Caron Schreuder caron@medianett.co.uk Publishing director Beth Fisher beth@medianett.co.uk 3rd Floor, 71 Gloucester Place London W1U 8JW 0203 818 0160 Follow us: Twitter @BandCNews | Instagram @BridgingCommercialMagazine

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ccording to FMB’s Q1 2022 ‘State of Trade Survey’, nearly three quarters of small builders have delayed jobs due to a lack of materials, while just over half have been postponed because of a dearth of skilled tradespeople, such as bricklayers, carpenters and joiners. Sky-rocketing price tags on materials are also impacting construction work and almost all (95%) of FMB members expect costs to further escalate. Consequently, 83% have put up their prices. SME developers across the nation will undoubtedly be feeling the pressures affecting their bottom lines, and will need to work smarter with their chosen partners if they want to stay on track. While house prices have remained a positive glitch in the UK’s economy against a backdrop of surging inflation and the cost of living crisis, it simply won’t be enough to rely on. Our cover story, ‘No longer safe as houses’ [p58] brings together nine experts to hash out the challenges the property development market is experiencing—and set to face—and how SMEs can overcome them through original thinking.

Fortunately, some of those innovations have already come to the fore. On p10, Finanze MD Alastair Hoyne reveals how a train conversation with a SSAS pension administrator led to the creation of a brand new product that could lead to significant savings for developers. Later on, we list a series of proptech inventions that are taking the market by storm and should be on your radar [p88], and how access to an exclusive funding line is allowing one brokerage to offer new solutions to its clients [p22].

Elsewhere, we discuss what you need to know about forward funding [p46], how frameworks can help level the playing field for SMEs in construction [p82] and the importance of downside protection [p94].

Since we launched the first issue of Bridging & Commercial, we have been expecting M&A activity on the horizon—and it now seems to be coming in droves. SPF Private Clients, The Loan Partnership, Fluent Money Group, Enra Specialist Finance, and Connect IFA have been in the news recently, to name a few. Considering 13% of bridging companies are looking to sell their businesses, we look at what goes into the sale of a loan book, and the considerations that need to be made on both sides of such a transaction [p38].

Reiterated throughout this issue is the fact that finance providers, brokers and property developers will need to work collaboratively in order for each party to continue successfully— and intermediaries will need to be the conductors of this. A sound understanding of who they are arranging finance with, and how they approach problems, is integral. And this leads me to impart something intriguing which a lender recently told me: “When times are certain, people are just looking for finance. But when times are uncertain, it’s about keeping the right partner in your development funder.”

Beth Fisher Editor-in-chief

5 May/June 2022

It’s really important that we get to a point where brokers can talk to us as specialist finance account managers, where we can actually verify the deal” p26 6 Bridging & Commercial

10 28 38 46 52 58 74 88 100

News Exclusive Zeitgeist Explained Feature Cover story Interview View Backstory

Finanze / TAB / Aureum Finance / UTB

Dissecting an unusual deal

Why a buyer might snap up a loan book

The comfort that developers need

There’s nothing up in the air about this lender

Why we shouldn’t rely on house prices to bail out developers

DannyWaters / Robert Dale / Chris Lanitis

We find six ways to improve the construction sector

Kelly Rule

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WHEN IT COMES TO PROPERTY FUNDING, THERE IS ONE METHOD THAT USUALLY GETS OVERLOOKED— INVESTING THROUGH AN SSAS PENSION SCHEME. IN A BID TO CHANGE THIS, FINANZE HAS LAUNCHED AN EXCLUSIVE PRODUCT USING THIS VEHICLE, IN PARTNERSHIP WITH ELYSIUM BRIDGING When sourcing project finance, developers and housebuilders generally opt for a traditional senior debt and/or mezzanine loan. However, there is one method that tends to fall off the radar—investing through a small self-administered scheme (SSAS). For those who may not know, this is a type of employment pension structure that a limited company can establish for up to 11 members over the age of 18, in order to gain more control over how their pensions are invested.

They generally comprise directors and other senior executive staff, but can also include family. Each SSAS is authorised with HMRC, granting it the same favourable tax treatment as any other registered UK pension scheme.

In addition to using the funds to further invest in the members’ company—for instance, by purchasing its trading premises and leasing them back to the firm—the scheme can borrow money up to 50% of its net asset value, calculated as the cash within the SSAS; all investments (including the value of any properties owned and third-party loans) minus the value of any loanbacks to the sponsoring employer and existing scheme borrowing, divided by two, to provide additional liquidity for investment purposes.

While an SSAS can be a valuable investment tool, it does have its Achilles’

How the next

BIG IDEA

in development finance started on a train…

Words by

andreea dulgheru

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heel: the fact that it cannot be used to invest in residential properties.

From his many visits to trade shows and talks with SSAS pension trustees, Alastair Hoyne, managing director at specialist finance brokerage Finanze, tells me that this barrier is a source of frustration among members, particularly residential property developers.

However, an impromptu conversation between him and a SSAS pension administrator during a train journey last autumn would soon solve this issue.

As the two discussed the thoughtprovoking debates held during an SSAS Experience Network event they’d just attended, a tantalising question came to the fore: At what point does a residential property actually become residential? Curious to find out, Alastair spoke to a leading scheme administrator, who happened to have an ex-HMRC tax inspector within the company. Together, they determined that the residential point is not when a kitchen or bathroom is completed, but when building certificates are issued.

“What this means is that you can buy land and/or convert a commercial premises within your SSAS, fund the cost of works, take the project right to the point of building certificates being issued, then stop—and it’s all within your rights to do so,” Alastair claims. “Of course, the beauty of this is that having converted the property to where it is almost residential, the value has increased substantially. The extra money you’ve made on the sale will go back to your SSAS. Given the scheme’s terms, you’re not paying capital gains or any associated tax, either.” With this strategy, once the property is near completion and awaiting certification, the SSAS can sell it either to a member once every 18 months (anything shorter would be considered trading, which is forbidden) or to an external entity as often as you want.

However, there is one obstacle that might stop SSAS trusts pursuing this investment route: lack of finance.

Alastair explains that each member can only contribute £40,000 a year to the scheme, making it a fairly drawn-out task to build the pot to a level where it can be used for property funding. And while they can technically borrow bridging, commercial or development finance for traditional SSAS-permitted investments, there are very few providers in the UK market that offer something specifically designed for this, Alastair states.

This is why he decided to take matters into his own hands, partnering with Elysium Bridging—with whom Finanze has strong ties through previous collaborations, including a ‘hunting licence’ loan launched in April—to create a bespoke development finance offering. Exclusively available through the brokerage, it can be used for ground-up developments and commercial-to-residential conversions undertaken by SSAS groups that may not have enough funds to invest in property on their own, or that need an infusion of cash for more expensive projects.

On paper, the SSAS development funding proposition offers loans between £100,000 and £10m at a maximum 65% LTGDV on terms of up to 18 months, which can cover as high as 70% of the purchase price and 100% of the work costs, as long as it doesn’t exceed the individual SSAS scheme’s borrowing capacity.

Depending on the client’s requirements, it can be used in multiple ways: to obtain the necessary funds to acquire land or a commercial building for conversion, to cover the development/ refurbishment costs of the property, or to secure exit finance if the final scheme (prior to the building certificate being issued) is being sold to a member of the SSAS. It could also be used to obtain funding for a combination of all three.

Once the project reaches the building certification stage, the SSAS has two options: to sell the property to a third party, in which case the loan gets repaid and any additional capital is added to the pension scheme, or to sell it to a member. Should the scheme opt for the latter, Elysium Bridging will transfer the ownership of the loan from the SSAS to the individual/legal entity, and will offer the member the extra amount needed to buy out the property (which is now likely to have increased in value) from the trust. This means that the individual member will only have to pay fees (such as the 2% arrangement charge, £500 admin, valuation, legal costs and others) on the additional sum, as opposed to taking out a separate, bigger loan.

“Using their SSAS pension, developers don’t pay stamp duty on the purchase or capital gains on the sale. So by creating the uplift in value within the SSAS, they can make a significant saving and more so when they sell out the almost finished project.

They can quickly build up their pension pot, further protecting these funds from tax and providing an efficient inheritance planning opportunity,” Alastair details.

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Bridging & Commercial

Following a five-month testing process, during which it was refined and promoted across the country, the SSAS development funding product officially launched in June.

Now, Finanze and Elysium Bridging are focusing on the next steps: completing £50m worth of loans by December this year, and £200m within the next three.

“With this type of offering, particularly for development, I would be surprised if it didn’t become our biggest product, despite it being for a more limited audience, as it’s creating a need that people didn’t realise they had,” Alastair states.

He also believes it is opening property developers’ eyes to the benefits that SSAS investment offers them. Paul Gammond, director at Elysium Bridging, concurs: “It will revolutionise SSAS pensions and create a real opportunity for professional property investors and developers to quickly build up a large income within their pension, free of tax, while funding projects that, had they been done normally, would have incurred capital gains, stamp duty and other associated taxes.”

In addition, Finanze is looking to expand its distribution pool. Currently, the offering is available to SSASs administered

by Retirement Capital and Empowered Pensions, but Alastair aims to get more pension administrators on board and make the proposition available to more trusts, to ultimately grow its use as a property investment tool. “I would like this product to be available to all the schemes that exist. At the end of the day, it’s about helping people save towards retirement successfully, and I want to assist more people in doing this,” Alastair shares.

He is also keen to collaborate with more lenders to exclusively offer this type of finance. “I think there would be a prime audience for them—we’re talking about sophisticated individuals who have successfully built their own companies to a level significant enough to set up a company pension, and who have now decided to enter into the property sphere.”

Alastair observes that it is “remarkable” that the idea was born simply by talking to other finance professionals about their pain points in the market. “What we’re doing at Finanze is projecting a real picture of the landscape and offering new, innovative solutions. The SSAS development funding product is the perfect case in point, and a wonderful opportunity for people to make an excellent profit simply by doing things a little differently. We have always been about ideas, and this is perhaps our most exciting one yet.”

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One stop shop

The in-house broker portal revolutionising the lending process

17 May/June 2022

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In June, TAB launched its new digital broker portal to make the lending process easier for all parties involved.

On a rainy Wednesday afternoon, I sit down with CEO Duncan Kreeger, technical director Mark Gillis and head of marketing Katrina Hindley, for an exciting show-andtell of how it works, why they chose to build it in-house, and how it will, ultimately, benefit the brokers who use it Words by

andreea dulgheru the people in our business,” highlights Duncan. Instead of using a third-party software provider, the lender chose to build the platform in-house, led by Mark, in order to communicate faster and more easily, as well as utilise the tech team’s extensive knowledge of how TAB runs and where the pain points are in the funding process.

“The tech team is embedded in the business,” says Katrina. “As well as their technical know-how, they have a deep understanding of the operations and the brand, and an appetite to continuously improve our processes and user experience.”

The portal is now open to all brokers who are keen on doing business with the specialist lender. Once they contact TAB to show their interest, they will be invited to create their own account. The portal works handin-hand with the company’s existing backend staff platform, allowing each party to be notified every time a broker, borrower or underwriter completes a step in the loan journey.

Once the intermediary has submitted a new enquiry and discussed the deal with a BDM, an indicative term sheet is provided online. The BDM will then consult on the official terms the lender can offer, before a DiP is issued. Both broker and borrower must read the full document before signing (they will not be allowed to proceed without doing so), after which they will automatically be logged in to the borrower application form, where they will verify and include any additional details required (such as information about the solicitor).

The forms can be completed in multiple sessions by many people simultaneously and updated if any changes or errors are identified

aving recently secured a funding line from Atalaya Capital Management, achieved a record-breaking lending performance in April and introduced a brand new tracker bridging product, TAB has kicked things up a notch with the launch of its broker portal.

The platform has been designed to streamline the lending process for both intermediaries and the company itself, from the initial enquiry all the way through to deal completion. “We’re trying to add value across the group, not just for the customers, but also for 18 Bridging & Commercial

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later on, thus offering significant flexibility to the broker and borrower to complete their part of the process at their own pace. The underwriter will then, on the staff platform, go through a specific, pre-built checklist (depending on the loan type) with up to 400 points to conduct due diligence (including the borrower’s ID and proof of residence, bank statements and Land Registry data)—and, if needed, can contact the broker or borrower through the portal to ask additional questions. Finally, the lender will issue the formal offer so the deal can officially close.

Aside from the obvious perk of a paperless journey—with all signatures done digitally via the lender’s proprietary tech—the portal offers accessibility, as it can be used on any type of device. But perhaps its biggest benefit is the transparency of the entire loan process, in line with TAB’s values.

Linked to the staff platform, all parties receive notifications of any progress on the deal, and can check its status at any time by logging in with their own account. Underwriters will be pinged with every task completed, allowing them to check that everything is running smoothly, or to identify any bottlenecks to get the deal back on track. “The intention is to remove the need for constant emails and separate file systems, so attachments, messages and requirements are all being sent/received and approved through the system, consolidating it into one place for both us and our brokers,” explains Katrina. “With real-time updates of progress and notifications of changes, this can only improve the process and efficiency.”

Katrina gives the recent example of a loan which had been delayed, with the visual data showing that this was due to the solicitors. “As we could easily see and understand where the problem was, we didn’t kill the loan—we allowed them to complete their tasks in their own time. Nine months later, the borrower received their funds, though the process took longer than usual.”

Once the deal is completed and funds are agreed, the back-office system handles all the loan financials, including monthly/retained/rolledup interest, fees, and redemption

statements, which are accessible to brokers and borrowers though their own TAB accounts. “To us, this isn’t going above and beyond, it’s just common sense. Borrowers want to see their facility better, and why shouldn’t they? This way we can share stuff we know people will want,” Duncan states.

What also makes the broker portal unique is the fact that it’s not just an independent piece of tech, but a part of the wider TABHQ system, which includes an investor portal, admin function for its staff, a CRM, loan management, servicing and collections platform, an education area (TAB University), and a reporting function for data collection and analysis that links into a service called Power BI. By having these features together, the finance provider aims to build a complete, one-stop-shop that can provide any service the lender and the people it collaborates with may need.

Although the portal is now live, Duncan, Mark and Katrina emphasise that it will be updated frequently.

At the moment, they’re considering adding further notification options for brokers to select (such as SMS alerts), as well as reminders to make sure brokers stay on top of the deal.

They may also create a bespoke mobile app, if there is demand for it.

Future improvements may involve applying artificial intelligence and machine learning to further automate the enquiries and underwriting process—however, they stress, the human touch will never be removed.

“This is really just the start. TAB’s aim is to build an all-encompassing platform that embraces existing technology and applies it to bespoke code that has been written by the in-house tech team to create a single source of truth. The platform is in constant evolution of what’s built and what is to be built,” Katrina concludes.

19 May/June 2022

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The equity solution WORDS BY JON YARKER

Rising build and labour costs are squeezing margins throughout the property industry. With the money only going so far, Dean Brown, managing director at Aureum Finance, explains how access to an exclusive funding line is allowing him to provide new solutions to developers

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hile it’s a tough time for developers right now, the mood is more positive at Milton Keynes-based brokerage Aureum Finance. The business has formed a strategic relationship with a multi-billion-pound sovereign wealth fund (that cannot be disclosed), which has made available an exclusive funding line for property developments through a UK fund, brokered via the Aureum team.

Dean—who founded the brokerage four years ago and spent 20 years prior in lending at companies such as Santander, the Ingenious Group, and Alpha Real Capital— is excited about what this capital means for the company and the opportunities it can offer its customers. “We’re doing this in partnership with one of our main clients.

They are a large-scale developer in their own right, and were working alongside a sovereign wealth fund,” he explains. “They requested that we could be part of it—because of the work we do in that space—raising equity for them and other clients.” The developer is the development manager on behalf of the fund and acts as the JV partner to the new property investors that Aureum introduces.

The fund has initially allocated £20m to this equity structure, which focuses on housing projects across England. The first investment of circa £2m financed the development of 30 houses, which completed in November 2021.

Several other schemes are in the pipeline, with Aureum now well-placed to continue matching this source of equity with the right opportunities. This current JV involves a 20% coupon on the equity, with profit split 25/75 thereafter in the developer’s favour. “Broadly speaking, it works out to be 50/50 overall, but the developers receive 75% of any upside, so it’s quite an incentive,” Dean states.

Having the right expertise is crucial for this work. “We have five brokers in the team, and several of us specialise in development and equity raising,” Dean details. “That’s what this fund really likes. While we could do the other parts, like investment mortgages and bridging, our main focus is development and equity.The fund put a lot of credibility on that.”

Meeting developers’ challenges “Equity plays a big role in enabling developers to do more projects,” Dean continues.

“SMEs need that equity to enable them to do more and larger schemes and to be able to compete on some of the sites with major housebuilders and their regional teams.”

“Similarly, people are having to invest more into their projects because of rising

build costs and labour. The senior lenders require larger contingencies, which means developers have to put more money into individual schemes. That money only goes so far.” The mismatch is clear, painting an obvious role for brokers like Aureum.

Dean expects equity to increase as a solution for the myriad of challenges developers now face in the current economic climate. “A lot of the family offices and funds that are out there have really cottoned on to [the housing opportunity] and are wanting to provide funding into that, so it will continue to grow,” he claims.

“It is specialist. A lot of the funds are under the radar—they don’t want to go to the mass market because they attract a lot of people that perhaps aren’t the kind of quality they’re looking for. Some use companies like us as a filter and make sure we’re almost underwriting those schemes before they see them. That’s where the due diligence came with this fund—to be sure we were the right people for that.”

Securing the best (and right) deals Due diligence is a key component in providing equity as a solution—and the broker went through an extensive process when negotiating the current arrangement with the fund. This involved Dean and his team delving into the particulars of each development being financed, not just from a pure risk management perspective but also to help ensure any questions or concerns from the equity investors could be thoroughly mitigated. “It might be the best deal in the world, but [equity funders] won’t do it if the developer doesn’t have the track record or know-how.”

Furnishing these relationships with the requisite level of scrutinisation and market expertise is essential. For brokers with the right connections, there are prospects to capitalise on here. “It’s very important for developers to present just how knowledgeable and experienced they are,” Dean asserts.

“That’s partly where we come in and add value, by helping them to make sure they show themselves in the right way. It’s not just about introducing them to a source of capital.”

This is where experience plays a vital role. Having sat on the lender’s side of the table, the Aureum team understands the standards that need to be met to help a deal cross the line. Fulfilling these and securing arrangements that make the best financial sense for all parties mean that, in a tough development market, equity solutions may soon become more achievable.

23 May/June 2022

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ecently, we’ve seen an abundance of specialist lenders enter the BTL space, among them United Trust Bank (UTB). However, this was no impulse to jump on the BTL bandwagon. As Buster explains, it was a calculated move that the lender had been planning for around 18 months.

During this time, it conducted significant research and consulted its broker partners to accurately gauge the size of the market, where the opportunities lay, and what the bank needed to implement—in terms of products and technology—to ensure the offering would be a success.

“We wanted to take our time. You only have one chance at making a good impression in an already crowded market, and we wanted our proposition to shine from day one,” says Buster.

The company has appointed Barry Luhmann to head up the new division, who brings extensive experience from his roles at Trussle Lab, Lloyds Banking Group and BlackRock European Mortgage Strategies. He has also previously worked as an independent consultant focused on new technology, processes and offerings.

With the groundwork completed, in April UTB began testing the product with a small number of broker partners that had given feedback during the research phase.

By the beginning of May, the BTL offering officially went live. However, Buster emphasises that as a controlled launch, the product range is only currently available to a group of 25 intermediaries, including 3mc, Positive Lending, TFC, Impact Specialist Finance, Connect and Brightstar. The lender wants to make sure it can keep on top of service and avoid getting overwhelmed by too much business, which could affect quality—a strategy which has worked well with its previous launches.

“This allows us to control sales activity and manage underwriting resource as we grow and gain momentum,” explains Buster, adding that the proposition will gradually be offered to more brokers and distributors throughout the second half of 2022. Its goal is to make it available to all its 2,000 broker partners by the end of this year. The bank is also keen to open it up to new intermediaries, who are advised to contact UTB to register their interest. “Eventually, we would like to accept business from all brokers in the UK, but Rome wasn’t built in a day!”

The product suite offers loans of up to £1m at a maximum 80% LTV and includes two- and five-year fixed-rate options.

Available to individual borrowers and SPVs, with no minimum income requirement—it is split into three price categories, depending on the deal’s complexity. The first is designed for standard BTL properties, with pricing from 3.2% for two-year options and 3.4% for five-year fixes. The second is available for more specialist BTL dwellings, such as HMOs or MUBs up to six units and holiday lets—also priced from 3.2% or 3.4%, but with more expensive rates at higher LTVs. The third category is for complex BTLs, including HMOs of up to 10 units, flats above less desirable commercial units, and others, for which rates start at 4.3% for two-year fixes and 4.4% for five-year terms.

Being accessible for a wide range of properties is, in Buster’s opinion, key in setting its offering apart from others. “There isn’t really a construction or property type we wouldn’t lend on, providing it’s a permanent structure,” he expounds. “I think some of that flexibility comes from the fact that we fund the loans from our own retail deposits. Of course, we will follow all PRA guidance and regulations, but we don’t have to face covenants within a warehouse

loan facility or meet the requirements of a securitisation vehicle.” While there are other banks in the BTL sector, he claims that a significant section of the market is warehousefunded. “These lenders don’t have some of the flexibility we can offer on things like property types or customer profiles.”

Nonetheless, the BTL proposition presents more than flexibility. Ahead of the launch, the bank used its existing tech to create a fully digital process that eliminates paper documents and streamlines the deal completion. To start, brokers can submit their case via a BTL portal on the bank’s website, similar to how mortgages and second-charge applications are handled. When the application is submitted, a Hometrack AVM, credit search and automated day-one underwrite are carried out to provide a DiP within five minutes, on average.

Next, a mandated case owner is allocated (whom the broker can speak to) and a full valuation is instructed; then, the client will use an app to confirm loan details and complete their virtual biometric ID. When all the steps are done, the loan will be approved and the offer issued online to the borrower and broker, ready for the solicitors to do their tasks.

“This kind of journey, wrapped around the service commitment and the expertise we’ve brought into the team, is hopefully what’s going to make it successful as we roll out,” Buster states.

“All of these things are the building blocks of the overall BTL proposition. In isolation, none of them are going to blow the roof off, but when you piece them together with the experienced people and criteria, you end up with something much greater.”

As well as opening up the product to brokers throughout the year, UTB plans to continually enhance its criteria and

UTB ENTERS THE BTL RING Words by

andreea dulgheru

In March, United Trust Bank announced its imminent entry into the BTL market.

I sit down with director of mortgages Buster Tolfree to find out the reasons for venturing into the sector, what the product range will offer, and the benefits of being backed by retail deposits digital process (for example, by integrating with other fintech providers to further simplify the loan journey) and recruit more underwriters to handle the expected volume of business.The bank aims to lend a material amount of BTL which, in Buster’s view, is at least £200m per year once at scale. On top of that, it is looking to expand the offering to cover multiple property loan facilities, consumer BTL and even second-charge BTL mortgages— all of which will be in development over the next few years.

“One of the words that a lot of people use to describe UTB is ‘diverse’. From a product point of view, we’ve shown a very strong track record over the past 10 years of bringing new offerings to the market, so it would be totally fair to say that BTL will mirror that,” Buster concludes.

24 Bridging & Commercial

Specialist lawyers in secured finance

Contact Jack Medlicott T: 0151 281 9040 E: jackmedlicott@msbsolicitors.co.uk

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A good deal, a good client, and a good property...

WHAT COULD BE THE PROBLEM? Words by

BETH FISHER

28 Bridging & Commercial

Exclusive

InterBay recently completed a particularly complex commercial opco/propco deal. I speak with OSB Group’s specialist finance account manager Simon Ward to understand the transaction in more detail

29 May/June 2022

S

imon—whose CV is unusual compared with those of many account managers in our market—started as a mortgage consultant at The Mortgage Business, before moving into underwriting then fraud investigation. At Lloyds Banking Group, where he worked for 17 years, he was tasked with assessing the back book. This intricate experience served him well when he joined the regulator’s financial crime and intelligence division on secondment in 2009. After one year, Simon returned to Lloyds to help set up its broker monitoring team in order to educate intermediaries on loan processes and procedures from a compliance point of view, in a bid to fill the gaps the bank was seeing in brokers’ data. After this, he applied all his problem-solving skills to roles as a BDM at a number of specialist lenders.

Simon joined InterBay from Kent Reliance in January 2021 and draws on his depth of knowledge of underwriting, brokering, lending and compliance to push and pull the levers involved in getting a deal over the line.

“The broker and I may feel something’s a really good deal, but it’s about getting the underwriter comfortable to sign the mandate on it,” he imparts.

“It may sit just outside our criteria, but it gives us the ability to move forward and come up with solutions.”

Simon tells me that this latest transaction is a prime example of how the lender can use the expertise of the right stakeholders within the bank to deep dive into an enquiry and work to an agreeable outcome. “For InterBay, the criteria is a starting point. I’m not saying we’re going to go miles outside it, but we’re a flexible bank and can look at a deal for its merits.”

This case—which was introduced by David Wells at Q Commercial Finance, a new broker to the bank, in October last year—had already done the rounds at multiple lenders, but it wasn’t within their appetite. The borrower was looking for a semi-commercial mortgage on a £500,000 property in Shrewsbury, Shropshire, roughly split into two residential BTL apartments— consisting of a one- and two-bed flat— and two commercial units. The latter

Exclusive

L-R: David Wells, Simon Ward

“Having tried 15 other lenders, and with the client not wanting a bridging loan, I called Simon”

30 Bridging & Commercial

was made up of one investment and one owner-occupied building on an operating company/property company (opco/propco) basis, a business arrangement that means the property asset (propco) is separated from the trading business and leased back to the operating company (the opco). “It was unusual, as you don’t see many of these. It’s quite rare to get both on the same deal,” highlights Simon.

Due to the owner-occupier, investment and BTL structure, David divulges that no other finance provider he’d reached out to would touch it. “Having tried 15 other lenders, and with the client not wanting a bridging loan, I called Simon.”

Simon concurred that this was a term loan and didn’t require a bridging facility. “There wasn’t a need for massive speed for the purchase, and why put in the additional cost?”

Following an in-depth discussion about the case, David spoke directly with InterBay’s underwriting manager, Davinia Blackman, to structure finance for the client based on their current set-up and plans for the building.

Complications arose because the borrower wanted to keep one of the commercial units—a post office with seven years left on the lease, which was let to the tenant on an investment basis—and move his own business into the other one. Instead of doing this as an owner-occupier, he insisted on an opco/propco structure, where he could own the SPV or rent it to his own company. “While this is something we can technically do within our criteria, it is usually for either owner-occupied or investment, but I thought we could certainly do a mixture of that,” says Simon. He adds that he was “amazed” the broker had not managed to find a home for the deal up to this point. “If you put both the criteria together and look at it from a risk perspective, we’re getting the rental from the office, BTLs and the investment. Also, we have the profits from the business, which can then maintain the payments.

It was a good deal, a good client, and a good property. It made sense.”

Once the specialist lender understood and felt comfortable with the set-up, it faced another hurdle: the dreaded valuation. The report flagged that the commercial and BTL units—which must have separate access—offered

Exclusive

only a shared entry point. “What the underwriter and I agreed with the broker was that, if we could get a quote to move this door a few feet to the other side of the footwell, then it would nullify the risk the valuers brought up and fit the criteria.” This quick thinking from the underwriting team allowed the deal to continue.

In the end, the borrower was quoted just £1,000 for the work, which could be sorted within a matter of hours.

“We were both at an event on the day this issue landed,” Simon divulges. “At one point we had 22 calls between us and managed to get the deal completed,” David laughs.

As a result of some “semantics” on the legal side, due to a yard at the back of the property which, yet again, had access issues, the £375,000 loan took circa four months to complete. It was provided at 75% LTV—the maximum InterBay goes up to—on a 10-year interest-only term. It closed on a rate of 4.99%, which was lower than the 5.29% originally quoted, as the lender had brought out cheaper products in the run-up to it completing.

“If it wasn’t for the hard work and skills of Simon and the underwriting team at InterBay, we would not have completed this case and would have lost a very important client,” David adds.

I ask Simon whether the opco/ propco scenario will become more popular due to the flurry of changes we’ve witnessed in the commercial market. “Potentially, yes… we are seeing a lot of landlords diversify their portfolios and going into the semi-commercial space. We also cover HMOs and multi-units, and a lot more of those are coming through, too. I think we will see people buying up these semi-commercial units and taking advantage of what’s out there.”

The broker has since contacted Simon with further business as a result.

“We’ve done lots of really good stuff, and the relationship’s blossomed,” Simon states. “For me, it’s really important that we get to a point where brokers can talk to us as specialist finance account managers, where we can actually verify the deal.” With this proactive approach, it’s likely we will see many more similar success stories from InterBay and an eventful year ahead. “It’s really busy at the moment.

My phone’s ringing off the hook.”

“If we could get a quote to move this door a few feet to the other side of the footwell, then it would nullify the risk the valuers brought up and fit the criteria”

31 May/June 2022

Our fixed rates are the real deal.

Worried about interest rates in the current climate? At Assetz Capital, our bridging rates have always been fixed for the duration of your client’s loan.

Plus, once we have issued a DIP, we will hold the rate for 3 months, so make sure you get a deal locked-in with us. Let’s discuss your next case: 0800 470 0430. *Please note Assetz Capital does not offer regulated mortgage contracts

Laleta Buctkuar, Relationship Director: Bridging

0800 470 0430

Find out more about our bridging product.

bridging@assetzcapital.co.uk Assetz SME Capital Limited is a company registered in England and Wales with company number 08007287. Assetz SME Capital Ltd is authorised and regulated by the Financial Conduct Authority in respect of its peer-to-peer lending platform only. ’Assetz Capital’ is a trading name of Assetz SME Capital Ltd. Assetz SME Capital is registered with the Office of the Information Commissioner (Reg No: Z3338899) for data protection purposes.

Just like our adverts we keep lending simple

0203 039 3499 info@albatrosscapital.co.uk

136-144 New www.albatrosscapital.co.uk King’s Road | London | SW6 4LZ 136-144 New King’s Road | London | SW6 4LZ

Advertorial

Earlier this year, an SRA approved law firm specialising exclusively in independent legal advice (ILA) entered the specialist finance market. In a bid to revolutionise the way this is provided during bridging and commercial transactions, iLA aims to take the pressure off borrowers and lenders by bringing same-day service to the sector. Its founders, qualified solicitors Anastasia Ttofis and Luke Baldwin, reveal where they got the idea to launch the business HOW DID YOU GET INTO THE MARKET? Anastasia Ttofis: Collectively, we have been advising on banking and property-related legal issues for decades, which has involved us acting on high-profile litigious banking claims (such as derivatives mis-selling, forex trading manipulation and bank adviser misconduct), and advising on complex banking facilities and security documents.

As solicitors, we also diversified over the years with experience in brokering within the specialist lending industry. It’s a unique blend. On the one hand, we know what can and does go wrong for clients when they are not properly guided on the right funding structure, and the associated risk implications of loan agreements, personal guarantees and debentures. On the other hand, we understand the funding requirements and conditions that are commonplace, and therefore know the issues that impact the parties from both sides. Naturally, we came across the requirement for ILA on every transaction as a need for our own clients, and being instructed to provide it.

WHERE DID YOU GET THE IDEA TO LAUNCH ILA? AT: ILA on a personal guarantee (or other related documents or security) is a necessity for lenders’ completion requirements and, among other things, provides them with comfort that the client understands what they are entering into and the consequences of doing so, and are not being forced into it.

We know first-hand that it is (or should we now say was) such a common and frustrating problem for clients, brokers and lenders to find a solicitor who could actually provide ILA, let alone deliver it fast and efficiently!

ILA is often left to the last minute, with only days—or even hours—until completion, which leaves very little time to get this sorted. These ongoing issues in the ILA market caused delays to completions and unnecessary costs or fees (particularly on bridging facilities). We spotted this issue and wanted to do something about it.

Thus, we launched iLA, with a sole focus to provide this service. This idea came at a good time as, historically, ILA could only be provided in person (which meant that an ILA specialist firm would have been limited to a relatively small number of clients in its local area), but this is no longer the case.

Times have changed and ILA can be given online, which essentially means we have the opportunity to service the entire world!

36

Bridging & Commercial

HOW ARE YOU LOOKING TO IMPROVE EFFICIENCIES DURING A PROPERTY TRANSACTION? Luke Baldwin: Via technology and communication. When creating iLA, we wanted to be agile and use leading technology for speed and efficiency. For example, to onboard clients, we use e-signatures for our terms of business and an encrypted digital identity verification tool; both can be completed in minutes.

For us, communication with our client, lenders and brokers is key. There’s nothing more frustrating than not being able to get hold of a lawyer and, let’s face it, that happens a lot! Lenders and brokers can call or text us, whatever they prefer. We want to get rid of the old-fashioned bureaucracy that slows down so many law firms and property transactions. It’s our primary duty to remove obstacles, not create them.

AT: We offer same-day service and, because we are exclusively dedicated to ILA, can provide the advice within a matter of hours.

We are open from 8am–8pm, seven days a week; the business is purpose-built to accommodate urgent ILA requirements.

Advertorial

Anastasia Ttofis

THE UK’S FIRST SRA APPROVED LAW FIRM SPECIALISING EXCLUSIVELY IN INDEPENDENT LEGAL ADVICE

YOU OFFER FIXED FEES TO CUSTOMERS— WHAT DOES THIS LOOK LIKE? LB: We like to offer clients complete transparency from the outset, so our fixedfee pricing is set out on our website. In short, we generally have two pricing models.

Our expediated service (advice today, tomorrow, or on a weekend) comes with a fixed fee of £500 for the first ILA and £250 for each subsequent ILA related to the same transaction. Our standard service is anything from two days in advance, and is offered for a fixed fee of £375 for the first ILA (and, again, £250 for any subsequent ILA).Where it’s a bridging-related ILA, we will review the documents and provide a fixed fee for that specific transaction, prior to engagement.

WOULD YOU EVER LOOK TO WIDEN YOUR SERVICES GOING FORWARD? LB: No. We are really passionate about specialising exclusively in ILA and being experts in the field. There is a huge demand for this service and, to properly service the market as efficiently as we do, we have to be solely dedicated to ILA. AS YOU SCALE, HOW WILL YOU BE LOOKING TO MAINTAIN SERVICE LEVELS AND SPEED? AT: Technology is at the forefront of our company to ensure the process around onboarding the client is exceptionally fast, and so this allows us to spend more time advising the client and focusing on

maintaining a high service level. As capacity increases, we will utilise a bank of solicitors who have been specifically trained to deliver the service to our standards. Our business is completely remote, so it makes it easier for specialist lawyers across the country to join.

FOR THOSE LENDERS THAT ARE STILL NOT PERMITTING ONLINE ILA, IS THERE ANY ADVICE YOU CAN PROVIDE AROUND COMPLIANCE? LB: We are always happy to help lenders (or brokers and solicitors) to understand why ILA can be provided online, and demonstrate the level of compliance, security and risk protection we use as a team.

For example, we use an encrypted digital identity verification tool which comprises:

• Identity report—which compares against

multiple government databases and sources for AML purposes • Photo ID verification—with face-match scanning to check authenticity • Face capture—a video liveness check • Credit reports—verifying current address and date of birth against bank and credit providers’ records, in real time • Screening for politically exposed persons, including ongoing monitoring and checks • Identifying true owners, directors and PSC of organisations—through integration with Companies House and OpenCorporates

Luke Baldwin

This is a far more robust and comprehensive method of verifying a client’s ID than simply looking at and certifying an original driver’s licence and utility bill when meeting in person, which is all that is required. In terms of meeting with the client via video, we can record this and supply it as part of our certification to the lender and its solicitors for their records and compliance checks.

To help, we have produced a brief Q&A process and compliance note, which you can get a copy of by using the QR code, below.

We are also working directly with a number of lenders to provide a more belts-andbraces audit of their ILA-related documents and process, to ensure the client is getting the advice they ought to receive, and the lender is fulfilling their legal obligations.

We have set out to be market-leading experts in the field, so this sort of service is something we would like to offer to any readers who are concerned about, or would just like to recap and check, their ILA procedure and documents.

SCAN ME

37 May/June 2022

HOW TO BUY OR SELL A

LOAN BOOK Words by

JOE Mc GRATH

With 13% of bridging companies looking to sell their business and 40% considering M&A activity, 2022 is set to be a busy year for specialist lenders seeking to sell their loan books. But with the profile of buyers differing dramatically, and the macroeconomic picture favouring certain assets, what are the key things they need to consider?

Zeitgeist

There has been a flurry of planned loan book sales announced in recent months, which follow a sustained period of successful transactions from a wide variety of UK specialist lenders.

While the decision to sell may be the result of a change in strategic direction for a business, loan book sales are common and can form part of broader tactical funding plans, particularly for non-bank lenders. In the current UK market, investors are keen, seeking assets that perform well in a rising inflationary environment and that will meet their overall return objectives.

However, there can be a deeper range of drivers as to why a buyer might choose to snap them up.

WHY ACQUIRE A LOAN BOOK? With economists emphasising the ongoing perils from inflation and predicting steep rises in interest rates, investors are mulling the appeal of residential and commercial mortgages, bridging loans and other secured assets, due to their inflation-linked profile. For lenders looking to sell a loan book, the current market appetite is a boost. Investor positivity has also been driven by previously sold books that have performed well in recent years and a growing pool of buyers, which includes insurance companies, asset managers, pension funds, investment banks, hedge funds and other finance providers.

In recent months, investment managers such as M&G and Pimco have highlighted how well these assets have been performing. “In terms of underlying fundamentals, the picture was, and remains, generally positive,” M&G stated in an investor update in February.

“Delinquencies in underlying loan pools remain low by historical standards, even as policymakers withdraw their support schemes.”

WHY SELL A LOAN BOOK? With investor hunger set to continue in the months ahead, specialist lenders may be selling a loan book for the first time. This can be useful for those looking to improve returns on equity, to de-risk, or to reinvest into similar or complementary product lines. Other reasons to embrace such a sale include to raise shortterm liquidity or to wind up lending activities and resolve the need to service existing loans.

“To improve returns on equity, lenders carry out assessments of those business areas that do not meet return requirements and which may be considered non-core or not a strategic priority,” explains Sajan Shah, a director at PwC. “A sale of a portfolio should free up capital that can then be deployed to other business areas.”

Purchasers may be able to achieve greater value from the portfolio than the existing owner, Sajan adds. “A buyer of a nonperforming pool may choose to follow different collections strategies, for instance.”

For those that have decided to sell part or all of their loan book, there are several approaches available. Sellers will need to consider the type of loans being sold, the time that the loans have to run, levels of buyer interest, the urgency of the sale process, and whether they are willing to keep some skin in the game.

SECURITISATION Perhaps the best known method of selling loans is through securitisation, defined by the European Commission as “packaging loans into securities and then selling them to investors”. This method went mainstream in 2015 in the Hollywood film The Big Short, when the narrator attempted to explain the lead-up to the 2008 financial crisis.

While Margot Robbie did an excellent job of explaining the sale of assets in her famous bubble bath scene, much has changed since then.

Prior to the crisis, investment banks made a much larger proportion of their revenues from securitisation than they do today. A 2018 paper from the Bank for International Settlements highlighted how the revenue share from bank securitisations had declined. After 2008, the regulations governing investment banks’ ability to hold such assets on balance sheets changed, making this work less profitable. As a result, some withdrew from the market or substantially scaled back their activity. Despite this, many investment banks are commonly involved in larger transactions today.

At the same time, regulators in the UK, Europe and the US overhauled the rule books on mortgage originations, asset sales and investing in assetbacked securities. This meant that originating issuers that wanted to securitise had to keep some skin in the game to ensure that they shared the risk of any future defaults with the new buyers.

Originators were also tasked with much more detailed affordability checks when lending.

“Both the mortgage and securitisation markets are very different from where they were in 2005/2006,” confirms Alex Maddox, capital markets and digital director at Kensington Mortgages. “For specialist lenders who don’t have a banking licence, securitisation can be an attractive source of funds. But if you do a securitisation, you must continue to hold capital through the retention in the securitisation.”

40 Bridging & Commercial

Zeitgeist

YOU MIGHT EXECUTE A WHOLE LOAN SALE TO AVOID BEING IN BREACH OF THE FUNDING LINE . . . WHILE THIS TYPE OF SALE ISN’T THE MOST ECONOMIC MODEL, IT ALLOWS AN ORIGINATOR TO SACRIFICE SOME OF THE UPSIDE IN ORDER TO MANAGE LIQUIDITY

41 May/June 2022

Zeitgeist

POOLED OR ‘WHOLE LOAN’ BOOKS

these can include tranches of first-charge residential mortgages, second-charge secured loans, commercial mortgages, bridging loans, car finance or credit card debt, and unsecured loans.

For pooled/whole loan sales, first- and secondcharge mortgages, bridging loans and unsecured personal loans are all common transactions.

However, the reasons for selling loan books in the short-term lending space can drive suspicion.

Securitisation isn’t the only way to sell on loans, though. Over the past 12 years, there has been a growing involvement of consultant groups, such as Deloitte and PwC, in assisting originating lenders in selling their assets. These companies are brought in to advise on the sale of portfolios through a competitive M&A process. They work with the full range of lenders, from high-street banks and building societies through to credit unions and specialist intermediated lenders.

“At PwC, we keep in touch with over 100 potential acquirers of loan portfolios,” says Sajan. “Part of our role as a sell-side adviser is to ensure that the most likely buyers are invited into the process, ie matching potential buyers with the vendor.”

Some lenders who operate with a strict warehouse line will have a fixed period within which to get originated loans sold. So as not to default on their agreements with their funders, there may be instances where they need to sell a pool of loans to avoid breaching the terms of their funding line. Buyers of loan pools tend to differ from those in capital markets and can include larger pension funds, private equity firms, hedge funds and other lenders.

“We have seen a number of asset managers who have launched dedicated funds that invest in mortgages,” imparts Alex.

“Our owners, Blackstone, have a big footprint in mortgages, for example.”

Sellers should be aware that this method is usually less profitable for them than securitisations, however they do offer a way to improve liquidity—and it is likely to be a quicker process.

Colin Sanders, CEO at Tuscan Capital, who was formerly a CEO at GE Money Home Lending, recalls that this approach was popular prior to the financial crisis. “You might execute a whole loan sale to avoid being in breach of the funding line. You’d hand over a ready-made portfolio for a given fee and get all the capital back for a profit. While this type of sale isn’t the most economic model, it allows an originator to sacrifice some of the upside in order to manage liquidity.” This strategy was particularly favoured in the BTL and commercial mortgage market in the early to mid-2000s, he adds.

WHAT ASSETS ARE TYPICALLY IN A LOAN SALE? The types of assets involved in a loan sale can vary considerably, depending on the seller and the method used. For securitised portfolios,

“When I see loan book sales happen in the shortterm property lending market, it tends to be when things haven’t gone well,” Colin claims. “It is often when an investor needs to get their cash out, when the originator is at risk of breaching their covenants, or when there is a cash call and there is a chance that they might not be able to meet it.”

The investor appeal of short-term property finance assets isn’t the same as for longer-dated residential and commercial mortgages, Colin expands. For pension funds, mainstream asset managers and insurance companies, their investment time horizon is substantially longer, which means they typically wouldn’t be interested in bridging. “If you are the acquirer, you are not getting longterm yield or an asset with annuity-like income.”

It is certainly understandable that the mix of assets within a portfolio can affect buyer interest. For instance, long-dated loan books of mortgages may be attractive to defined benefit pension funds because they have investment objectives matched against extremely long-term liabilities. But that doesn’t mean that shorterdated assets lack appeal. In fact, bridging loans may be very enticing to speculative hedge funds or alternative asset managers with in-house facilities to manage any non-performance.

The appeal to major institutional investors will also relate to the size of the deal. Some loan books will need to be larger for them to be considered economically viable for the biggest asset managers and asset owners.

WHAT ABOUT THE BORROWER AND BROKER? Prior to a loan book sale, there may be some media coverage but, often, customers and brokers first learn about it through a letter via the post or email. When a loan book sale completes, borrowers will typically notice very little difference in their repayment arrangements, although the customer service function may change. All of this will usually be advised to borrowers after the deal. Similarly, brokers and intermediaries will normally be informed only if they were involved in the origination or completion of a loan.

42 Bridging & Commercial

Zeitgeist

WHEN I SEE LOAN BOOK SALES HAPPEN IN THE SHORT-TERM PROPERTY LENDING MARKET, IT TENDS TO BE WHEN THINGS HAVEN’T GONE WELL

THE UK HAS ESTABLISHED A SOLID TRACK RECORD FOR EXECUTING LOAN BOOK SALES IN RECENT YEARS. HERE ARE SOME OF THE MOST NOTEWORTHY TRANSACTIONS…

• PwC’s financial services and real

assets lead advisory team advised NatWest on the sale of Project Mercatus, a loan portfolio secured against city centre shopping centres.

It represented debt of over £400m and was sold to a consortium comprising Attestor, Ellandi, and Octane Capital Partners

• One of the most high-profile sales

took place in November 2021, when Kensington Mortgages successfully sold a £1bn book of mortgage loans to Starling Bank. Kensington, which is owned by alternative asset managers Blackstone and Sixth Street, used Morgan Stanley to advise on the sale

• A few months earlier, Secure

Trust Bank agreed to sell a book of mortgage loans to Jacqali Designated Activity Company, a Dublindomiciled finance vehicle. The loans were originated by Secure Trust prior to its exit from the residential mortgage market in 2019

• Another sale that made headlines

across Europe in 2021 was by Allied Irish Bank. The Irish lender sold its small business loan book to Allica Bank as part of its decision to retreat from lending in the UK

• High-street challenger Metro Bank

has been a well-known seller of loan books in recent years. In December 2020, it confirmed the sale of a £3bn book of mortgages to NatWest, as part of the bank’s transformation strategy

• In 2019, Tesco Bank sold its entire

mortgage book for £3.8bn to Lloyds Banking Group after it decided to leave the home lending sector

43 May/June 2022

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“

Residential Bridge

Explained

P

ut simply, forward funding is a transaction where the investor or funder acquires a development site prior to construction Vauxhall, Greenford, Croydon and many and enters into others. These properties are likely to an agreement to fund the project up to contain far more amenity areas, such as completion. The sale, and accompanying cinemas, kitchens and even five-a-side transfer of ownership, takes place before football pitches, as a means to retain long- development of a 467-home BTR scheme the construction is finished and the price term rentals from high-income residents. in Nine Elms, London, including 30 is paid upfront, typically in instalments, Student lets are also popular in this discounted market rent and 103 affordable over the building process. At the point of space, with a recent forward funding rent homes. The project is scheduled to be completion, the buyer makes delivered by Q2 2025, with construction undertaken a final balancing payment on the value of the property, by London Square.

Randeesh Sandhu, CEO and from which the value of any earlier payments is deducted. co-founder of Précis Capital, says of forward funding: “As On the advantages of this a developer, you don’t have option, Andrew Muckian, to get third-party equity. a partner at the Ireland You just have to build the branch of multinational law properties. There’s now firm Dentons, says: “For a a blurred line in this area developer, forward funding between who the developer offers significant cash flow and contractor is, because from the early site sale, you just have to manage the certainty of development build and effectively become finance for the project, In today’s environment, offering developers a development manager. and a more balanced access to capital before a brick is even laid is The BTR investor and their approach to risk than the are taking away the forward sale, where the alluring. Here, we ask industry experts to assess lenders funding risk and the pressure majority of construction risk sits with the developer.” the appeal, staying power, and the due diligence of exiting the scheme.”

Rising popularity Andrew continues: “For the necessary of forward funding to ensure its Forward funding is not a investor or funder, forward new phenomenon. It has funding will likely generate continuing popularity been an option for those enhanced returns on the with a real estate portfolio investment, as it will acquire for over a decade, yet it has the development at a higher only recently been offered initial yield than would be Words by more freely. Mike Coates, a possible in a forward sale.” christopher marchant commercial finance broker at What forward funding Commercial Expert, recounts is helping to build a little of the history leading to Within the UK, forward funding agreements are centred around deal between Captima and Coventry this point. “Around 10 years ago, a forward amounting to £76m funding facility was fairly common. Lenders the build-to-rent (BTR) market, an area University likely to expand and that this finance facility for an upcoming 770-bed student were offering their preferred clients huge has already propelled, with multi-unit accommodation scheme in the city’s centre. credit lines and facilities. That stopped developments in Manchester, Stratford, Real estate development lending platform quite quickly. The market was changing; Précis Capital, with funds and accounts there were a lot more investors getting managed by Carlyle’s Global Credit involved and, essentially, it wasn’t your segment and funds managed by Apollo standard seasoned investor. These people Global Management, partnered as senior weren’t really suitable for forward funding. lenders for a £251m five-year, whole-loan forward funding facility to Moda Living.

The strategy will be used to finance the

EVERYTHING YOU NEED TO KNOW ABOUT FORWARD FUNDING

46 Bridging & Commercial

Explained

“For a developer, forward funding offers significant cash flow from the early site sale, certainty of development finance for the project, and a more balanced approach to risk than the forward sale, where the majority of construction risk sits with the developer” 47 May/June 2022

Explained

However, that’s changed over the past 12 months and it hasn’t been advertised.”

A reason Coates attributes to this shift is the rise of challenger banks, which have become more nimble than legacy institutions in allowing developers to apply for a facility that essentially gives them the ability to go out and buy properties faster.

With more investors getting involved, forward funding is receiving attention from around the world. Demand is originating in China, Hong Kong and the US—and Property Development Fund Partners’ (PDFP) director Mike Myerscough notes these buyers are getting involved in significant numbers.

“The way they’re looking to invest in the UK property market is by buying bulk purchases of BTR investments. One of their vehicles to do that is forward funding,” he affirms.

Andrew is also witnessing the increasing popularity in this arrangement. “We expect to see growth in this area in the Irish market, particularly in the BTR, student accommodation and operational real estate sectors,” he says. One driver of his prediction may be the growth inherent in Ireland, with a push underway across the nation to establish more housing stock of all forms due to a supply shortage, which led property prices to jump 7.4% to an average of €269,522 (approximately £227,600) in 2020.

However, he is also prepared to list the challenges facing forward financing, many of which are familiar to those with an eye on the global economy: increasing interest rates, construction cost inflation, supply chain issues, planning permission system delays, and the changing appetites of institutional investors for speculative development.

Traditional development finance from banks and specialist lenders has also become more difficult to source for developers at acceptable cost and LTV ratios, making equity finance such as forward funding more important than ever. Andrew also argues that inflation and interest rate hikes are likely to result in banks and alternative lenders adopting a more conservative approach in their underwriting.

Who gets forward funding?

As explained by Coates, the type of individual or firm to receive this facility is a developer with an established track record in delivering high-quality schemes similar to the proposed project, and an ability to demonstrate efficient project management and cost control.

According to Andrew, developers will also need to ensure they have full final planning permission to proceed and have agreed contracts with the contractor and design team for the scheme. For the best chances of getting forward funding, the development will also need to be designed to the best-in-class ESG standards applying to the relevant sector.

Paul Norton, a business consultant at PDFP, believes the bar may be too high for forward funding in the UK BTR space. “Some of these investors want only the crème de la crème. At PDFP, we are involved in helping a lot of the smaller housebuilders to expand their businesses.

Forward funding is a great model; SME housebuilders feel that if they can get paid upfront for their work, they can accelerate building and expand their cash flow.”

According to Paul, this reluctance to cater to SMEs is putting restraints by some funds on how much these firms can achieve and limits the size of their projects, something that is compounding issues in the UK homebuilding sector and putting further pressures on a rental market already critically short of stock.

Randeesh also delves into why SMEs may be missing out on forward funding arrangements. “It relates, in part, to the size of the transaction. Précis can only do a finite number of projects a year. We’re therefore likely to prioritise the bigger ones.”

Secondly, he cites the track record of the borrower. “BTR is an operational business, it’s not a pure real estate investment, so you really need to know if the borrower has the mechanics to operate. With this 48

Bridging & Commercial

in mind, it’s no surprise that the biggest institutions in this country are the ones receiving forward funding. A lot of them have come from the US and learned from their experiences there, because that market is massive and much more mature.”

Due diligence matters For forward funding, extensive due diligence must be undertaken to ensure the investor has the support of the lender.

“We do a deep dive on applicants,” Coates details. “With directors, we might go back through six months of statements—we want to see trading accounts, a credit file, and a property portfolio, in addition to a plan. Where are you going? Where do you see yourself in five to 10 years’ time? We take a huge amount of data before we find that lender.” That provider, he adds, is also going to do all sorts of research, including Google and media searches for red flags. “To get forward funding, you have to fit every criteria.”

This may all sound like an imposing ordeal, but once the hurdle is cleared, this funding structure can be highly beneficial for both parties, with the lender unlikely to challenge the client with the same rigour for future finance, and the developer enjoying access to an immediate line of credit.

Asked to sum up forward funding, Coates has a slogan that reflects its appeal: “The comfort that the investor knows they have the support of their bank.”

Explained

“With directors, we might go back through six months of statements—we want to see trading accounts, a credit file, and a property portfolio, in addition to a plan. Where are you going? Where do you see yourself in five to 10 years’ time?”

49 May/June 2022

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Feature

Broker confidence in Spring’s new bridging products is sky-high On the towering 31st floor of The Shard in London, a room full of brokers is buzzing with their feedback on the finance provider’s recent entry into the bridging market—and we were invited to hear it first

Words by

BETH FISHER Photography by 52 Bridging & Commercial

alex chai

Claire Newman

Feature

S

pring Finance started making waves when former Masthaven Bank CEO Andrew Bloom purchased the majority shareholding and made a seven-figure equity investment in the business in 2021. Since then, the specialist lender has recruited a host of ex-Masthaven big names—including head of bridging, Claire Newman; sales director of bridging, Jim Baker; bridging BDM for London and the South East, Ginny Warby; and senior underwriter of bridging, Louise Young. Most recently, the company snapped up industry stalwart Gavin Diamond as CEO. With an experienced team under its roof, Spring launched its bridging pilot scheme in March— offering regulated, unregulated, refurbishment, and first- and second-charge products—with a select number of intermediaries and, last month, completed its first deal. Having now rolled the proposition out to the wider market, the finance provider sat down with this initial group of brokers over lunch to discuss its next steps.

In a speech to its key partners, Claire revealed that Spring will be increasing its maximum loan size across all products, while keeping the minimum the same.

She divulged that the lender aims to introduce AVMs on standard residential bridging loans in July and enhancements to its HMO range in August, prior to a separate commercial product by Q2 2023.

She also announced that, in the coming months, the business will be unveiling a development finance range, covering anything from light to ground-up builds. A handful of brokers were delighted to hear that the company will be expanding into Scotland, too.

Amid stunning panoramic views of the city, Jim and Andrew urged the guests to freely chat about how they found Spring’s entry into the short-term finance arena, what areas they can improve on, and what the industry can expect from the provider moving forward.

Here, we share the best bits…

54 Bridging & Commercial

“I think the soft launch has been a success; there are definitely some compelling developments coming up. In terms of strengths, Spring has a fantastic team that already has strong relationships with everyone; it offers competitive rates for the more quirky transactions, provides an easy process to follow, and gives rapid responses on the front end. If I had to pick one weakness, it would be that providing heads of terms was a little slow. Looking forward, I am excited about the release of the regulated self-build bridging product and AVMs being introduced.”

Jo Logan, bridging and development finance specialist at Brightstar

“Although Spring is new to the market, that can’t be said of the people behind it. Spring has assembled an impressive team of industry experts and has offered competitive products from launch. Having access to such great people has given me confidence in placing business with them—and I’ve not been let down. I am happy to report that cases have been assessed and processed quickly and, when tricky decisions arose, they were made quickly and sensibly. So far, so good. In the future, it’s key that as their business grows and pipelines increase, we do not lose what makes Spring great to work with. I’m sure with the appointment of Gavin, coupled with the existing team, the business will go from strength to strength. I also look forward to confirmation of its new products in the coming months. With the price point indicated, its offering will be competitive, especially in the regulated ground-up market.”

Michael Cartwright, shortterm finance specialist at BuildLoan

“Spring is a refreshing lender with a captivating story. The team are genuinely authentic and honest in their offering and Master Private Finance is extremely happy to be working with these great people. Their culture totally aligns with ours, and our solid relationships with them can only lead to better outcomes for all involved. Exciting times ahead.”

Alison Houghton-Corfield, national relationship director at Master Private Finance

“The staff and management are obviously well liked within the broker community.

The updates they announced will put them in a better position to compete; we wish them all the best.”

Danny Carter, managing director at UKFCS Mortgage Specialists

“The pilot for us has been great, and we’re thrilled to have been a part of it. The offering that Spring has brought to market sits around the middle of the pack, which is not exactly groundbreaking, but I feel the way it is engaging with deals could be. With a common-sense approach, it has offered a couple of unique scenarios for our clients, which have been well received. I think this is a lender to watch out for; it has strategically placed itself among the action while it sees how things materialise, and I feel it will be able to pivot to any upcoming opportunities quickly. Lastly, the business has a plug-and-play team which has great previous experience of working together—and that is worth its weight in gold.”

Dave Fathers, director of structured finance at Finspace

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As an experienced property lender specialising in bridging finance, we work closely with our panel of packagers to support a range of common (and uncommon) client needs, and there’s practically nothing we haven’t seen before over our near 50-year history; our team are committed to providing a professional, tailored service, and can be flexible in many different and complicated situations – deadline driven or otherwise.

Currently in the spotlight we’re seeing huge growth in the uses of bridging across the property development and refurbishment sector, and therefore increased demand for larger, multi-million pound bridging loans.

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Jason Berry, Group Sales and Marketing Director at Crystal Specialist Finance, comments: We consistently find that when used in the right circumstances, bridging finance is a wealth creation product for borrowers. We’ve seen a rise in professional landlords becoming more ambitious and using bridging to redevelop commercial and retail sites into residential dwellings on the back of relaxed planning rules – landlords who may previously have focused on smaller refurbishment projects, such as run-down properties purchased at auction.

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SAFE AS HOUSES Words by

BETH FISHER

With soaring costs, material delays and labour shortages, property developers are feeling the gravity of footing the bill.

Against this adverse backdrop, I meet with nine experts in the field who are finding new ways of adapting to keep projects on track

Somehow, during the chaotic times we find ourselves in, I manage to prise a group of experts in the property development finance market away from their increasingly demanding workloads to discuss how developers can overcome the trials of running their businesses in a soaring-inflation environment, and the importance of flexibility in project funding to accommodate disruption and delays. The thoughts of Daniel Joyce, director at Close Brothers Property Finance; Rebecca Nutt, director of portfolio management at Atelier; Adam Bovingdon, head of property development at United Trust Bank; John McNamara, head of real estate development finance at Focus Commercial; Eli Korman, CIO and head of development finance at TAB; Emma Burke, head of origination at Maslow Capital; Chris RamsayWright, associate director of project monitoring at Naismiths; Lee Merrifield, underwriting and credit manager at MSP Capital; and Richard Payne, director of project monitoring at Adair, are sure to get the industry talking…

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Beth Fisher: On top of Brexit and Covid, we now have rising inflation and energy costs, and the Ukraine crisis and Russian sanctions that come along with that. With all these challenges mounting up, how are you seeing them affect the property development space?

Rebecca Nutt: Steel has gone up greatly since Russia invaded Ukraine, and materials are delayed due to the import paperwork required postBrexit. The import delays issue has been around for a while, but has been masked by Covid; now, it’s an obvious problem. Consequently, I’m finding that it’s much harder for less experienced entrants in the industry; they’re struggling to steer the course.

We’ve also noticed a change in procurement route—a switch from D&B fixed-price contracts to construction management. Given the escalating costs of materials (steel, concrete, timber and glass), main contractors are unwilling to provide fixed prices for works. As such, developers are finding it more economical to tender works packages separately. The risk stays with the borrower, but there is more accuracy and transparency on cost.

Most of the projects we fund are taking longer to reach completion. Some of our more experienced developers are reacting to soaring prices by changing design and value engineering as they go. Less experienced developers can’t do this and are forced to run with the price hikes and take a hit on their profits.

On top of all this, cost increases are impacting the environmental credentials of projects as green technology is often viewed as a ‘nice to have’ rather than a ‘must have’. When prices are rising, green tech is often the first casualty.

John McNamara: I’m finding the delays at planning councils are making a lot of my developers very nervous, especially due to the rising costs of development finance and construction.

The focus for us as a broker is on the due diligence of the development appraisal, making sure that the pricing is correct. We’re also seeing a massive 10% contingency on the appraisal to cover costs, due to them fluctuating.

BF: I’ve heard a rising contingency rate being spoken about for some

time now. Do you, as a group, think that will continue to escalate?

RN: Two years ago, a standard contingency allowance was 5%. Now it’s very much 10%, and greater if there are lots of provisional sums in the contract.

Ideally, we like to have contracts 90– 95% fixed before we would be happy with the 10% contingency. It’s a big shift and it can make or break a deal.

Adam Bovingdon: That’s a good point, Rebecca. We recently looked at one scheme where the developer had limited experience, but was someone we wanted to back. They were looking to self-manage the project, as opposed to going out to a main contractor. But within a short time after having drawn down on the facility, the costs to price up all the packages had increased by 20%.

So, that initial contingency, whether 5% or 10%, wouldn’t have been sufficient anyway. Therefore, we would certainly push for developers to enter fixed-price contracts with main contractors where they can. However, on the basis that some of the core costs increase, you also need to be prepared to have a rounded conversation with the contractor.

RN: I’ve even noticed that our borrowers are changing the procurement routes because they can’t get comfort of a fixed price with a main contractor.

Consequently, a lot of our schemes now tend to be going down the construction management path, to give a bit more cost certainty and control over the project budget.

Richard Payne: Most of the deals we’re looking at are between £1m–5m—that’s the construction cost. And lots of these are done by development builders, where there is no cost certainty because, effectively, your developer is the same person. You’re going to have a fixed-price contract, but it’s not as meaningful when the CEO of the development company is the borrower. That’s a major problem.

Earlier this year, I’ve been on record suggesting that build cost inflation might well hit 20% in 2022. And I’ve seen nothing that’s going to change my mind on that. In fact, I read at the weekend that one economist was predicting inflation across the country might hit 20% by the end of the year.

At the moment, real build cost inflation is without a doubt higher than day-today inflation, especially where there’s lots of steel involved, because steel takes so much energy to create.

Any of the elements in your question, Beth, are reasons why we shouldn’t be happy. Anyone that’s still blaming Covid or Brexit is not correct. You can blame them a bit, but the energy issue is by far the biggest problem. I don’t think there’s a shortage of labour any more, nor substantial wage inflation.

And I don’t think interest rates are going to be as bad as everyone expects; the reasons for the overall inflation are not going to be solved by increasing interest rates. It’s not because you and I have too much money to spend and are, therefore, spending it. This is far more like the 70s than the 80s, where there was high inflation and no wage inflation.

It doesn’t have a good ending, by the way.

In terms of building costs, there’s nothing to suggest they’re going to stop rising. And that’s far more to do with the Ukraine-Russia situation and the cost of energy. I have a feeling we might be buying energy from sources that, two years ago, we wouldn’t have contemplated buying doughnuts from.

I see problems with inflation carrying on for a while. And contingencies of 20% won’t be unheard of...

Chris Ramsay-Wright: We had seen costs beginning to peak just prior to the Russia-Ukraine conflict, yet they’re still rising. As a result, some funders are now more focused on understanding the construction methods due to material price inflation volatility, eg timber or steel frame vs traditional building, in greater detail, and are definitely applying more scrutiny on contractors’ capability/financial strength when using D&B contracts.

Lee Merrifield: The other challenge is that, in a way, the sector hasn’t really adapted. As far as I can tell, the sales market is in rude health, with lots of activity and sales being achieved. Land values don’t seem to have adjusted— there’s still a shortage of sites because people are bidding top money for them. We’ve got this strange dilemma where land value is holding and GDV is creeping up a bit, but there’s a massive

61 May/June 2022

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rise in build costs, which everyone accepts and acknowledges. Then they do their appraisal and realise the numbers don’t work. Somewhere along the line, the whole market’s got to catch up.

RP: Thank God for rising house prices.

LM: Yes. RP: And when that stops, or slows, then you’ve got the real problem.

LM: Yes. I think that’s key.

RP: But it shows no signs of that.

LM: If someone’s up and running with their project, and they’re getting build inflation, they’re also getting a bit of GDV uplift—and, if the sales market’s good, they might get some sold off before it reaches practical completion.

As a lender, you can probably fiddle around with the numbers, if I can use that expression, and make it work. As you say, when the music stops, and sales slow down, that’s when the challenge is going to arise. Because someone will have bought land at the top of the market because they saw GDV going up, then the build puts a massive squeeze on the numbers. There’s a danger that people don’t make any money.

BF: Does this worry you, as lenders, in terms of funding longer-term projects?

Emma Burke: Very much so. One of the ways we can try to alleviate that is through lender due diligence. And, unfortunately, the due diligence we require has recently expanded. It’s not as simple as agreeing to include a 10% contingency and going from there.

There are several aspects we now cover upfront. We sense-check the build costs and how this correlates with the proposed finish. We look at the experience of the developer and contractor. As part of our credit committee discussion, we delve into the agreed retention amounts and whether a performance bond can be obtained. Often it can’t, because the cost is prohibitive to a developer. What level of packages would we expect to be procured before they can draw from the construction element of our loan facility?

As an example, we funded a scheme where one of the conditions was that 60% of the packages had to be secured.

That meant the groundworks, including the steel, and all of the pre-cast concrete orders had been placed, as that was where we were and are currently seeing price increases on. We analyse the past three years’ financial and management accounts of the subcontractors that are going to be appointed. This can be administratively intense. We’re getting into the nitty-gritty of everyone on site.

Ordinarily, you wouldn’t ask a thirdparty contractor for information on various subcontractors, as the risk sits with them, right? But with the current economic pressures, you must... If 20% of the construction budget is going to a steel manufacturer, you need to know whether they’re going to get that steel on site. How long is that price guaranteed for—60 or 90 days? What’s the steel manufacturing process? What’s the financial strength of the contractor?

You need to dig into their accounts and see their retained earnings or cash at bank. Number of employees? Supply chain? The retention and contingency amounts depend on how much of the subcontract, or how much of the packages and budget, is locked down.

The less that’s agreed, the higher those amounts will be. Ultimately, we want to work with the borrower and assist them all the way through the DD process.

Eli Korman: We also take borrower equity into account. Often with these projects that can take longer to procure, costs will go up before we’ve lent any money. Seeing how much liquidity the borrower has to cover that gives us comfort in our due diligence. Thus, should something go wrong at the start, they are wellpositioned to cover that gap.

We’ve also seen an interesting thing with regard to contingencies. The developer— when they are a direct client—often puts in a 10% contingency at the outset, but we’re seeing brokers trying to push us down on that to 5%. Coming back to Richard’s point, inflation is going to keep causing interest rates to rise.

As lenders, we always look at the exit.

What is the GDV? We have to take into account that lenders are going to start to increase their interest rate ratios, and that has an impact on how we look at the project from the beginning.

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Daniel Joyce: At Close, we spend time focusing on the quality and past performance of the developer and we have an excellent client retention rate.

So we’ve seen a lot of what they’ve been able to do and can look at their financial track record. But, at the moment, I think the key point is beyond what we’ve already been talking about.

It’s about making sure we’re getting the tenure right from the outset. If we’re looking at a facility that might, in general terms, take 15 months, it may be pushed to 18 or 24 months.

While material and labour cost is an important topic, sequencing on site is equally very important. Five weeks ago, when you put your order in, it had a five-week delivery date. It’s now 10–15 weeks, which brings delays.

Manufacturers, particularly, are going to continue to come under severe inflationary pressure, for example from their increasing utility bills. When they’re making such small margins, we’re probably going see more failures in that sector, as well. So I think, as a lender, we have to do a lot of the groundwork and make sure we are happy with regard to the client’s strategy and how they’re aligning their scheme moving forward.

We can add 10% contingency to a client’s figure, but I can promise you one thing, a PMS will add another 5–10%.

Ultimately, we will want to do a deal for experienced developers, but we want to be doing the right deal. We’ve definitely got to be mindful of how long these schemes are going to take to come to fruition. Capital Economics for example are talking about house prices potentially dropping by 5% over the next two years.

AB: Daniel makes a really good point, particularly around the tenure of the loan. Anyone who’s lending money has seen the average term of the construction period protracted.

Typically, we were looking at 14–16 months, and the average build not sales period, has stretched to at least 20 months. What has shortened is the sales cycle. When you get to PC, sales are coming through quicker than ever.

This is expected to begin to slow by the middle of this year, or the back end of the summer. We certainly should not be complacent in respect of what house prices have done over the past 18 Cont. p66

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“SOMEONE WILL HAVE BOUGHT LAND AT THE TOP OF THE MARKET BECAUSE THEY SAW GDV GOING UP, THEN THE BUILD PUTS A MASSIVE SQUEEZE ON THE NUMBERS. THERE’S A DANGER THAT PEOPLE DON’T MAKE ANY MONEY”

63 May/June 2022

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“IT IS WITHOUT DOUBT THE MOST CHALLENGING ENVIRONMENT I’VE EVER WORKED IN”

66 Bridging & Commercial

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months. This probably won’t continue to help some projects out of difficulty.

It’s about trying to pick up on warning signs much earlier in the process. You can do lots of due diligence, but can’t beat getting out on site and speaking to your customers and engaging with your monitoring surveyors. Furthermore, UTB has its own in-house construction team who are continuously in touch with developers so they can pick up on anything that’s going slightly off-piste, and then work with the customer to get back on track. It is without doubt the most challenging environment I’ve ever worked in.

RN: Our due diligence has increased but, in addition to that, we’re aware that we need to support our borrowers. On some projects, we’ve offered fortnightly drawdrowns, rather than monthly, just to support the borrower and make sure they have the cash flow to keep the project going. Because, quite often, they have labourers on site who get paid weekly or fortnightly so, with rising costs on materials available, cash flow becomes a problem. On top of that, rather than just releasing money on vesting certificates, we are allowing advanced payments to book factory runs for kitchens or windows, or whatever they need to start manufacturing. This cuts out any future delays and supports our borrowers in the whole construction process.

RP: Interesting. Obviously, time is cost, because the longer you’re on site, the higher the prelims are. But also, what we haven’t yet mentioned, which is something lenders and borrowers need to sort out together, is upfront payments.

Three years ago, if it wasn’t on site, you weren’t going to get paid. During lockdown, sadly, the worst aspect, from a construction point of view—apart from losing labour—was that suppliers sold off all their stock. It became uneconomic to make stock, because it wasn’t moving. Now anything that used to be a stock item is being made for you when you order it. Therefore, the order times have gone up. That is the main contributor to the time on site. Trust me, a contractor does not want to be on site for 20 months when they could do it in 15, because it costs them more.

Unfortunately, some of the key components have very long lead-in

times, a few of which we’ve mentioned: windows, doors and kitchens. However, no manufacturer is going to start making a kitchen without having 20% of the price in their hand. That gives the contractor and the developer a cash flow problem—and it’s not something that, necessarily, a lender wants to lend on, because they don’t have anything to get a charge over. You can’t have a vesting certificate over something that hasn’t yet begun to be manufactured— RN: [cuts in]—For us, we’re happy to release up to £100,000 in an advance payment to get factory runs booked, provided the supplier is UKbased, and we do due diligence on their financial background. We’ve realised that we’ve had to do that, otherwise borrowers are crippled.

They’re never going to complete their projects or get close to achieving their programme without that support.

RP: I fully agree, and others are doing the same. And it’s absolutely fine in your role, Rebecca, but it’s not something that goes past credit very easily, because they’re interested in what they’ve got a charge over. And, of course, when taking a £100,000 position, which is effectively what you’re doing on each job, you’re doing DD on the suppliers of these things. But that £100,000 is at more risk than the previous £200,000, which was against works that completed on site. So this is a higher-risk item. At the moment, you charge the same interest rate for either of these, though I’d volunteer that that is not the same risk for the amount you’re lending at the time. However, you don’t really have a choice—without it, the project’s not going to progress because, often, the developer does not have £100,000. They may have it in the equivalent of land, but not in cash.

EB: I’d say it depends on the size of the development you’re funding.

For 80 houses, £100,000 isn’t as big of a risk as £100,000 on eight. No two developments, or developers, are the same. But supply chains have been affected. I think most windows are made in Poland and assembled in Germany. This whole situation with Ukraine and the Russian sanctions have affected that, due to where those two countries get their labour force and raw materials from. So, the first thing we had to do with regard to the

crisis was see if there were materials on any of our sites coming through Ukraine. And while we didn’t have it on those that we had funded, some of our developers did have that issue on others.

As a lender, that has to be considered.

If your developer has been affected on other sites, that will come back to affect the site you’re lending on, from a cash flow point of view. We are seeing things like 16 weeks for windows and a shortage of bricks and steel. Steel and timber are still going up. The issues that were there during the pandemic are still prevalent because of Russia and Ukraine and the rising energy costs. It hasn’t bottomed out. Labour costs are going up.

Bricklayers and labourers are being paid more than they ever were. Labourers are getting paid now what bricklayers were getting three to four years ago.

RN: Yes, and they can pick and choose and walk off site if you’re not paying it.

EB: From an employment perspective, when you’re hiring direct labour onto your site, there’s nothing holding them there. They don’t get holiday or bank holiday pay. They don’t get supplied health and safety gear. So there’s nothing keeping them if they get a better offer for a site next door.

RN: Yes. EK: That’s why I feel that the communication we, as lenders, have with the borrower is key. So if they do discover problems along the way, we’ve all got banks of professional teams we can use, and even contractors we’ve got relationships with, to assist. As long as they’re communicating with us, we can help them get through those processes. We can give advice on various contractors, even if it’s just labourers or bricklayers on site. While the borrower may be on one site, we’re seeing up to 10 at the same time, and therefore can use our expertise to help them through any hiccups they may have.

LM: You’re right. As a lender, you want to be part of the solution, not the problem. Yes, we’ve all got our requirements and parameters that we need to work with, but you don’t want to be saying, “Well, that steel order is your problem. You should have enough cash to cover it”. That might have been

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the way lenders operated before and, technically, you could say that we don’t do forward funding, but we’re in a different climate; we’ve got to be more flexible to keep the wheels turning on site. If we don’t free up the cash flow, and the project takes longer, it causes an issue at the back end of the loan.

We’re in the business of taking risks, and what we’re trying to do now is balance those and find solutions that work for everyone. It’s really difficult because we’re in uncharted territory and being asked to do things as lenders we, perhaps, don’t normally do or feel comfortable doing. But we have to make these developments work. We can talk about big contingencies at the outset as if it will make us sleep better at night, but most of the time it won’t. We will have to get in among it and help where we can, but there’ll always be a ceiling to that.

Getting a fixed-price contract is a way of mitigating risk, but if the contractor goes bust because everybody squeezed the life out of it, then you’ve probably got more problems than you would have if you’d self-procured and been a bit more flexible at the beginning. There are myriad complicated Rubik’s Cube-esque problems that we’re all wrestling with.

EK: I’d agree with that. Nowadays, I think borrowers are looking for development lenders with the right experience. What I mean by that is, when times are certain, people are just looking for finance. But when times are uncertain, it’s about keeping the right partner in your development funder.

RN: It all comes down to the relationship that we have with the borrower and the relationship that the borrower has with their suppliers and trades on site. Old-fashioned relationship building is key in times like these.

CRW: One thing that’s been common over the past few years is timber frame manufacturing times getting longer, mainly through demand. Smaller selfbuild developers using direct labour like the comfort of the design, supply and installation packages which offer a collateral warranty and frees up their own resource. Where programmes are becoming extended is in the lead time for materials supply and manufacturing.

For instance, for the brickwork or windows, you’ve got to consider

advancing the deposits. You won’t necessarily have the timber frame on site, but if you haven’t paid the deposit for the windows or brickwork, by the time the frame’s on site, the lead time could easily be two or three months. The same applies to kitchen suppliers. Everything slows down. There are a lot of cash flow issues arising early on these projects, before there is anything tangible on the site of value, in terms of security. We often see developers burning cash to beat inflation, but exhaust their reserves/operational cash in deposits, resulting in lower site labour numbers and, inevitably, delays.

BF: While we’ve talked at length about flexibility, in terms of finance providers being more of a partner than simply a lender, who is liable when things go wrong? How else are lenders getting comfortable with certain risks?

AB: As a senior debt funder, we see it as an investment. We’re investing in and sponsoring the developer. We know that projects can go off-piste—it could be issues with the contractor, legals, or technical matters. We see ourselves as a through-the-cycle lender—we’ve got to be here when things aren’t going well. Ultimately, it’s how you support the borrower. That might mean providing loan extensions, additional funding and/or guidance. We’ll do what it takes by working together with our customer to get the project back on track to achieve successful completion.

EB: Being in a partnership with a developer is about people’s attitudes.

I always ask for an open line of communication. I want to be ahead of a problem, not hearing about it in the monthly MS reports. I want a phone call to know what’s happening. Then you can go to the site, discuss it, and see why the issue is there. It’s a very different process when you have a borrower who’s just walked away. That comes back to looking at a deal at the outset: what’s going to keep them in it? What’s going to keep them keen? How much equity do they have in it? Will they see it through because they respect their investors and equity providers? Even if they don’t make money on this scheme, will they see it through for reputation’s sake? That is the kind of person you want to back; people who’ll work with you. At the beginning of a development, you won’t be able to tell whether you’ll still be friends at the end.

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But if you meet enough of them, you can pretty much gauge in the first 15–20 minutes if you’re going to speak every month for the next two years or not.

DJ: One of my rules is to never lend to anyone you don’t like.

EB: I think you and I had this conversation in Cannes, didn’t we?

DJ: We did. And if that’s your starting point, you’re on the right track. You need to have an open dialogue with them around their strategy at the initial discussion phase. When things go wrong, that’s when their true personality comes to light. Most developers want to go on to the next project and, if you work well with them, there’s no reason why you can’t do that together.

I’ve got developer clients who’ve been working with the bank for more than 17 years—and they’ve been through the various cycles. I’ve seen some of them on site laying bricks, doing what they need to do to get things over the line. We’re still backing them today.

It’s about the strength of character in the people you’re dealing with.

JM: That’s the benefit of using an experienced development broker who understands their clients and development finance, and communicates with the lender and borrower. Focus Commercial visits its sites twice a month to see if there are any problems, and that’s where the added value comes in.

BF: In terms of success stories from property developers during all of this, how are they approaching their building schedules, contracts and cost forecasts?

Putting contingencies aside, are there any other ways that they are looking to handle this, and how is this impacting the profitability of their schemes?

RN: I’ve noticed a lot of our borrowers are stockpiling materials. They have good relationships with suppliers and know when prices are going to go up—so they buy in advance, when they can. Some of our developers are also acquiring or renting yards where they can store everything if their site is too tight. Lead in times are long so they’re thinking way ahead of when they need materials.

RP: I agree, Rebecca, I’ve come across that. I’ve had situations where

Cover Story

the developer has paid for items almost before they’ve got the funding.

Consequently, the day-one draw is for materials that you wouldn’t necessarily expect to come for a few months. The other thing I’ve seen is utility costs being paid early. Often, when you get a quote, it doesn’t last for the duration of the period they say it should. So many developers are now paying utility costs in the first three months, where they normally would have paid it later on.

This is for two reasons: one, because it is subject to surcharge; and two, because they can then book a date for the utility to be fixed. Currently, companies won’t take dates, or stick to them, for fitting your electricity or water, without payment. That’s a major problem.

Those outlays, which can be substantial in a development, are moving to the front end of a development’s costs.

LM: We’re also looking at different construction methodologies because, clearly, in a climate where the price of everything is going up, it’s a perfect opportunity to look at modular and energy-efficient systems. If you can shorten the build period, get a bit more certainty of price—and I accept there’s an element of flex in that—and deliver an environmentally friendly product with low energy costs, what’s not to like? It does give rise to other issues, however, such as heavy forward funding payments, which lenders are always a bit twitchy about.

“ONE OF MY RULES IS TO NEVER LEND TO ANYONE YOU DON’T LIKE”

EK: As finance providers, we have to consider the risk involved in that. A lot of developers will want to go down that route, without understanding the impact of it. They just see the rosy side: it’s going to be quick, manufactured on site, and delivered. But if you don’t get your set-up completely right on site, then you’re going to end up with a bigger problem than you started with. That’s something they need to think about very carefully.

Decisiveness from the borrower is also important. When the developer’s on site, unexpected things are always going to happen, whether the engineer changes their specification, or designs comes back slightly different. This comes down to the developer making a decision. If they can do this quickly so they don’t impact the programme, then they can come out the other end. This would 69 May/June 2022

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certainly help them to protect their profitability and ensure they’re out of the project as swiftly as possible.

BF: On the topic of stockpiling materials, what options do SME developers—who have less purchasing power—have, if any?

AB: Pre-2008 recession, advanced payments were pretty standard in our marketplace. We occasionally found the odd borrower misappropriating the funds they’d drawn and not a huge amount of work had been undertaken on site… So, banks, on the whole, restricted forward funding. As specialist lenders, we can have those discussions and more so in the current environment. From your initial conversation with the developer, you can understand where those pinch points are likely to come with regard to advanced payments—whether it’s on timber frame, equipment, kitchens or windows. You can then build that into your facility. While it’s not a specific amount per loan, it has to be appropriate for the scheme in hand, doesn’t it? You need to make sure that you’re able to work with whatever your client requires.

DJ: We recently announced a tie-up with Travis Perkins. It’s quite an innovative way for SME developers to benefit from increased account allowances with a large supplier, which will source the materials, get the best price, and get them delivered. Small SPV developers would generally be able to approach Travis Perkins and secure an account for, say, £50,000-100,000 at best, if they have a bit of experience. With the agreement we have in place, Travis Perkins can agree to a larger commitment knowing if certain conditionality is met, that the bank will meet the cost. While they might not necessarily be the cheapest, it brings certainty—and they’ve got the purchase power with manufacturers the SMEs don’t have.

BF: Do you expect to see a rise in fixed-price development finance going forward?

EB: Are you speaking from a SONIA perspective, in relation to the increase in interest rates that’s keeping us all awake at night?

BF: Yes. Are borrowers now on the hunt for fixed rates?

EB: Yes and no. I’d say it depends on what school of developer you’re dealing with. Internally, it’s a conversation we’ve been having for weeks; what is the best and fairest way to deal with this to our existing client base and any new clients? We’ve yet to come up with a final answer. If you read what way SONIA is proposing to go, and where it will be by the end of this year, or next, it’s scary. I don’t think it’s as simple for some lenders to fix as it is for others; it’s not easy for us to fix that cost in. Is it something we could do in the future?

Certainly, if we get a good headwind at it. But we come back to the same answer every time we talk about it...

What it is, on a very common-sense basis, is an interest capitalisation facility that runs out before the end of the term. Therefore, the interest must be serviced. And what are your options at that point? If you’ve backed the right client with deep pockets, that can contribute to maintaining your LTV. Secondly, you’re hoping your development exit lenders are still there.

And thirdly, you’re hoping that house prices continue to increase. But you can’t lend on a hope basis. You want assurance. So it’s finding that balance without killing the deal at the start.

I predict we’ll see the SONIA floor rising across the board. I feel some lenders have held back. I believe that, over the next couple of weeks, you’ll see that moving—in what regard, I don’t know. But I feel fixed-price development finance is attractive for a developer right now.

AB: We could offer a fixed price, but it’s against expectations of a rise in interest rates. Therefore, we price over base.

You’d undoubtedly be looking to price in another 50–70 bps over a two-year period. So, it’s available. The number of requests we have for this? Probably less than one in 10. Right now, I don’t think it’s a product in demand, but it’s a question we’re asked from time to time. In the grand scheme of things, I’d say it doesn’t concern developers as much as an increase in building materials. That’s a far greater worry.

EB: Do you think the reason it’s not concerning them is because most lenders are still quoting 75 bps as the floor?

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AB: I guess there will be lenders who price differently. We use Bank of England base rates; others will use SONIA or their own standard variable rate. My personal view is that it’s not as much of an issue for developers because build materials and availability of labour have been a greater challenge over the past 18 months, and I believe that will continue. Once everything else gets squeezed, and if house prices stop rising, perhaps… That will cause other issues which, again, may take priority. But I don’t see it as the biggest problem.

EB: We could all start offering swaps and hedges again, like we did a long time ago. That would be fun…

LM: There’s an argument that a fixedprice contract is more important in the current climate than a fixed-price development loan. While you can have a fixed-price loan, if you’re working as self-procurement, and the costs are going all over the place, then your fixedprice development facility is probably not the priority. As lenders, those are the kinds of conversations we probably need to be having more of now. As rates go up, I’m sure that will come more into the equation. But, please, let’s not go back to swaps and things like that.

That was not a great place to be.

BF: How else do you see the development finance market evolving as a result of all of these headwinds?

AB: One of the things we talked about was developers coming in with 10% contingency. Then, by the time it arrives with the lender, that contingency has been whittled down to 5% in order to maximise pay by advance. As lenders and brokers, that’s something we have a responsibility for, to ensure we’re going into these schemes with our eyes wide open, and not trying to mislead one another. Otherwise, that’s where the market comes unstuck. We mustn’t expect house prices to continue to bail out projects, and we have to prepare for build costs to further increase. With that, everyone’s got their point in the market—whether you’re at 60%, 65% or 70% LTGDV—but it’s about making sure your assessment is robust at the outset and we’re all proactive throughout. Then, with a bit of luck, we’ll still be here in a similar position in 12–24 months, with our developers still trading through.

Cover Story

“WE MUSTN’T EXPECT HOUSE PRICES TO CONTINUE TO BAIL OUT PROJECTS, AND WE HAVE TO PREPARE FOR BUILD COSTS TO FURTHER INCREASE”

71 May/June 2022

Kara Williams shares five things to look for in a bridging lender:

1

Speed and simplicity

Choosing the right lender for your client is always important, but when you’re dealing with larger bridging cases such as these, knowing you’ve got dedicated support and fast, flexible finance options at your disposal becomes even more essential.

Here at Together, even the largest loans we underwrite benefit from the same speed and service as any other, and that’s down to our many years of experience as a team and as a business, as well as our strong network of trusted valuers and solicitors who can action things quickly.

It’s important to work with a lender who has the in-house skills and resources to properly assess a property project in order to make a direct and prompt decision, and flexible criteria to suit a wide range of client circumstances.

At Together, our specialist underwriters and intermediary team work closely with packagers to deliver quick decisions on loan applications even where there are complexities in place such as multiple or complex incomes, unusual property types, and clients who are expats or investing from overseas.

3

Substantial funding capability

Certainty of funding is always a key consideration, but it’s particularly important when handling larger loan applications. The lender you work with should have strong investment and a track record for delivering multimillion pound cases. For example, in April this year Together provided more than 260 commercial bridging loans worth £103.6m – a number of which were worth £5m and above – thanks to our strong funding lines.

Development and refurbishment projects encompass many different stages, and your clients’ finance needs will often change as the work progresses. That’s why it’s important their lender can offer an easy transition between products to keep their project on track.

Whichever your clients are facing, whether it’s a refurb, a redevelopment or a large scale development project, we can support their next step with a range of refinance and exit options, including bridging loans, commercial term and buy-to-let mortgages.

5

Good relationships with packagers

2

Flexibile lending criteria

4

Funding for the lifecycle of a project

Finally, it’s important to work with a lender who values relationships with intermediaries and has strong relationships with a panel of packagers. These specialist distributors have expert knowledge of Together’s products and criteria which means your cases are likely to benefit from a faster service – particularly with larger loans which may need referring to an underwriter early on.

Fast, flexible bridging loans for whatever your clients’ need.

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For Professional Intermediary Use Only.

Interview

Danny Waters

74 Bridging & Commercial

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HE

DEALMAKER

Having just steered the company through its third private equity transaction, Enra Specialist Finance’s CEO Danny Waters reflects on the past 21 years of his career, his drive to fight hard for every aspect of the business, and his excitement for what lies ahead

Words by

jon yarker Enra Specialist Finance is no stranger to a private equity deal. In March, the firm announced its third one when Elliott Advisors acquired a majority stake in the business (subject to regulatory approval). This involved a stake being bought from Exponent Private Equity, which had held a share in the group since 2017. Prior to that, private equity firm Livingbridge had purchased a minority interest in the business in 2014.

Enra’s M&A history has certainly grabbed the headlines, not least when it bought lender West One in 2014—for which Danny became a trendsetter, with several similar transactions following suit over the years. When I ask him about this label, he states that the move was about creating shareholder value through intelligent business strategy. “‘Trendsetter’ is much better than what I was called at the time,” he jokes.

“Back then, it was a controversial transaction, based on people being fearful about the impact it would have on their own businesses.” He adds that his motivation behind this was to find interesting growth opportunities for the company.

This approach is the hallmark of Danny’s career, as he actively considers transactions that can drive the group towards its goals. The trio of private equity partnerships is proof of this, but also an indicator of his love of a deal.

“It’s a crucial element of running a business that is often forgotten as companies grow,” states Danny. “It’s really important to me that we stay hungry. If we’re not negotiating hard and fighting to deliver the best service, then that’s where we lose our edge.”

A sliding doors moment To understand what brought Danny to this moment in his career, it’s worth looking back to how it all began. In 2002, having finished school at the 75 May/June 2022

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age of 18, Danny was searching for a job near his home in Edgware, London, which led him to a “very entry level position” interview at the embryonic Enterprise Finance (now part of the Enra group). “In a true sliding doors moment in my life, the person interviewing me said there might be something else a bit more exciting—and they wanted me to meet the managing director,” he recalls.

Danny became Enterprise’s third employee and describes its business arm as more of a “concept” when he joined. It was an exciting time, however, as the next few years coincided with interesting developments in the wider industry.

Enterprise soon found a niche and began to grow. And, after overcoming initial nerves, so did Danny’s confidence. “In the first few weeks, it was like people were speaking a different language,” he divulges. “The acronyms made me think I’d never grasp it.” Six months in, he began to really understand the key levers he needed to pull to be successful. “I was very hungry and ambitious. I threw myself into it because I loved what I was doing.”

The following years provided a valuable learning curve. Danny transitioned from focusing on deals to understanding how the wider business worked.

He passed up the ranks to managing director then, in 2009—and in his midtwenties—to CEO. “No one gives you a magic book of ‘how to be a CEO’ when you first get the job,” Danny stresses. “The most important things are to be true to oneself and remain openminded. I’m a different CEO today than I was when I started, just by virtue of the experiences of the past few years.”

A career of deals Enra had known West One well before the acquisition. Both businesses’ HQs were less than a mile apart, and the former was the latter’s largest originator, responsible for over 40% of its loan introductions. There was a “deep and close forged relationship” between them, which led to initial conversations.

“They tracked the business and followed its progression, seeing how it performed during Covid. This is an example of that flight to quality.

There’s only a couple of firms that can absorb that kind of cheque size” “West One was owned by four equal shareholders, but without any real singular leadership of a CEO to drive strategy,” Danny expounds. “We sat down with the team, agreed a deal in principle to acquire the business, [with two of the partners exiting], bringing it under our umbrella. We had access to pools of capital that were already cheaper than those utilised by West One. Then we worked extremely hard to integrate and grow that business over the next two to three years.”

Although there were some doubts—Danny admits the competition between broker and lender was “unusual” and “potentially disruptive”—the deal suited Enra from a strategic standpoint. It would allow the company to add value through cheaper capital, with the West One brand, in turn, benefiting from stronger leadership and direction. “Going into a deal with confidence in the strength of the idea, and the rationale for doing it, is really important,” he emphasises. “We were bold with West One, we pursued it actively, and it’s worked out really well.”

With the process complete, attention turned to product development.

However, the advantages of M&A were clear and Enra remained open to other opportunities. Sure enough, in 2018, it inked another deal when it snapped up Vantage Finance.

“This deal was opportunistic, just like West One—we knew the people and identified a business that we could add value to and which fitted within our overall corporate strategy,” Danny imparts. “In particular, Vantage specialised in distributing different products, [widening] our broker offering.”

Now, the Enra team is focusing on Elliott. The private equity firm was the front runner in a competitive process that saw a lot of interest from numerous leading, global names. While the deal is subject to FCA approval, Danny is excited about what it can bring.

“Elliott is very large, with significant financial services experience with both 76 Bridging & Commercial

Interview

bank and non-bank lenders,” he says. “This success is something that appealed to me. It’s important to deal with people who have been on the journey before. Their vision and ambition for the business aligns closely with mine. In other words, the deal has to work on many levels—not just price.”

The transaction was also advantageous in the way it combined with the exit of private equity firm Exponent. “It was the natural end of the Exponent ownership cycle,” reflects Danny. “They’d been great supporters of the business, but we’d achieved everything we set out to accomplish in their original case, and more. We’d launched products, grown existing ones, and increased P&L substantially under their ownership in just over five years.”

Consequently, the CEO is eager to embark upon this new chapter with Elliott’s backing. “I’m still relatively young, ambitious, and believe the business can continue to grow. We’re at an exciting juncture,” he adds.

Building on 2021 The group’s businesses have lent £5bn to date, with nearly £1.2bn of assets under management and 209 employees. And the latest intersection comes after an eventful year for the company; in August 2021, Enra signed a £500m bridging facility with JP Morgan, building on a £250m forward-flow arrangement already secured with the finance giant. This, Danny explains, is an example of the business benefiting from the reputation it has built over time.

“We have a brilliant relationship with JP Morgan. We’d known them for years but, for whatever reason, we hadn’t got a chance to collaborate,” he illuminates. “They tracked the business and followed its progression, seeing how it performed during Covid. This is an example of that flight to quality.

There’s only a couple of firms that can absorb that kind of cheque size.”

Last year also saw Enra unveil a green BTL range as part of an environmental campaign called ‘Funding the Future’. This was an important step and about more than just capturing borrowers’ attention. “We’re just trying to do our bit,” Danny affirms.

He is now keen to progress the group’s product evolution and has identified new opportunities, which will include entering the specialist owner-occupied mortgage space. “We will do that at some point in 2022. It’s an interesting market and not as congested as others we operate in,” Danny states. “All the infrastructure is in place in our business to do it, so it’s more a case of why shouldn’t we?”

While there may be further diversification to its offering down the line, Danny is clear about his ambitions for Enra: to be the largest non-bank lender in the UK, but one that also gets the best risk-adjusted returns. “I don’t want our business to be a price leader, as I don’t think that’s durable,” he claims. “I want us to add value in other ways.”

Lessons for the future Reflecting on his 21-year career at the firm, the CEO has no plans to step back from the company’s day-to-day running. With a third private equity deal secured, and opportunities identified for expansion, he is optimistic about what the next 21 years may hold.

“If you had sat down an 18-year-old Danny Waters and told me I would grow a business and be through three private equity transactions with the value we’ve created, I would have asked if you’d been drinking,” he admits.

However, he is mindful of the challenges he faced along the way, with the financial crisis occurring in his sixth year at the company. This taught him a lot about his outlook on business—“the scars are still fresh from 2008”—and continues to influence how he approaches decisions.

“Experiencing that quite early in my career was a valuable lesson because I saw how a lot of people, perceived with excellent businesses, watched their net worth decimated overnight,” he conveys. “That has always made me very considered in how we operate. A focus on the long term, with a conscious steer away from short-termism.”

It is this attitude he passes on to new starters at Enra. He encourages them to “think big” and ensure they succeed at execution. “You can have a bad strategy and brilliant execution and get away with it. If you have a good strategy and its executed poorly, that’s another matter!”

77 May/June 2022

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Interview

How frameworks can level the playing field for SMEs in property development

Robert Dale Sourcing cost-effective and tried-and-tested suppliers in the property development market has never been more important.This is why frameworks—such as the one Daniel Connal Partnership (DCP) has recently secured a place on—are expected to grow in popularity and encourage equal opportunities for businesses of all sizes Words by

BETH FISHER In early 2022, DCP secured a place on the £500m LHC Procurement Framework for public sector buildings and homes until January 2028. As a pre-approved supplier, the consultancy firm will support public sector organisations across the UK with building and quantity surveying and project management services. The framework of construction specialists has 12 workstreams for projects by local authorities, social landlords, tenant management organisations, health authorities, trusts, publicly funded schools, further education establishments and registered charities.

To find out more about the criteria for selection, how such frameworks operate, and whether we could see the likes of this in the private sector, I speak with DCP’s senior partner Robert Dale.

Congrats on securing a place on the framework! Why do you believe DCP was chosen?

Thank you. Quite rightly, the application process was rigorous, so being awarded a place is testament to the quality and effectiveness of our company. It was a

two-stage restricted tender process: an initial qualification assessment, with shortlisted applicants being asked to submit an invitation to tender. This required the collation of evidence covering our procedures and systems, showing the skills and experience of our staff, and past project delivery examples for best practice. We were also asked to price our fees for model projects to demonstrate the value of our services. As a successful practice that has existed for over 75 years, we were able to prove a consistent, robust track record in our field, with wideranging experience across all markets including, of course, the public sector.

We have a strong financial standing and excellent employment and health and safety practices. We were able to show our commitment to managing our environmental responsibilities, a sound approach to equality and active social value practices—all essential to our selection. Applicants were also evaluated on customer service, procurement risk, flexibility and sensitivity to client needs.

All of these align with our principles.

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Robert Dale

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What does this achievement mean for you as a business?

reassurance of their delivery capabilities.

In the case of the LHC framework, bidders were evaluated on a 70% quality and 30% price split. This levels the playing field for micro businesses, small enterprises and medium-to-large companies. It means that framework places are not heavily weighted to a pricing base where larger firms can benefit from economies of scale.

LHC clients use the framework because they are assured of high-quality project support by appointed suppliers. Not only is it an exciting prospect for us to work on a wide variety of developments that will enhance and support communities, but it’s also recognition on a national platform of the great work we do. In effect, it’s a recommendation to clients and potential customers in other sectors.

What sort of projects will your team be working on across the UK over the next six years as part of this?

It could be anything from schools and hospitals to housing developments. I’m delighted to say that we already work very successfully with the types of organisations eligible to use the framework, including some award-winning schemes for local authorities and charitable trusts—such as Elm House for Breckland Council and Wells Maltings for the Wells Maltings Trust—so we are looking forward to extending our client base now the framework is up and running.

How do frameworks work and why are they important?

Essentially, frameworks bring buyers and suppliers together. Suppliers compete through open competition to be appointed to one. These are typically umbrella agreements, where a certain level of service can be assured. Individual contracts can be made during the lifetime of a framework (usually four years but, in the case of this one, six years). Legislation governs the way frameworks are run.

Members (the buyers) can call on the individual appointed suppliers in full confidence of their value, knowledge and experience. It’s geared to be a costeffective and time-efficient system.

How can frameworks reduce barriers to entry for SMEs in the property development market?

Misconceptions around SMEs lacking the capacity, resources or expertise to deliver larger projects exist. This often flawed ‘big is better’ approach means smaller businesses may not even be considered for development projects. Being appointed to a framework provides positive exposure for them to purchasing clients, along with the 84 Bridging & Commercial

How do frameworks encourage better and more suitable building projects that reflect the regions they are situated in?

Public sector organisations across the UK using the LHC Procurement Framework can be certain that financial management in project delivery will meet industry procurement needs. But local knowledge, and the use of local workforces, is hugely important. Hence on the LHC MDC1 framework, we have been appointed to the London and South East England (LSE), and North and Central England area (CPC).

How can they help solve the ongoing national housing crisis?

Frameworks enable an efficient and quicker procurement route for the public sector, avoiding the need for a long and often repetitive tendering process for contract bids from any number of firms. The public sector has for some time relied strongly on them to ensure the appointment of suppliers meets stringent procurement rules. So it’s no surprise that the private sector is increasingly looking at the potential for frameworks to select consultants— which, in my view, is a very positive move. In such uncertain economic times, efficient, value for money procurement is important across the board.

Our Green Commitment Planting a UK tree for each new deal Removing over 200 tons CO2 by 2025 Net Zero vs scope 1 & 2 by 2022 Funding renovations to improve EPC Supporting Passivhaus developments Donating to local Wildlife Trusts

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Knowledge Bank and FP Show to host Criteria Clinics Live Mortgage criteria search system Knowledge Bank is set to roll out its popular online criteria clinics to a live audience for the first time ever at the Finance Professional Show on 10th November at Olympia London.

The partnership will see Knowledge Bank debut a series of interactive, in-person sessions that tackle questions and solutions around specific finance products.

Topics planned may include areas such as complex BTL, adverse credit, understanding risk, a deep dive into affordability, and more. A full programme—including details of the lenders involved—will be published closer to the event date.

We are so excited to bring the buzz of the hugely popular Knowledge Bank Criteria Clinics “live” to the FP Show this year,

Following the same format as our webinars, brokers will be able to join us throughout the day for a variety of sessions covering regulated, BTL, commercial and specialist lending. We’ll be placing brokers’ cases live during the sessions, as well as talking through their criteria in detail and getting an insight into their underwriting - Nicola Firth, Knowledge Bank founder and CEO There are plans in place to facilitate breakout conversations that will inevitably arise from the panel discussions and presentations, in order to support those who want to discuss aspects in confidence—something which the online clinics execute very well.

Property and finance professionals are encouraged to register their interest in attending the Criteria Clinics Live via the FP Show website from July.

https://financeprofessionalshow.co.uk/

THE FP SHOW IS SPONSORED BY

Visualisation of Canary Wharf, London via the VU.CITY platform—the yellow buildings have planning consent and the blue buildings are currently under construction (Source: VU.CITY)

The BOD2 3D printer in use (Source: COBOD)

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1. VU.CITY

Six proptech businesses to watch in 2022 Words by

andreea dulgheru

Who it’s for: architects, planners, developers and local authorities What it offers: We’re all familiar with CGI images of future developments giving us a glimpse of what will be built. But what they don’t show is a residential or commercial scheme from all angles and how it will fit with its surroundings. This is why VU.CITY developed its interactive 3D planning and design platform which enables users to create an exact digital replica of a development within a chosen area—with this, developers, architects, local authorities and other parties can thoroughly visualise the scheme and understand its potential, learn how it will impact the region and population, and identify what changes can be made to improve and optimise its quality.

Once you select the desired city from a list of more than 20 (among them London, Manchester and Edinburgh), you can either create the scheme from scratch— rather like a digital version of Lego—or import refined designs from external 3D modelling software, such as Revit, Rhino, SketchUp and 3ds Max.You can then use camera tools to study it from bird’seye to pedestrian level, which is helpful for identifying the units with the most desirable views and appreciating the impact of light and weather at an early stage, to best position windows and balconies.

The tech also provides planning data layers relevant to each city—from public and private sector sources—in order to examine key factors such as air pollution, conservation areas, flood risk zones, internet speed and many more, to apprehend the feasibility and effects of a scheme. On top of this, it allows users to add notes and collaborate with other parties for smoother communication between architects, developers, planners and local authorities.

2. COBOD

Mobile banking, ordering dinner and taxis through an app, answering the doorbell through your phone… tech has become an indispensable part of our everyday lives. But can it be used to improve the construction sector? Turns out, it can—and these six firms are showing us how they’re doing it in a radical way

Who it’s for: developers, housebuilders and contractors What it offers: 3D printing has gone from being a novelty idea to something you can do in your own home, so it’s no surprise this tech has made it into the construction world—and COBOD (Construction of Buildings On Demand) is doing just this. Its latest 3D printer, BOD2, features a modular truss design, which offers a variety of sizes to suit every housebuilder’s project requirements. Its

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View Scheme completed using Modulous’ proptech solution (Source: Modulous)

Environmental factors to be considered for a site

re-engineered tangential nozzle (which can be changed in less than two minutes for various layer widths and heights) enables precise control when printing and can smooth or texturise walls, thus reducing the amount of plastering and posttreatment needed. Furthermore, BOD2 can use materials from any supplier, as long as they are printable.

The BOD2 can print at a speed of 1,000mm per second and can be manned by just two operators, lowering labour costs and optimising the efficiency of the construction site. COBOD technology is available in the UK and Ireland through Harcourt Technologies.

3. GROUNDSURE Who it’s for: property valuers, surveyors and commercial lenders What it offers: Before any development can begin, a thorough evaluation of the site is essential to ensure the foundation of the scheme is sound—and Groundsure is taking this to the next level. The company’s Siteguard Climate report offers an indepth analysis of commercial sites and properties to highlight key environmental risks that could affect their valuation assessment. The solution fully meets the RICS appraisal and valuation standards and is accepted by major UK financial institutions, including Barclays, Santander and NatWest.

The key points the service examines are

the level of land contamination and flood risk. It looks at a site’s industrial history (as far back as the mid-1800s) to identify the potential factors that might threaten a commercial development. These include past mining activities—which could affect the ground stability and lead to a collapse—or the possibility of flooding due to rivers and seas, coastal erosion, or groundwater (water rising through basements and cellars). The report also includes a forward prediction of the impact of flooding due to climate change at a property-specific level, which enables valuers and lenders to assess any potential risk during the lifetime of the loan that could affect resale value.

The ‘Siteguard Climate’ report helps buyers spot potential issues in order to take steps to mitigate them and add forecasted costs into the overall sum they require for the site. Meanwhile, it allows finance providers to see whether it is viable for them to provide a loan for the purchase of a particular site or property, and if they need to adjust the lending criteria to take into account any risk factors identified.

4. EKSO BIONICS Who it’s for: construction workers What it offers: Ekso Bionics—which specialises in wearable robotic tech to enhance the body’s natural movement and improve quality of life—created its first industrial upper-body exoskeleton, 90

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EksoVest, to support workers’ arms and shoulders, in 2017. Following feedback from a variety of customers, including Ford and Boeing, which used the vest to reduce workplace injuries and bolster productivity, the company went on to develop the product’s latest iteration, EVO, which can be applied in any industry in which overhead work is performed, including construction.

The new model—which fits on the arms, back and waist without restricting movement or airflow, and leaves room for a fall harness if necessary—uses nitrogen gas springs to store and return gravitational energy to the users’ limbs.

When they lower their arms, the spring mechanism is charged. When they raise them, the stored energy is released, providing an assistive force through the cuff to help lift the arm. This results in less power required from the shoulder muscles to raise any tools needed to complete their task. Consequently, workers are able to perform a job for longer (as the body tires

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Site search Man wearing the EVO exo-skeleton for industrial use (Source: Ekso Bionics)

more slowly), thereby reducing injury risk.

EVO works without batteries, charging, or electrical power, meaning there are no additional operating costs.

5. URBAN INTELLIGENCE Who it’s for: property developers and planners What it offers: Every development starts at one crucial point: finding the right site.

But this can be an arduous task that may take a good chunk of a developer’s time.

Urban Intelligence has designed its Site Search solution to help clients secure the right land for their project. The product can scan and assess every square metre of Great Britain—including over 29 million HM Land Registry parcels—to identify potential sites for a developer or planner depending on their desires, including size, location and current land use.

The process starts with a consultation with the client, during which Urban Intelligence pinpoints their requirements

and ideal features. It then builds a bespoke algorithm to search through all available sites to find those that match the wish list.

Following this, it can use its proprietary SiteScore software to produce a report for each site, which assesses them based on geographical and political context, planning and environmental constraints, development options, and sustainability.

6. MODULOUS Who it’s for: property developers, landowners, architects and contractors What it offers: Modulous is a supplier of physical and digital products to enable others to deliver affordable and sustainable multi-family housing. It aims to make the whole construction cycle more efficient, cost effective and transparent.

The physical product is a proprietary Kit of Parts—a series of eight fully engineered sub-assemblies, including wall panels and floor cassettes, produced by Modulous’ global manufacturer partners, such as

CEMEX and Knauf, meaning production is decentralised and no dedicated factories are needed. Currently, the Kit of Parts is designed for multi-family apartment buildings from three-to eight-storeys high—however, the firm is looking to enhance the offering in the future to serve specialist sectors, such as student accommodation, senior and co-living.

Meanwhile, the digital offering is a software platform that enables users to input a site location and basic prerequisites, such as building height and unit mix, to generate optimised massing schemes for that site in real time, rather than the weeks a feasibility study typically takes. The software bases design solutions on the physical Kit of Parts, which not only guarantees the technical feasibility of the solution, but also provides accurate costs and an indicative programme length, as the kit is fully defined and quantified.

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Bridge rates from 0.55% Fast, people-led, decision making Loans from £100,000 to £5,000,000 LTV/LTC/Refurbishment costs 75%/85%/100% up to 24 months Rates from 0.55% with competitive procuration fees

Single point of contact Simply email us and one of our team will be directly in touch contact@sancus.com

> Residential > Semi-Commercial | Mixed Use > PRS Schemes | Auctions | HMO’s > Light to Heavy Refurbishment > Multiple Assets

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sancus.com Indicative criteria only, each loan application is considered on its merits. Sancus Lending (UK) Ltd is regulated by the FCA, firm reference number 593992.

Risk Warning: If you are co-funding you could lose part or all of your capital. Indicated returns, unless otherwise stated are shown before any provision for bad debts and may be subject to tax. Sancus do not provide private mortgages. Sancus Lending (UK) Ltd is incorporated under the laws of England and Wales, company number 7534003. Part of Sancus Group Holdings company no 57766 registered office Block C, Hirzel Court, Hirzel Street, St Peter Port, Guernsey GY1 2NL.

Lending less ordinary on eco and sustainable projects Bridging | Refurbishment | Auction | Conversion Development | Developer Exit | Buy-to-Let | HMO MUFB | Holiday Let | Serviced Accomodation

Roma can provide flexible funding to assist with the completion of sustainable projects for your developer and investment customers.

Let’s talk! For more information, contact us on 0161 817 7480 or hello@romafinance.co.uk.

For introducer and professional property trader use only.

romafinance.co.uk

The importance of downside protection Words by

caron schreuder

Interview

C

hief operations and investment officer Chris Lanitis chats to me about where he sees Amazon Capital (which officially launched in January 2020) fitting in the market, the methodology behind its chosen sectors, and how often the company gets confused with a certain delivery giant.

Chris started his career as an investment and development agent in a firm later acquired by a former iteration of CBRE. “That’s essentially where I cut my teeth,” he says. “I did a number of deals, was quite hungry and ambitious, and met a lot of people in property.”

It was around 2007 that Chris encountered Charles Gourgey, who set up Amazon Property in the early 1990s and is its CEO. Today, the core team, which Chris describes as “small and nimble”, totals five; a further 10 make up the wider company, which houses investment, development and trading departments,

In April, Amazon Property announced the launch of a £250m pot of equity funding to deploy via its finance arm, Amazon Capital. Its approach? To focus on commercial property projects in a specific set of ‘recession-proof’ sectors, which all have a strong level of underlying demand and foster innovation

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Interview

“Plenty of operators have got a good nose about a deal, but they just don’t have the equity”

as well as the latest financing division.

Amazon Property concentrates on London, the home counties and the South East, and has some 80 developments under its belt. Amazon Capital, in the pursuit of the very best operating partners, will consider deals UK wide.

I ask Chris about the company’s aspirations at the point that it set out to offer capital, and his view on the overall landscape of equity providers. “We looked at the structure very carefully and thought, ‘Where do we have the competitive edge?’”

According to Chris, investors fall into two camps: family offices (which are notoriously difficult to get face time with and whose equity is often spread across numerous opportunities) and HNWs (many of whom are based abroad and act more in a silent capacity), and PE houses (whose committee-based structures can prolong decision-making).

“We sit in the middle,” Chris tells me. “We just concentrate on property and, having operated across most of them, we get most sectors. We can make decisions a lot quicker because there’s no board. If we have the right gut feeling about something, we’ll do it.”

He recognises that plenty of operators have clever, innovative ideas that they would like to make a reality.

“They’ve got a good nose about a deal, but they just don’t have the equity.”

He also points out that Amazon Capital is big on adding value and being hands-on.

The team brings decades of experience, expertise and building contacts to the table, with a goal to become “the repeat provider of equity for entrepreneurial, smart, property-minded people”.

Among the top priorities for Chris is a partner who really believes in the deal—and backs this up with a degree of ‘hurt’ money. “Everyone needs to be aligned in the process,” he affirms.

The business labels itself as “openminded” and wants to work with introducers of all kinds, understanding that good JV partnerships can arise from a variety of sources. To date, it counts brokers, solicitors and agents as key avenues that have led to successful completions.

Around a decade ago, Amazon Property was extremely active in prime residential and considers itself a pioneer in that space.

Now, Chris deems it to have become too “binary” and plagued by taxation. “It’s unfortunate that it’s becoming a tougher 96

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market to operate in, partly because build costs are so high,” he shares.

But the firm’s penchant for trendspotting continues, as it seeks out collaborations in sectors in which the demographics are in their favour.

The first of four primary targets for the funder is specialist dementia care. “We’ve got an ageing population, and there’s a real need for specific care,” Chris states.

Exacerbated by the impact of Covid on hospital space and the resulting backlog, Amazon Capital has identified a scarcity of suitable facilities, particularly in London.

It has found an operating partner to commence this journey and development has begun on a site in Belgravia.

“We’re trying to carve out a very highend, boutique model for the golden postcodes of central London, wherein one can afford to pay those premium rents for these types of services.”

The second recession-defying area the firm is turning its attention to is PBSA— for which a site has already been bought, unconditionally, and is awaiting planning consent. This, Chris reveals, is where the challenges crop up, rather than availability of sites or demand. “It’s not easy to get student consents in London. You need to jump through certain hoops and obstacles, and you’re very location driven.”

He adds that the expectations for the overall standard of student accommodation have risen since the onset of the pandemic, resulting in more ‘category A’ schemes that include top amenities and are socially and environmentally conscious.

A speciality of Amazon Capital is repositioning commercial real estate to improve the income stream. “We always look at a building and see what we can extract from it,” Chris says. “We’re a property company, so, for us, it’s all about buying right. Having a per square foot entry price is very important. So, we’ll cap value buys and make our money through cash flows and yield shifts.”

For example, it recently acquired the Conran Building in Butler’s Wharf, near Tower Bridge, with the intention of converting it into a plug-and-play, category A serviced office block—the third subsector it’s committing its funding firepower to.

Chris sees this type of all-inclusive managed solution as the way of the future, with businesses now less likely to want to take on leases—and the associated time and effort required

to create something fit for purpose.

“They want to secure best-in-class space where, when their staff are working there, they’re happy, in a community, and sociable with one another.”

The fourth niche the equity provider is keen to support is life sciences or, more specifically, lab space. As Europe and the UK try to catch up with the US (the dominant player in this sector, according to Chris), demand for assets that can be used for scientific research purposes is on the rise—and so is the rental yield.

Given the current inflationary environment and various other economic factors bearing down heavily on most industries, I enquire as to how the business is managing risk. Although its overall gearing is conservative, it still has a strong appetite for more speculative sectors such as prime residential.

“Availability of opportunities is far more limited, coupled with the uncertainties of affordable housing provision,” he explains.

“But the other sectors we’re in are underpinned by a cash flow, an income.

So, we’ve got that downside protection.”

I’m naturally curious about what, if any, confusion abounds when it comes to its name. “The thing is, we were there before them,” says Chris—or, at least, earlier than one of the world’s most famous corporations really took off. Aside from fielding questions from journalists eager to find out about ‘their’ latest millionplus square foot take-up, Chris is happy to share such a well-known moniker.

Perhaps, with its sights firmly set on supporting solid, demand-driven markets, Amazon Capital can look forward to a similarly spectacular trajectory.

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020 8349 5190 alternativebridging.co.uk years young

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10/03/2022 10:16

May/June 2022

The Platform for Development Finance and Bridging Lenders soprabanking.com/aurius-df

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Based on Apak’s Aurius platform, Aurius-DF meets the business needs of Development Finance lenders by providing market specific functionality, including: • Loan Schedule Modelling (both pre-approval and in-life) • Facility Limit, Advance Limit and Loan Tranche Management • Tracking of involved Brokers, Third Parties and Professionals • Guarantees and Security Monitoring (including tracking constantly moving LTVs) • Notes and Diary Management On top of the Development Finance specific functionality, Aurius-DF clients benefit from access to all the underlying Aurius platform capabilities: • Open API access through the Aurius connectivity suite • Configurable, embedded workflow and document management • Tried and tested accounting, payments and transaction handling Delivered using a cloud-based Software as a Service model, unlike traditional software delivery models, lenders have a low cost of entry and pay based on the amount of business handled by the solution.

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Backstory

‘It’s very difficult to provide advice when the industry is so volatile’ Sirius Property Finance’s new senior associate discusses the advantages of a lending background in brokering, the difficulties of managing current market instability, and why she wants to ban the phrase ‘whole of market’ Kelly joined the real estate debt adviser in April, having spent the previous three years at fellow brokerage Vibe Specialist Finance. She has worked in the sector—on both the lending and brokering sides—for over 15 years and has held roles at major names such as Santander and OneSavings Bank. In her new role, Kelly will be helping Sirius structure the best solutions for a new group of clients.

Why did you decide to join Sirius?

I was specifically on the hunt for a London-based firm and wanted to work for the best business in the city. Given the experience and longevity the Sirius and Brightstar team have, it was clear that they were the front runners. Sirius is such a wellestablished company that I was initially worried I might feel I was just a number working for them.

Instead, it feels like I’ve joined the biggest family of successful brokers. Everyone is valued on their own merits, which has been so warming and reassuring.

What one thing does the industry not know about the brokerage?

They are extremely family-oriented and look after their own. At other jobs, I tended to just get my head down and work through lunch. But here, everyone stops working around 1pm to sit down to eat together.

We usually have a different cuisine each day, then go back to our desks to carry on getting the deals done!

You describe yourself as a problemsolver—why is this skill more important now than ever?

If you’re looking for a mortgage and it’s relatively straightforward, then many people can do at least some of the research themselves through their own bank or online.When the property is a bit out of the ordinary, or circumstances are unusual from a complex income or residency point of view, then it’s nigh on impossible to find a solution this way.You need to rely on someone who lives and breathes this every day to ensure they are finding the most suitable and competitive option for you. Our clients’ day job is to develop or invest in properties… Mine is sourcing the finance.

How do you use your previous experience of working at a lender to the best of your advantage?

That experience is key. From working at a lender, I’ve witnessed hundreds of deals through credit and come to learn what a good one looks like from a lender’s point of view.What elements are risky?

What gives them the most return on interest? This

has really helped me identify the best projects that meet these requirements. A lot of decisions are still made by a human, and these are down to individual judgement.They can be challenged, though—as long as you are armed with the right tools. I don’t think I would be as confident as I am today to push back on certain verdicts without the lender knowledge I’ve gained along the way. I’ve also built some very strong relationships across the industry, which I can call on if I really need to.

What do you foresee as the biggest challenge your clients face this year?

The market uncertainty has been difficult to manage; it’s very hard to provide advice when the industry is so volatile. My clients are faced with rising base rates and the unknowns of what they’re likely to be at the end of their development in a year’s time, or what reversion rates will be on offer at the end of their five-year fixed term.They are keen to keep these as low as possible, which is tough to manage at the moment.

If you could change one thing about the specialist finance industry, what would it be?

Not allowing anyone to use the term ‘whole of market’. Nobody is whole of market! The sourcing systems only look at mainstream lenders and don’t include all challenger banks or private offices.

Unless you’re networking the entire market on a regular basis, then you won’t be aware of which lenders are launching new products and criteria.

The more ears you have to the ground, the better.

Were you surprised by any of the figures in the latest EY ‘UK Bridging Finance Market Study’?

I was surprised to see that 34% of lenders are not intending to use AVMs. The survey talks a lot about the positive impact Covid-19 has had on the marketplace, and I would’ve thought this would be a hot topic to speed up application turnaround times and save costs, especially on lower LTV and less risky BTL transactions.

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How did you spend your very first pay cheque?

When I was 16, I got my first summer job in an office before I started my A levels. My first pay cheque was £600 for a month’s full-time work—and I think I bought a tub of Ben & Jerry’s Phish Food ice cream, lent £20 to my best friend, and then became anxious and saved the rest.

Your dream job—if you weren’t doing this, what would you do?

I’d be a journalist, as I really enjoy writing. I don’t do it enough; I never have the time. But I would love to be somewhere remote with no clock, a book of blank white pages, and a really good fountain pen—and just write away until I get cramp!

Office, WFH, or hybrid?

Hybrid for sure. I’m too sociable to be locked up in my house five days a week.

Do you have any hidden talents?

I can name all 50 US states within three minutes—but I haven’t done that in about a decade, so please don’t test me...