Bridging & Commercial Magazine — The ESG Issue

ISSUE 23 SEPT/OCT 2022

WHY THE GREEN FINANCE MARKET NEEDS TO BE COMMERCIALISED

+ Aspen launches semi-commercial bridge-to-let while unveiling new rate card

p24

BRIDGING FINANCE

THE SPECIALIST EFFECT P U R C H A S E | C A P I TA L R A I S E | C O N V E R S I O N & R E F U R B I S H M E N T | D E V E L O P E R E X I T

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U T B A N K . C O. U K

Acknowledgments Editor-in-chief Beth Fisher Creative direction Beth Fisher Sub editor Christy Lawrance Senior reporter Andreea Dulgheru Reporter Kit Million Ross Contributors Darren Woon Felicity Hall Jon Yarker Tom Higgins Photography Alexander Chai Kit Million Ross Sales and marketing Beth Fisher beth@medianett.co.uk Special thanks Reece Lake, Atelier Matt Hayes, MAF Finance Group Sari Thomas, Arc & Co Sagheer Malik, Offa Andy Homer, Gatehouse Bank Melissa Economou, Gatehouse Bank Arran Angus, Prickly Pear Communications 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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To read about our commitment to the environment and sustainable print publishing, please visit https://bridgingandcommercial.co.uk/page_magazine.

O

n 8th September, the UK lost a symbol of strength, leadership and grace. Bridging & Commercial’s deepest condolences go to the Royal Family and the countless people who loved Her Majesty The Queen Elizabeth II. “It is a source of great pride to me that the leading role my husband played in encouraging people to protect our fragile planet lives on through the work of our eldest son Charles and his eldest son William. I could not be more proud of them,” the Queen said at COP26, after Prince Philip’s death. This ESG Issue is dedicated to her.

It’s been one year since The Sustainability Issue of Bridging & Commercial and, while there has been progress in the lending sector (and I am purposely grouping the wider mortgage market with this, as it’s not just down to our industry), we are still far behind where we need to be to make significant change—and in time. This is why members of the newly formed ESG Forum, made up of specialist lending pioneers in sustainable finance, have been getting together regularly to solve the multiple conundrums of bringing ecofriendly housebuilding into the mainstream. I was invited to chair the latest discussion [p52] on how to commercialise the green finance space in a bid to accelerate its adoption, accessibility, and profitability for developers.

Elsewhere, we look at whether the mammoth task of retrofitting the UK’s old and draughty housing stock is indeed feasible by the government’s nearing deadlines [p36]. Considering that price rises are predicted to continue into 2023, the undertaking is clearly in jeopardy. With more homes set to be built in areas prone to flooding, we also ask if the insurance industry is ready and able to cope [p96].

As climate change brings about more devastating weather—as seen recently in Pakistan—insurers around the world need to act now.

We’ve not neglected the ‘G’ in ESG, either: you can read Global Counsel’s Felicity Hall’s column on good governance [p30]. In particular, why board composition and pay and the risks surrounding lobbying and responsible political engagement have seen significant attention over the past 12 months.

We also take a look at formal and fun activities that firms are doing to improve their social stance—in the hope this inspires you to do the same [p68].

In addition, we interview a number of Islamic finance providers about the ways in which ESG is built into their propositions [p75]; talk to Arc & Co’s Georgie Crocker on how funds are under the most scrutiny to provide transparency over their sustainability investment criteria [p88]; and, following two high-profile broker acquisitions, we ask Begbies Traynor Group about its plans for the future and how the new division will be able to arrange finance for a wide variety of renewable technologies and offer advice on sustainability solutions for all businesses [p18].

Despite the majority of the conversation currently centred on the sweeping changes around the cost of living crisis, base rate rises and, most recently, scores of lenders pulling or repricing products due to market volatility, the importance of ESG has never been greater. We hope you find it helpful to read about what other companies are doing to improve their efforts in this regard and that it helps shape or enhance your own. As the Queen famously said: “It’s worth remembering that it is often the small steps, not the giant leaps, that bring about the most lasting change.”

Beth Fisher Editor-in-chief

3 Sept/Oct 2022

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12 18 24 30 36 44 52 68 80 88 96 102 108

The Cut News Exclusive Column Zeitgeist Explained Cover Story Feature One Day Interview View B&C Awards 2022 Backstory Does the system need a revamp?

Why BTG bought two brokerages

Lending a hand in a volatile market

The pressure points for boards

Why upgrading old housing stock could be unfeasible

Equitable charges may gain popularity

Enter the ESG Forum

Improving your social stance / Ethical finance

Not at Edinburgh Festival Fringe

Georgie Crocker

The UK faces the most costly natural hazard

Neil Molyneux

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12 Bridging & Commercial

The Cut

Are EPCs still fit for purpose?

Plans to reform energy efficiency ratings in Scotland are sparking questions over the existing EPC system. Industry experts weigh in on the use and transparency of its data, and whether it reflects current issues, technology and markets—or needs a revamp. While it may still be the best tool out there, is it now an outdated green herring?

13 Sept/Oct 2022

The Cut

Chris Gardner Joint CEO at Atelier

Nora Rebole

Head of portfolio management of residential development at Octopus Real Estate Given the global climate challenges we face, continual development and improvement of the ways in which we measure efficiency and carbon emissions are critical.

EPC scores are a very useful tool for both property professionals and the general public, allowing people to easily identify the relative performance of a property.

However, they are based on an estimate of what it costs to heat a home, rather than the carbon emissions generated.

The underlying science behind EPC ratings hasn’t changed since the methodology was last updated in 2012, but the technology has evolved rapidly, and energy efficiency is as hot a topic as ever. Therefore, it is important to keep the software that calculates EPCs as up to date as possible, factoring in the latest technologies being used within the construction industry—whether for new-build developments or retrofitting homes and commercial buildings. Also, look closely at the carbon emissions on buildings, not just energy efficiency—the ultimate goal is to address both.

Robert Stevens

Head of property risk at Nationwide Building Society The EPC process was created many years ago, and the issue is it is now being used as a solution for something that it wasn’t designed for.

However, it is still the best tool and widely used in the market to understand the housing stock in the UK. When it comes to improving the EPC rating system, there are two main areas that need to be considered. First, it should be based around the reduction of carbon emissions. Second, the cost of improvements and energy need updating, so that the recommendations are more relevant to consumers and they understand the impact of improving a property in relation to emissions and prices. A review of the SAP methodology and costings needs to happen and be implemented as soon as possible to avoid homeowners and landlords making changes to properties now that won’t have the desired longer-term results.

Where EPCs really fall down is their inability to show the true carbon impact of a property, as they take no account of the embodied carbon. A newly built, well-insulated home could quite feasibly be awarded an EPC A rating because of its energy efficiency—but this’d be entirely misleading if the property was packed with embodied carbon. The climate impact of the construction process would be totally overlooked, making the EPC little more than a green herring.

That’s why I feel EPCs are no longer fit for purpose; they are meaningless as a rating of a property’s green credentials, and a would-be buyer or tenant who wants to choose a home with a lower carbon footprint can learn nothing from them.

Moreover, EPCs do nothing to encourage property developers, builders or their supply chain to build more sustainably.

If the government is serious about helping the construction industry get to net zero, the EPC system needs to be reformed.You can only manage what you can measure, and we need a more robust benchmark that takes into account both operational and embodied carbon.

14 Bridging & Commercial

Renzo Vigliotti

Associate (asset management) at Avamore Capital The EPC system is not necessarily outdated, but it can drive short-term thinking.

With the introduction of more data points and consideration of additional factors, a more precise scoring can be provided.

We need greater precision and an openness to work in conjunction with more modernised scoring systems.

For example, the Building Research Establishment Environment Assessment Method (BREEAM) certification exists to assess the long-term sustainability of a project, apply a rating and make recommendations on how it can be improved.

The system sets the standard for best practice in sustainable design and is more forwardthinking in considering how the property is designed to mitigate environmental impact, rather than simply looking at what that impact is likely to be. Likewise, in the near future, we could see steps taken to combine sustainability and efficiency ratings to provide a more wellrounded ecological score for new builds or refurbishments.

The Cut

Rob Cartwright

Director of energy services and solutions at CoreLogic, and director at Property Energy Professionals’ Association (PEPA) EPCs are often criticised as inaccurate when a comparison is made to actual running costs, but this is due to two main factors: occupancy is not taken into account; and the methodology— and therefore assumed fuel prices—is out of date.

Given the dynamic nature of energy costs, which we’re likely to see continue, the procedure needs a mechanism to adapt more frequently. The same is true of emissions factors for electricity, which are not as dynamic as prices, but have changed significantly since the last revision 10 years ago, and are becoming more important as we focus on the transition to electrification of heat in line with government strategy.

Enabling more regular changes to both the methodology and underlying fuel costs and carbon industry will allow the EPC to adapt better to market changes. In relation to accuracy, consideration should be also given to quoting a percentage saving in fuel bills rather than absolute values for predicted savings.

Finally, the EPC is a static document, with a set of recommended improvements and associated savings that assume all preceding recommendations have been implemented, so it doesn’t allow for a pick ‘n’ mix approach when considering a package. The government should allow the sharing of the underlying data for an EPC, so property owners can use thirdparty services to better model a package of improvements for them, as well as potentially enabling such modelling through the EPC register itself.

Sam Rees

Senior public affairs officer at RICS

Tiba Raja

Executive director at MFS The system, if not outdated, is certainly flawed. It is very reliant on who assesses the property, and the algorithms used to decide the final score produce inconsistent and, at times, incongruous results.

The issue is that the rating is based on the cost of energy used, not on the actual carbon emitted, so the current system can punish developers, landlords or homeowners for installing heat pumps, as they use more electricity and liquefied petroleum gas, which are costlier.

The debate is whether the EPC rating system ought to be improved or replaced. I think the latter is unlikely—with all the EPC regulation coming into play, scrapping the system would cause huge upheaval, so it’ll be a question of working within the system we have.

Energy consumption and efficiency are critical, but so are the methods used for heating or powering the home.

This is where more up-todate calculations are needed so the scoring system truly reflects the energy sector and climate change landscape.

The SAP EPC methodology is in need of significant reform— especially as governments are increasingly using EPC ratings as a target for policy and regulatory development, far exceeding their original intention. The EPC calculations result in three performance metrics—estimated cost, energy use and carbon emissions of the building itself.

In housing, the overall EPC rating is based on cost alone, not the latter two metrics—and it is the least reliable of the three, since real-life energy bills are highly dependent on energy price fluctuations, which are not considered by EPCs. A greater emphasis needs to be put on the data that is already recorded—especially the CO2 emissions and energy usage parts of the EPC. These two metrics should be more visible to consumers and their relative ratings should be based on absolute figures, rather than abstract numerical scales. Consumers should also be able to manipulate the EPC data to tailor it to their own personal circumstances and, in doing so, create a more realistic dataset for that property and its occupier.

This is why RICS is calling for significant investment in the digitisation of EPCs and the way consumers can benefit from its data. To achieve this, the information underlying the EPC calculations must be made publicly available.

15

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Reaching for £1bn WORDS BY BETH FISHER

Following two high-profile broker acquisitions, Begbies Traynor Group’s new funding solutions division is on track to arrange a staggering £1bn of loans

News

B

egbies Traynor Group (BTG) was founded in 1989 and started off as an insolvency practice, which subsequently diversified into corporate finance and property consultancy, and now supports this with a nationwide network of over 100 offices. The 33-year-old business forms part of Begbies Traynor Group PLC, an AIMlisted professional services consultancy providing solutions for businesses, financial institutions and professional advisers in corporate recovery, restructuring and turnaround, corporate finance, real estate consultancy and forensic accounting.

In a move to grow further and bolt on more complementary services to its clients, BTG acquired its first brokerage, nationwide firm MAF Finance Group, in May 2021. As part of the purchase, MAF—previously known as Midlands Asset Finance—became part of the group bringing comprehensive industry expertise spanning construction, engineering, manufacturing, healthcare, agriculture and renewables, fleet management, vehicle leasing, supplier finance and property.

MAF—which arranges facilities for new asset purchases, including equipment, vehicles and property, as well as refinances and restructuring existing loans—has a team of finance experts with managers in the East and West Midlands, Lincolnshire, North East, North West, and London and the South East.

Two months later, BTG bought London-based brokerage Mantra Group. The business consists of a commercial finance (real estate and trading businesses), regulated mortgage and BTL, and insurance brokerage, all in-house with a national presence.

The plan is for Mantra and MAF Finance Group— which currently have around 80 staff between them and are expected to organically grow in headcount and number of customers—to retain their brands while sitting within the newly formed division, BTG Funding Solutions. Now they are part of the same group, both can offer or introduce business across a wide range of sectors, including real estate (such as residential and commercial mortgages, BTL, bridging and development finance), construction, engineering and manufacturing, haulage, healthcare, agriculture, renewables, and vehicles.

The two brands will work together on their cross-sales strategy to offer extra services to existing and new clients.

When asked why MAF decided to be purchased, its managing director Dave Chapman explains they were looking at the next stage of growth and how they can now catapult to a much higher level. “BTG was a good fit for MAF as it leaves you to get on and run your business while offering support in areas, such as marketing, if required. It also provides a national network of offices and accountancy connections which was attractive,” he states.

From BTG’s viewpoint, the two brokerages can help balance cyclical and non-cyclical income streams and further strengthen the group’s relationships.

“The joining up of MAF and Mantra means we’ve got a combined powerhouse of lenders we deal

with. So, the accumulation of our lending looking forward will be pushing about £1bn,” says Dave.

“We’ll be doing more business across the group and helping more clients,” he adds, pointing to BTG’s “massive accounting connections across the UK” where the group has secured a lot of its business over the past three decades.

Nimesh Sanghrajka, managing director at Mantra, comments that, being based in London, and with most of its business South-centric, the BTG affiliation automatically gives the brand a wider national presence. “There are various complementary businesses within the BTG stable, namely corporate finance, advisory and valuation. The potential to retain, scale and grow the Mantra brand under the BTG banner was too attractive to turn away.”

“To complement the purchase of MAF was also very appealing,” he continues. “MAF has a well-established asset finance and renewables business which we can plug into our existing clients. Furthermore, we can offer their borrowers regulated mortgages and insurance services so we can operate in a wider market.”

In terms of the division’s focus on ESG, MAF’s renewables asset finance expertise can be utilised to work with a whole variety of businesses to help them reduce their energy costs, something Dave has seen greater demand for over the past year. “Everyone is now starting to get on board with renewable strategies, with energy costs going through the roof.” For example, MAF is providing clients with renewable energy audits to look at current practices to see how they could be improved. It can also find finance for equipment, such as solar panels, solar battery storage, electric vehicle charging, wind turbines, ground source heat pumps, air source heat pumps, biomass boilers, combined heat and power, smart meters, and voltage optimisers.

When asked about the importance of specialist finance advice during a volatile and constantly changing market, Dave replies that both MAF and Mantra are “trusted advisers” and can offer wholeof-market solutions across a diversified product range, with access to a wide panel of lenders.

“We have strong relationships with funders and can help clients get their transactions completed, whether they are more vanilla or slightly up the risk curve due to market conditions. We are specialists in what we do with many years’ experience.”

BTG Funding Solutions—described as a “vehicle for future growth” and which sits alongside BTG insolvency, BTG advisory, and Eddisons—also has its eye on future purchases that make business sense and offer a natural synergy between the two brands. “If we do bring in some other acquisitions in the finance brokerage space, and they don’t fit within neither MAF or Mantra’s brands, then we can put those under BTG Funding Solutions,” comments Andrew Dunn, group marketing and business development partner at BTG. In the meantime, the focus will be on a smooth integration of MAF and Mantra within BTG Funding Solutions and implementing a clearly defined crosssales strategy in a bid to promote additional services and help more SMEs achieve their goals and grow.

19 Sept/Oct 2022

News

property development development exit loans bridging loans commercial mortgages residential investment commercial buy to lets hmo/multi unit blocks refurbishment loans pension fund loans holiday lets expat loans commercial insurance residential mortgages

News

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We are a credit broker and not a lender. We are remunerated by way of an introductory payment payable by the funder. The nature of this payment and the effect on the interest rate you might pay will vary from funder to funder and is dependent upon a number of factors including (but not exclusive to) asset type, product chosen and customer circumstances.

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Exclusive

Aspen launches semi-commercial bridge-to-let while unveiling new rate card

Amid the tumult of recent times, Aspen Bridging’s equity funding position supports growth plans as the lender launches a new rate card and expands its bridge-to-let range with a new semi-commercial offering Words by

andreea dulgheru

Exclusive

A

t the start of this year, Aspen was determined to grow its book by 50% over the year and to build on its reputation as a funding partner of choice in the bridging market. In February, it unveiled its new bridge-to-let offering, designed to offer wider flexibility and lower ERCs to fill market gaps and continue the firm’s growth.

It seems to be a success so far — the lender has surpassed its target of growing its overall loan book by 50% within the first seven months of this year, partly due to having grown its average bridging loan size to £1m, but also because one-quarter of all deals done in 2022 so far were completed using the bridge-to-let proposition.

As the Bank of England and the government appear at loggerheads, and as base rates are rising and set to climb further, I ask Aspen’s director Jack Coombs how this affects the lender’s outlook and what its plans are for the next 18 months.

“We have recently had positive meetings at executive and board level and are delighted to say the group plans to maintain the current exciting growth trajectory over the next 18 months,” said Jack.

“We recognise that the UK has an undersupply of housing, high levels of homeowner equity, and most borrowers are on fixed rates. In addition, there are always good developers and investors with strong projects who ought to be supported.

“Being in the fortunate position of being equity funded, we at Aspen are determined to offer our support during this time, just as we previously did during Covid both through our conventional and our CBILS offerings.”

Aspen’s new rate card The business has overhauled its rates and products for October to ensure it can offer practical and flexible solutions to introducers and borrowers—especially in light of the change in offerings and appetite across the marketplace.

Several core areas have defined Aspen’s lending this year, including refurbishment

and development exits (including structural projects with several million pounds of works cost), no valuation (supporting rapid requirement of funds), and foreign national purchases. It is the firm’s intention to continue focusing on these specific products to meet rising demand due to where the market is heading.

For refurbishment and development exits, where Aspen has written 40% of its loans this year, the lender expects to see developers opting to take bridging and bridge-to-let loans to help purchase, fund works and provide sales exits periods, as smaller competitive development facilities are harder to come by.

In this core sector, Aspen is now offering 75% LTV at 0.79% per month, as well as providing 100% of works funding in arrears. In addition, the lender will increase the LTV to 80% to save a good quality deal.

Meanwhile, its no-valuation product, which is offered at 0.79% at 70% LTV, has contributed to 25% of all deals completed since the beginning of 2022—which, according to Jack, are generally completed in less than 10 working days. “[The no-valuation product] is working incredibly well for us, and it’s quite an important point in a market where the average bridging completion times are getting slower and as some term lenders are pulling offers within days of completion,” says Jack.

Foreign nationals have made up 20% of Aspen’s client base over the last 12 months, in particular those from Asia and Africa. The lender expects this will continue, particularly as the weaker pound and the strong fundamentals of London property make for an attractive proposition to international investors, while term offerings in the space are currently being redefined. Aspen has made a point of charging these borrowers the same as UK nationals.

Across all of the above areas, Aspen is also offering its stepped rate product, which has comprised almost half of the bridging loans written this year, with rates of 0.49% for the first six months.

There is also no lack of appetite for larger deals—indeed a full 60% of the live book is made up of deals over £1m.

26

Bridging & Commercial

Aspen introduces semi-commercial bridge-to-let According to Jack, the bridge-to-let range launched in February was a “big door opener” for the lender, as it boosted the number of active introducers the firm works with. “The bridge-to-let product spikes brokers’ interest, and then they find out that we have a suite of excellent bridging products. Thanks to this, we’ve seen our introducer base grow significantly throughout this year,” he expands.

Aspen’s bridge-to-let terms run for either 18 months or two years and are split equally between the retained bridge initial period and the serviced BTL. However, depending on their needs, the borrower can move onto the BTL loan up to three months earlier or later, or exit at any point with limited ERC’s typically of only 1% and falling to 0% in the final month.

This two-year offering is even more relevant now due to rising BTL rates, and, given the greater need for flexibility with regard to whether to sell or refinance, is particularly helpful.

The residential product range, which has been relaunched with pay-rates of 5.49% at LTVs of up to 75%, has been used to support heavy works projects across England and Wales, including a £5.2m project in Bath.

Now, the finance provider is taking a step further by bolstering its offering with a range designed specifically for semicommercial properties. The solution— which was launched in September—offers loans between £200,000 and £2m up to 70% LTV. The product will cover properties where class E commercial makes up to 50% of the floor plan by area and will also permit heavy works to take place during the bridging finance element.

Jack states this product is designed “to both contribute to the revitalisation of the high street and meet the demand expressed by brokers and borrowers for a flexible product in this space”.

Rates for the semi-commercial bridgeto-let loan start from 0.79% per month for the bridging portion and 5.99% for the remaining BTL finance.

The product, like all of Aspen’s range, is available to individual borrowers, as well as limited companies and foreign nationals

Exclusive

“Being in the fortunate position of being equity funded, we at Aspen are determined to offer our support during this time” with a good credit score. While some explicable credit issues are acceptable, depending on the case, the company primarily targets experienced borrowers.

From trees to EPCs I was also curious to learn how the specialist lender’s ESG strategy is reflected in its ambitions. As part of its goal to reduce its carbon emissions, Aspen has pledged to plant a new tree for every case completed, working with the Lincolnshire Wildlife Trust. The initiative aims to reduce the firm’s overall scope 1 and 2 emissions to below net zero this year, and is expected to result in the removal of over 200 tons of CO2 by 2025.

“Our Aspen Green Commitment pledge is part of a strategy to raise awareness of our green credentials and aspirations in that market. We are also always open to fund more green projects, and we expect the new semi-commercial bridge-to-let

product will contribute, alongside our existing heavy refurbishment offering, towards improving EPCs on properties we lend against up and down the breadth of the UK,” says Jack. He adds that the lender is considering introducing green incentives and discounts for energy efficiency improvement works as it continues to adapt its offering based on market conditions and demand.

Growth and graduates The business also has big plans for its team.

Having recruited six employees across its underwriting, credit, and risk divisions so far this year, the lender plans to hire more staff to ensure it can continue to meet its time-based service excellence targets—with loans being completed this year in as little as five days and with over half of the deals being completed within 20 working days of submission.

A key part of the recruitment drive is

Jack Coombs, director at Aspen Bridging

its graduate scheme, which Jack notes has contributed significantly to Aspen’s success. “Over 30% of the staff that we’ve got in our team are graduate hires, and some of our best underwriters and credit analysts have come from [this] scheme.

I wouldn’t change this approach for the world, and we look forward to welcoming the new intake in 2023,” he adds.

And, with a bigger team comes the need for a larger office; in October, Aspen signed a 10-year lease on new premises which adds 40% to Aspen’s previous floor space to accommodate the expanding company.

As we talk about the lender’s plans for the near future, Jack’s pride in how much the business has achieved to date is clear. “We are really excited about the development of Aspen over the past few years. The aim when we launched the company was twofold: first, to offer a quality service, useful products and competitive terms to our customers and, second, to provide S&U PLC—our listed parent—with meaningful diversification of the loan book and earnings.

“We are pleased, particularly given the support of the broker community and winning this year’s Bridging & Commercial award for Product of the Year for our bridge-to-let offering, to be meeting our first goal of providing a quality service and competitive products.

“This year, we are also firmly en-route to achieving our second aim of diversifying our loan book, and expect to be able to do so truly within the next two years. We will continue to offer clients and brokers alike a certain and trusted lending partner.”

27 Sept/Oct 2022

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Column

ompanies and financial institutions have long been aware of the financial and reputational importance of good governance. Most are likely to have attended to this many years before they began considering the significance of environmental or social issues.

The overarching concept of ESG is now, to some degree at least, in the mainstream across all sectors of the UK economy.Yet, amid this clear shift, E, S and G of ESG have not always been given equal weight.

With the warnings around the scale and likely effects of climate change becoming more bleak every year, it is regarding the environmental aspects of ESG where businesses, including in specialist finance markets, have tended to find themselves coming under the most pressure. This has led many to focus the development of their ESG strategy around issues such as greenhouse gas emissions and resource use.

When it comes to the S of ESG, a step change in focus on the issues was predicted in the wake of the Covid-19 pandemic.

As we enter the perfect storm of an energy and cost of living crisis, this is a narrative that continues to build momentum and gain prominence in business decision-making.

The governance aspect of ESG, on the other hand, has often felt somewhat removed. As a concept, it tends to receive much less media attention than social and certainly environmental issues.

But, while governance does not have quite the same excitement surrounding it, it is certainly no less important.

Included within the governance bracket are a wide variety of matters, ranging from the overarching management of ESG risks to the composition and structure of executive boards through to accounting and audit, as well as bribery and corruption.

As with all ESG issues, some governance topics are more material to certain businesses than others. Two areas where there has been a significant level of attention over the past year—and which are highly relevant for the specialist finance sector—include board composition and the management of risks surrounding lobbying.

Under board composition, stakeholders and regulators alike are increasingly fixated not just on the composition of boards but also on the extent to which they further progress on subjects such as diversity and inclusion (D&I).

In the UK, the FCA has been extremely active in supporting D&I progress among regulated firms, publishing new transparency rules in April this year and consistently noting D&I as an area of focus within its strategy documents.

Board pay: money and motivation In addition to how a board is composed, we have seen a substantial shift in pressure on how executives are paid.

In general, two metrics guide this debate: the first is the magnitude of remuneration; and the second the incentives.

On the latter, there has been a rapid increase in linking executive remuneration to ESG performance, in particular among some of the largest UK businesses and financial institutions.

For most companies, ESG measures in executive incentive plans have tended to focus on easily quantifiable issues such as the number of health and safety incidents, rather than driving executives towards improving their performance against harder-to-measure ones such as greenhouse gas emissions.

Over time, however, we can expect more businesses to consider and include a wider range of ESG matters in incentive plans.

A final pressure point for boards is around the overall management of ESG risks. There has been a particular

emphasis on this from global companies over the past year as the EU has proposed a corporate sustainability due diligence directive, a piece of legislation designed in part to make business leaders more accountable over ESG issues. Similar legislation is being called for in the UK by investors.

In the meantime, businesses’ ESG reports are starting to include clearer information on accountability within companies, with an increasing number of sustainability specialists being appointed at board level.

Many of these trends are earning significant traction in the mainstream of the UK economy. But, as with the concept of ESG as a whole, one can with reasonable comfort assume that expectations for the specialist finance market will need to align quickly.

It is not just how boards are structured, however, that is gaining attention regarding governance, but also how businesses push to influence governments and policymaking.

Lobbying and conflict Business ethics relating to traditional financial risks, such as market manipulation or money laundering, have long been a concentration point of regulators and wider stakeholders. Now, we are increasingly seeing more interest in the lobbying positions companies and

THE CRITICAL CONCEPT THAT LACKS ATTENTION Words by

felicity hall

Associate director of climate and sustainability at Global Counsel

Governance—the G in ESG—concerns the very oversight and reputation of a company but receives little publicity, despite a sharp evolution in the issues it covers financial market participants are taking on ESG issues.

These have been grouped broadly under the topic of responsible political engagement, where much of the motivation has been on the lobbying activities of industry in relation to the achievement of national and international climate goals.

To help with this, in March this year, the Global Standard on Responsible Corporate Climate Lobbying was launched.

It aims to commit firms and investors to ethical practice in this area, including disclosing any support given to trade groups who may campaign on their behalf, and ensuring companies take action if lobbying is in conflict with the achievement of the Paris Agreement goals.

Governance might feel like the familiar old hand of ESG, but the dynamics within the issues it covers are changing quickly.

For those operating in the specialist finance sector, staying abreast of these offers opportunities. After all, good governance not only includes robust risk management, but is also a way of improving social and environmental performance by ensuring that ESG is fully woven into the fabric of the business.

30 Bridging & Commercial

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Advertorial

Encouraging energy efficiency: the new refurb BTL Precise Mortgages introduced a new range of refurbishment BTL mortgages this summer, including two options charged at preferential interest rates to reward clients carrying out energy-efficient upgrades.

Colin Barrett, group mortgage proposition director, walks us through the products and explains why the lender has chosen to go down this route

How does your new refurbishment BTL proposition work?

The offering is very simple, providing brokers a range of financing options for landlord clients looking to refurbish property, along with lower interest rates as an incentive for improving their energy efficiency. These loans offer the flexibility of bridging finance with the certainty of an exit onto a long-term BTL mortgage once the improvement work has been done, provided that the property meets the expected valuation following refurbishment. The BTL mortgage can be taken out at up to 80% LTV based on the post-work valuation of the property.

Landlords can usually choose whether to pay the interest on the bridging finance during the refurbishment work or keep their costs down by adding it to the BTL mortgage once the property is lettable.

They also have the reassurance of knowing how much they will be paying on both parts of the loan from the start of the process, along with a secured exit for the project as both the bridging and BTL offers are issued simultaneously. This can obviously be a real benefit in a rising interest rate environment as it allows borrowers to lock in rates upfront.

How does the new range differ from Precise Mortgages’ earlier offerings?

We are of course not newcomers to refurbishment BTL lending. This simply builds on our established products by incorporating an environmental element.

We still offer a standard refurbishment product, which might for

example fund the installation of a new kitchen or bathroom, but we have also introduced an energyefficient refurbishment option, charged at a lower interest rate, for an upgrade that includes an element of energy efficiency— such as putting in additional insulation.

Finally, there is the EPC C+ refurbishment product, charged at the lowest rate, for the refurbishment of a property that already has an EPC rating of C or above, or is awarded such a rating after the work has been carried out.

What type of landlords can these deals be suitable for?

These products suit a wide range of BTL clients, but they hold the greatest appeal for SME landlords looking to improve their properties to optimise rental yields, rather than very large investors with huge portfolios. As a rule of thumb, we would say they have most appeal to those planning on spending anything from one to four months on the works.

What considerations did you take before launching the BTL refurbishment range?

As a group, we are committed to delivering a positive impact on the environment, accelerating the transition to a low-carbon economy and achieving operational net zero by 2030. Part of that commitment entails innovating and designing products that enable and support our customers to act in more environmentally conscious ways. The BTL refurbishment products aim to do just that but, before launch, it was 34

Bridging & Commercial

important for us to establish that an appetite for such deals existed.

About 12 months ago, we started running a series of landlord surveys, which indicated that there was indeed demand out there for mortgages that reward investors when they upgrade and improve the energy efficiency of their properties, but that engagement levels were not as high as they could be.

So, along with offering these products, we know we have a job to do in raising awareness.

What advantages do landlords have by using a refurbishment BTL mortgage rather than dipping into capital reserves or using a straightforward remortgage to fund their projects?

Every individual landlord client will make their own decision about how to fund property improvements to optimise capital value, and those decisions will of course be informed by a range of factors, including the structure of their property portfolio, their capital position, their financial forecasts and so on.

But, for landlords who are looking to borrow to finance a property refurb, this selection of products allows them to keep all of their investment costs associated with the one property. There is no minimum term on the bridging element, all of the rates are agreed upfront and there is a consistency of process, which keeps it simple and easy to manage.

Advertorial

How has take-up of these products been so far?

We have been delighted with the response to the launch of the new range—numbers have been significantly higher than forecast overall. But, to date, there has been more interest in the standard product and less in the energy efficiency and EPC C+ loans than we had anticipated. There has been roughly a 50/50 split between the standard and the other two combined, when we were expecting more landlords to opt for the energy efficiency loan—not least because it is relatively easy to qualify for but also because it’s cheaper. This tells us we have further to go on the education piece while acknowledging that energy efficiency options won’t necessarily suit every one of a broker’s landlord customers.

Why did you include the standard option? Why not simply give borrowers the choice between two products to encourage energy efficiency?

It was and remains very important to us not to exclude groups of landlords and/ or properties from our lending. The last thing we want to do is become complicit in creating a class of sub-prime properties out there. One outside risk of the current EPC framework under consideration is that more landlords may turn away from older

properties and buy just new builds, forcing first-time buyers into older, less energy-efficient properties. As standards tighten, those first-time buyers could potentially become trapped in these properties a few years down the line if lenders can’t or won’t lend on them. That is just one imagined scenario, but something as an industry we need to be mindful and realistic about.

So, as lenders, we need to encourage and facilitate borrowing that supports energyefficient improvements but not impose these products on all borrowers.

What are the benefits a lender such as Precise Mortgages can bring to brokers and their customers compared to other funders?

We are not new to this part of the market. Precise has been successfully offering refurbishment BTL loans for four years. So this latest range, with its focus on environmentally friendly property upgrades, modifies and builds on very well-established foundations. We know what we are doing from the experienced underwriter dedicated to each case to the BDM guiding the whole process.

This means brokers and their clients can be assured not just of our expertise, but

also of our consistency of service and communication, which are key to making a project run smoothly. We have great relationships with the valuers and conveyancers involved who are teed up to jump on each case immediately. The same valuer carries out the bridging and BTL elements, enhancing that reliability of service. The conveyancing fees are discounted, which is good news for the client, and we pay two procuration fees— one on each part of the deal—which is good news for the broker.

How important is the role of mortgage lenders in the fight against climate change?

I believe that any effort to steer the industry towards improving the housing stock of the UK is to be advocated for and, as borrower demand for environmentally facing products increases, we have a duty to meet that demand.

For more information, contact your local BDM: www.precisemortgages.co.uk/ ContactUs/SalesTeam

35 Sept/Oct 2022

Words by

jon yarker

Ensuring homes meet energyefficiency targets is a huge undertaking compounded by tight deadlines, major upfront costs, and a lack of finance products. With price rises predicted to continue into 2023, the task of upgrading our housing stock could be in jeopardy Retrofitting buildings is expected to play a significant role in meeting the government’s net-zero target of 2050. In its 2021 proposal paper, the Department for Business, Energy and Industrial Strategy stated this included phasing out the installation of gas boilers by 2035, making heat pumps an affordable alternative, and giving homes an energy-efficiency upgrade.

For the latter, this included additional funding of £1.75bn for the Home Upgrade Grant and Social Housing Decarbonisation Fund, with the aim to get homes up to a minimum EPC rating of C. This will be a significant endeavour. According to the government’s own data, the UK has around 30 million buildings, which account for 17% of national emissions.

Yet, the attention and noise around retrofitting has not been matched by progress. Energy-efficiency retrofits are “significantly off track” according to the 2022 report to parliament from the Climate Change Committee. For instance, in 2021, only 54,000 heat pumps were installed—which equates to 3% of all gas boiler replacements required to meet the UK’s targets. Though the Climate Change Committee noted progress had been made on the policy front, with the government providing clear support for retrofitting, its report found “key policy gaps remain”.

Mammoth task, tight timing The sheer scale of retrofitting the UK is the main problem for the industry. The BEIS insists in its net-zero strategy that “buildings will need to be almost completely decarbonised” by 2050. For context, the BEIS estimates 86% of homes in the UK use natural gas boilers and, according to the most recent data in 2019, 60% of English homes had EPC ratings of D or lower. Also, due to their age, British homes lose heat up

Can the UK be

RETROFITTED?

Zeitgeist

“THE MAINSTREAM LENDERS HAVE LITTLE TO NO INTEREST IN THE RETROFITTING MARKET AS THE LOAN SIZES TEND TO BE SMALLER, MORE FIDDLY AND VERY LABOUR INTENSIVE. THAT IS WHERE THE SPECIALIST MARKET COMES INTO ITS OWN” 38 Bridging & Commercial

Zeitgeist

to three times faster than those in Europe.

“The sheer vastness of the work required is a challenge,” says Tanya Elmaz, head of intermediary sales at Together. “Adapting our existing infrastructure to deal with building disruption during installation will certainly prove a challenge. It’s not straightforward to design plans and make adaptations that work around and for existing structures. It would be great if we could start from scratch, but that is of course not possible.”

Wates Group retrofits properties on a large scale and, from personal experience, the company’s environmental sustainability director Bekir Andrews knows getting owner-occupiers to act will be difficult. “There is a real paucity of good information out there, and this makes it difficult for individual homeowners to understand what their options are,” says Bekir, who points to issues with regard to the roll-out of energy-efficient technology that is vital to retrofitting.

“Around 600,000 heat pumps need to be installed each year by 2028 if the UK is to make the transition away from gas boilers and meet its net zero targets, yet only around 35,000 were installed in 2021. The scale of the task ahead is enormous and definitely needs to be looked at more closely.”

Time is not on retrofitters’ side. Although the government has set deadlines for retrofitting—landlords must ensure properties are at least EPC C-rated for new and existing tenancies by 2025 and 2028, respectively—these are not set in stone.

“The government has remained tightlipped on whether these dates will change,” remarks Paul Brett, managing director of intermediaries at Landbay. “With the first proposed deadline less than three years away and more than half of stock D-rated or worse, prospects for achieving these well-intentioned goals are slim.”

Lack of knowledge around EPC ratings and how they are measured could also be an issue. Assetz Group CEO Stuart Law says the data used in this framework needs to be reviewed. “A key issue is that the way EPCs are measured has not kept up pace with the market. The certification needs to be updated to give results that are more accurate.”

EPC reform aside, knowledge about the ratings and their importance is lacking.

According to research from Shawbrook, 15% of landlords are unaware of the UK’s 2025 deadline, with 27% having no knowledge of what their property’s rating was. “As such, one of the major challenges

facing the PRS is a significant knowledge gap, with a substantial proportion of landlords simply not knowing if or what level of work will be needed in order for their properties to meet the minimum C rating,” says Emma Cox, managing director of real estate at Shawbrook.

Counting the costs The retrofitting outlays can be significant.

In a research paper, the BEIS found the cost of external wall insulation can range from £7,000 to £9,000 for a small semi. Continuing with a small semi as an example, floor insulation can cost up to £9,800 and replacing windows with double glazing can range from £3,900 to £10,700. And these figures were from 2017—before inflation began to surge.

As Wates’s Bekir highlights, heat pump installation is a major area of concern.

Putting them in place is a focal point of the BEIS’s strategy, but more needs to be done to accelerate their rollout.

The upfront cost of heat pumps is the main issue, according to Barny Evans, director of sustainability at planning and development consultancy Turley. “Although there is evidence that heat pumps may be cheaper to run, they’re more expensive to buy,” he says, explaining a heat pump can cost around £8,000 outright, while a boiler will typically cost around £2,000.

“You need to be financially comfortable to be able to afford the retrofit, which limits accessibility,” Barny adds. “There are also issues surrounding the supply chain,” he highlights, explaining a “huge increase” in trained installers, retailers, and ancillary providers is needed.

Though retrofitting homes can help with energy efficiency and improve finances over the long term, high upfront costs can be a barrier for many households, especially given the worsening cost of living crisis in the UK. “An obvious challenge is the cost of retrofitting and, with inflation rising the way it is, many people will not be able to afford home improvements,” says Paul.

“With energy prices rising to eye-watering levels now and in the foreseeable future, it is a good time to upgrade homes for energy efficiency in order to bring down bills. But that is easier said than done if you don’t have the finances—unless you can borrow.”

Paying for retrofitting may be a bitter pill to swallow for those with squeezed finances, but such improvements can bring financial benefits. “The cost of living crisis should encourage retrofitting as it improves the payback,” states Barny. “It is more financially economical and would

help shield homeowners from rising energy costs. Unfortunately, retrofitting is a slow-burn activity that requires sustained investment, industry standardisation, monitoring, and political support.”

Of course, homeowners are not the only ones enduring this dilemma.

Shawbrook’s research found 31% of landlords have only just enough money to cover retrofitting costs, with 14% admitting they could not afford this.

Despite this financial pressure, some landlords are still proceeding to make their assets meet the standards, says Shawbrook’s Emma: “The cost of living crisis has, however, appeared to have provided the impetus for landlords to make changes, with over half having done so in the past six months and the vast majority of them deciding to take action because of the current financial pressures.”

A growing market Many homeowners and landlords will naturally be forced to consider borrowing money for these projects. A lack of finance products designed for retrofits is an obstacle but also an opportunity for lenders to capitalise on a budding market.

Though there are government grants available, Together’s Tanya expects some landlords to exit the sector as retrofitting becomes too big an ask. This creates opportunities, however, as property investors choosing to stay in the industry will be committed to the long-term viability of their assets and will therefore want to bring them up to the required standard.

“Landlords need to look at the current EPC document and identify what they will need to do to bring their properties up to the required standard,” says Tanya.

“The key to the success of the retrofitting target lies in educating them on what is required and readily available. Lenders have an opportunity and a responsibility to showcase the support that is available in order to help the UK meet this initiative.”

There is room for assistance from private lenders, with SPF Private Clients director Amadeus Wilson describing a “gaping hole” for specialists to fill. “One is forced down the second-charge route which is more expensive and prohibitively so in terms of redemption charges,” he says.

“The mainstream lenders have little to no interest in this market as the loan sizes tend to be smaller, more fiddly, and very labour intensive. That is where the specialist market comes into its own.”

However, finance providers have been slow to provide such support for borrowers.

39 Sept/Oct 2022

Zeitgeist

“RETROFITTING IS A SLOW-BURN ACTIVITY THAT REQUIRES SUSTAINED INVESTMENT, INDUSTRY STANDARDISATION, MONITORING AND POLITICAL SUPPORT”

40 Bridging & Commercial

Optimistically, Glenhawk’s commercial director Michael Clifford points out that, if lenders fully understand the opportunity in the market, new products will soon follow. “The industry really needs to educate itself on what steps can be taken to provide meaningful assistance in improving EPCs in our housing stock,” he says. He argues this will become more relevant due to the government’s recent updates to EPC assessment methodology.

Michael adds: “Solutions for borrowers will then follow and I expect this will centre on two areas: allowing developers who are working in the area access to better rates, slicker service, and higher leverage; and giving residential investors and homeowners the ability to access the equity held within their assets in innovative and cost-effective manners.”

This could lead to a greater uptake of green mortgages. These offerings are designed to increase the appeal of energy-efficient properties, with lenders giving borrowers cashback and/or better rates based on the underlying asset’s EPC rating. Green mortgages can also be designed to reward homeowners conducting retrofitting work.

These solutions are already increasing in popularity, according to LiveMore managing director of capital markets and finance Simon Webb. As a result, it is something the lender is intending to look at as part of its product development plans.

“Green mortgages are gaining in popularity, and this is an area that we intend to look at in the future, possibly through a cashback or a reduction of our standard rate,” says Simon. “We believe green mortgages can encourage customers to address the energy efficiency improvement potential of their homes, and we want to be part of that.”

Retrofitting may be getting more attention from developers and lenders alike, but the scale of change required and the economic backdrop remain significant issues according to Glenhawk’s Michael.

“The UK has the oldest housing stock in Europe; more than half the country’s homes were built before 1965, more than one-third were built before 1945, and one-fifth were built before 1919,” he emphasises. “There are not sufficient finance options available to support the level of retrofitting requirements of the country and meet government targets.

With the expectation of recession and price rises moving into 2023, there is also a risk that this will be inadequately addressed in the coming months and years.”

nt

Energy Eff ici e

D y c n

u o c is

We’re committed to future-proofing landlords’ investments, providing long-term sustainable solutions to improve their energy efficiency.

That’s why we’ve launched our new Energy Efficiency Discount, rewarding investors with a reduced arrangement fee for properties with an Energy Performance Certificate (EPC) rating of ‘C’ or above.

Banking for the real world.

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High-speed loans but at a high price

Words by

darren woon

Equitable charges can be expensive, but the fact they can be completed quickly makes them an attractive or at least practical option in today’s economy

Explained

E

quitable charges can be a quick way of raising a loan against a property, but they can be costly due to them coming with fewer possession rights should a borrower default.

They are often made when legal charges are unobtainable, but are known to have been set up when the formalities of the legal process were not adhered to correctly. With consent from legal charge holders not being required, one might deduce that the equitable route can be a faster, easier option in some circumstances.

However, as William LloydHayward, group chief operating officer at Brightstar, quickly points out, it does come with higher risk. “Holding an equitable charge does not give the owner the power of sale,” he says, although it is possible to obtain this with a court order.

“This increased risk may be reflected in higher costs of borrowing, so brokers should consider whether the convenience is worth the potential extra cost in order to meet their client’s requirements.”

James Lennon, founding director at Tapton Capital, agrees: “From the lender’s perspective, an equitable charge provides watered-down possession rights compared to your typical second-charge loan. With an equitable charge, a lender would be unable to appoint LPA receivers to enforce in a default scenario and must instead get a possession order via the courts, which can take 6-18 months, depending on their backlog.

This is typically why LTVs offered for these products are lower and rates are higher.”

Gemma Taylor, director at Rocket Bridging, notes that interest rates for this product are typically between 1.5-2% per month.

“In the worst case scenario,” James continues, “the lender must ensure they can redeem

their loan in full, with the associated interest and legal costs, over a much longer timespan compared to enforcing a second legal charge.”

Paying for speed Gemma also acknowledges the uncertainty that these charges bring. However, as director of a company that prides itself on getting deals done “at rocket speed”, she sheds some light on the solutions that equitable charges provide to borrowers.

“First charges are the premium stake,” she explains. “Second charges sit behind the firstcharge debt but, to raise one, in most cases, consent is required from the first-charge holder.

“The problem lies for borrowers when the first-charge holder will not allow a second charge to sit behind them or, more often than not, the debt providers

“EQUITABLE CHARGES ARE OUR LEAST PREFERRED LOANS AND, FOR OBVIOUS REASONS, OUR MOST EXPENSIVE BRIDGING PRODUCT” take too long to provide consent for what the borrower needs.

This is particularly relevant when it comes to bridging.

Borrowers are paying for speed to complete. Waiting for a deed of postponement can sometimes take weeks, if not months.”

How it works Gemma explains a bit more about the process: “We cap our risk to a maximum of 50% LTV on residential properties—once we deduct the [first-charge] debt, that is the amount we’d

46 Bridging & Commercial

Explained

consider lending up to.”

She gives an example of a £1m BTL property about to go on the market for sale. It has a long-standing mortgage of £250,000 and a customer behind it with a clean credit history. “The borrower requires £150,000 net to put towards another investment property and is unable to wait until the sale of the BTL,” she explains, “ordinarily, a second-charge bridging loan would suffice; however the BTL mortgage provider, as a policy, does not allow second charges. A second charge would therefore breach the borrower’s mortgage contract. In such an instance, Rocket would lend the funds using an equitable charge.”

However, all cases must be reviewed holistically.

Gemma adds: “What do the assets and liabilities of the borrower look like? Their credit history? Ultimately, what’s the probability of their exit strategy [being successful]?”

Gemma highlights that, in addition to the property charge, the borrower would also provide 100% personal guarantees and debentures over their business.

But, just as one wouldn’t go on a roller coaster without restraint, James points out that it is always best to err on the side of caution when velocity and danger play their parts so well.

“It’s important to check if the primary lender’s charge contains a negative pledge,” he says. “This is a clause that prohibits the borrower from securing any further debt with third parties against the properties without the prior lender’s written consent. If the borrower decided to go ahead with an equitable charge loan against a property where the primary lender’s charge contains a negative pledge, they run the risk of being in breach of contract with the primary lender.”

More ports in a storm With all the risk that it brings, is there a future for this type of product? The answer, according to Will, lies in our economy.

“As [it] faces huge pressures over the coming months, having every type of lending available for clients could be

“THERE MAY BE DEMAND FOR MORE EQUITABLE CHARGES IF THE RESPONSE TIME OF BANKING SERVICES BECOMES MORE PROTRACTED” even more important to keep our economy moving in an upward direction,” he explains.

“Equitable charges are our least preferred loans and, for obvious reasons, our most expensive bridging product,” Gemma concludes. “In some instances, we can appreciate that it isn’t worth the borrower remortgaging, and we can understand their frustrations where they feel like they’re stuck between a rock and a hard place—a need to grow and having a healthy amount of equity to leverage against stored in their portfolio.”

Gemma strongly advises that mortgagee applicants check if their lender will allow second charges in the first instance. While the majority of banks fall into this category, not all of them do.

Will this change in the short term? “I suspect not, but there may be demand for more equitable charges if the response time of banking services becomes more protracted, especially when borrowers are wanting to capitalise on auction purchases, where they are committed to a timeframe to complete.”

47 Sept/Oct 2022

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How bridging finance can support the UK’s ESG targets: energy efficiency.

Tanya Elmaz, Together’s Head of Intermediary Sales for Commercial Finance, says: “With upcoming minimum EPC rating requirements set to meet sustainability targets, many properties could become redundant and their value could plummet. Giving landlords access to smart finance options could help your clients future-proof their portfolio.”

“New government rules surrounding EPC ratings are due to come into effect in 2025, which will require landlords to take more responsibility for the energy efficiency of their rental properties.

“Anything which improves the conditions for tenants in rental accommodation and the positive environmental impact is progress. However, the impact this could have on landlords and their existing stock of underachieving properties is proving to be of concern to many.

“A large number of these properties – many of which are older, popular characterful buildings – could become too expensive to bring in line with the new regulations, which may see them at risk of becoming redundant. This poses a number of issues.

“Firstly, it would greatly impact the value of these assets and expected return on investment for landlords. This could affect their ability to keep up repayments on their buy-tolet mortgages if their income is depleted. Secondly, having unused buildings – particularly given the current shortage of housing in the UK – would actually be environmentally, economically and socially unsustainable.

Tanya Elmaz Head of Intermediary Sales for Commercial Finance

Energy Performance Certificates: what do brokers need to know?

To help the UK achieve its carbon reduction targets and improve energy efficiency standards, the Government introduced the Energy Performance Certificate (EPC) almost 15 years ago. Whenever a property in the UK is sold or rented out, it must have a certificate showing its energy efficiency performance based on factors such as insulation, heating and how much energy it uses.

A property will get an overall rating on a scale running from A to G. A is the best, and G is the least efficient. Generally speaking, older properties have lower ratings because they lack (for instance) cavity wall insulation or double glazing unless these have been retro-fitted.

The proposed Minimum Energy Standards for rented properties will shift from an E rating to a C rating under the new rules, and making changes isn’t optional. The new regulations will be introduced for new tenancies first from 2025, followed by all tenancies from 2028.

“With 60% of the UK’s current housing stock still rated D or below, the scale of the challenge is clear. In this ESG issue of Bridging & Commercial magazine, we explore how bridging finance can help landlords meet the Government’s targets to support the sustainability and energy efficiency of the UK’s rental properties. And why, for landlords and property investors, we’re making access to finance as straightforward as possible.

If a landlord’s property is found to fall short of the required rating, they could face a fine of up to £30,000. Plus they’ll have an unlettable property on their hands, which will mean a property standing empty – and a loss of rental income for the owner.

“I’ve invited Lorenzo Satchell, our Specialist Account Manager in the South, to explain the upcoming changes, and how bridging finance could support the nation’s landlords in bringing older properties up to date.”

Lorenzo Satchell, Together’s Regional Account Manager – London and the South.

“Older properties have always been a favourite with buyto-let landlords, whether it’s two-up, two-down terraces offering the perfect first home for young professionals or larger Victorian villas prime for converting into houses in multiple occupation (HMOs).

“But where older properties may offer more room for development (and potentially a greater return on investment), new regulations around energy ratings may mean older rental properties suddenly look far less attractive to the landlord looking for a good return.

“While data shows that homes built before 1900 generally have an E rating or lower, all is not lost if your client does have older homes in their portfolio, or has their eye on a historic property. With a little time and money, older homes can be brought up to the required standard, and the improvements they make could even make their property more attractive to potential tenants.

“If they’re adding to their portfolio and don’t have sitting tenants, improvements that increase the energy efficiency of a property – like installing a new boiler and double glazing – can be lumped in with other renovation work and factored into any potential borrowing, all in one go.

Plus, if they’re considering liquidating some of their stock over the next few years, a property with a better EPC rating is likely to attract a better price and more attention from buyers who aren’t up for renovating themselves.

“We’re also seeing more first-time landlords taking an interest in older properties. Those currently renting in London, for example, might not have the deposit (or the income) available to purchase an expensive first home in the city, but can afford a property which is suitable to let further afield.

We’ve experienced cases recently where these first-time landlords decide to purchase a property they can add value to (such as an older building with a low EPC rating) and let it out for a while, providing them with a second income and the opportunity to grow their deposit for their own home in London in the future.

“While insights suggest a lot of landlords are buying new builds which already meet the energy efficiency standards instead of holding out for a doer-upper at auction, there

are challenges, in both availability and yield.

“Landlords buying off plan, or choosing an almost-new property that’s ready to move into, are competing not only with other landlords but with private homebuyers who don’t have an appetite for DIY, and will most likely pay a premium for the convenience.

And with prices continuing to rise, it’s unlikely that the yield on a new rental property will be as strong.

“Let’s not forget we’re talking about sustainability here too. Ensuring older properties are still usable and don’t become redundant means these buildings aren’t going to waste, which could potentially prevent more Greenfield land being built on.

Furthermore, it means cities with a high supply of period properties – like the host of Victorian buildings which can be found around London, Leeds and Liverpool, for example – can remain vibrant communities for future generations to enjoy.”

Tanya Elmaz continues...

“According the latest research, landlords cited the cost and accessing the right finance as some of the biggest barriers to achieving a C rating across their existing portfolio.

Many have also raised concerns over the loss of rental income whilst work is being completed.

“Whether your client is looking to do some general upgrades and include energy efficiency measures into the cost, or need to do a whole raft of improvements just to bring their property up to scratch, short term funding like a bridging loan could prove the right solution.

“Securing a bridging loan against a rental property, or another property in their portfolio could allow them to make the necessary investment (if they’ll need less than 12 months to complete the required work). After they’ve made the improvements, and potentially increased the value of the property, you could help them refinance onto a new buy-to-let mortgage.

“Our specialist underwriters and intermediary team will work closely with you or your packager to understand their circumstances and make a common-sense lending decision.

“If you’re keen to learn more about funding for EPC requirements, whether bridging or a term product, we’re here to help. Simply get in touch with your packager or speak to our sales team on 0161 9337 101.”

For professional and intermediary use only.

“Making less intrusive improvements, like adding cavity wall insulation or switching to LED lighting, could provide one solution.

It would mean your Lorenzo Satchell landlord clients don’t have to uproot existing Regional Account trustworthy tenants, Manager – whilst moving in the right London and direction towards hitting the South. the 2025 requirements.

“However, making the necessary changes to rental accommodation can still be costly – particularly as research puts the average upgrade bill at £6,000 to £10,000 per building.

WHY THE GREEN FINANCE MARKET NEEDS TO BE COMMERCIALISED Eco-friendly loans are not yet mainstream, but market forces and regulation are likely to push them there in the near future. So how do lenders and brokers stay one step ahead?

Words by

BETH FISHER Photography

Alexander chai

S

ince March this year, specialist lenders pioneering in sustainable finance have been getting together to solve the multiple conundrums of bringing eco-friendly housebuilding into the mainstream.

The ESG Forum has been recruiting finance providers that are leading the way in this sector to share ideas and generate answers to difficult questions in this emerging space.

Since its formation, it has attracted other green finance marketplace participants and, eager to widen this, recently launched the Green Finance Marketplace Charter to promote eco-friendly finance to intermediaries and borrowers, and show the options that are available.

Lenders and brokers that sign up will be making one simple commitment that, wherever possible, they quote a green alternative alongside standard loan options—something that is rarely commonplace. The number of those doing this will be a measure of success.

The founders of the forum include development lender Atelier’s co-founder and CEO Chris Gardner, head of business operations Reece Lake, marketing manager Charlotte Wright and ESG assurance manager Smithi Sharma. They were joined

by BTL lender Landbay’s MD of intermediaries Paul Brett, PEbacked development lending platform Precis Capital’s COO Daljit Sandhu and Manchester-based bridging provider MS Lending Group’s CEO and founder Michael Stratton and MD Rob Goodall. In recent weeks, a number of other high-profile lenders have also agreed to join the group, which is set to be announced soon.

The day after temperatures in the UK exceeded 40°C for the first time ever, we gathered in a chilled meeting room at 80 Charlotte Street—a £200m-plus BREEAM excellent, LEED bold and EPC B-rated building—to discuss how commercialising the green finance market could accelerate its adoption, accessibility and profitability for developers.

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Beth Fisher: Since last year’s Sustainability Issue, what progress, if any, have we seen in this space?

Chris Gardner: I guess the brutal answer is not enough. I think that the economic uncertainty, the war in Ukraine, and uncertainty over house prices have taken over the agenda.

There was some momentum, but circumstances have overtaken that.

There’s a certain irony there; we have an energy crisis and building sustainably with reductions in operational energy use and carbon are the kind of things the market needs at the moment.

BF: Michael, you brought out some ESG offerings earlier this year. What are your thoughts on the number of sustainable products in the market?

Michael Stratton: I don’t think there are enough. More lenders are getting on board but, from our perspective, it’s a massive educational piece. When we speak to a lot of the intermediaries we’re dealing with about our products, a large proportion aren’t particularly aware of ESG—for example, what different products [lenders] have got. Obviously, we’re in the bridging space. A lot of them concentrate on vanilla bridging. We need to try and educate them on not just what we do, but the wider piece within the industry itself with regard to the importance of ESG. Paul Brett: I agree with Chris’s sentiment that not enough is being done. However, just us having these conversations and forums—it had to start somewhere. I think the hurdle for the industry is to get that creative orientation. There’s not enough creative thought about how to actually drive this forward—and that’s the biggest challenge. It’s getting that boulder going, isn’t it? It needs so much momentum to get it to start rolling—and we’re only just doing this.

BF: In terms of the problems that developers are facing right now, you’ve got supply and labour issues as a result of Brexit, Covid and the war in Ukraine.

What obstacles do SME developers need to overcome in terms of building sustainably?

Daljit Sandhu: Viability. We’re already pressured due to the factors you’ve just mentioned. Adding

on another layer of cost to build sustainably just makes it unviable.

proportion of residential property is deemed outside A, B and C?

PB: That’s a really good point. If you’re a developer, you would be asking yourself, “How can I drive risk out of my development on cost, execution, and exit?” In an uncertain market, taking the safe route and sticking to what you know is a very compelling channel to go down. If you’re thinking about building sustainably and talking about new technologies and methodologies, you are taking on a certain amount of supply chain risk among other things.

DS: If it’s new build, it will definitely be A, B or C.

MS: The planning system in this country is a major barrier for small developers to get sites off the ground. Huge delays actually prevent [developers] having that green model. Awareness is a key issue, but I think the planning process across the UK is a painful one and causing huge problems across the industry.

BF: Do you think there are solutions or incentives that the government could put in place to get quicker planning approvals on sustainable developments?

Rob Goodall: The planning backlog is still there [from Covid]. But it’s simple things like the discharge of conditions taking far too long. Once you’ve got the financial application, the discharge of conditions could take a further 4-12 weeks. A lot of the time, it’s down to staffing levels. I don’t think it’s necessarily a case of making planning any easier. I believe it’s down to resources more than anything else.

CG: What we do see in planning is quite a lot of the inconsistent application of sustainability requirements that are often at odds with the development that’s being proposed. Section 106, for example, is now becoming so complex and onerous to execute, it’s almost like getting a planning approval subject to a 106 is the start of a journey—not the end. To add to Rob’s point, anything with planning is going to take weeks and weeks, and therefore the best way they could deal with that would be through more resource. Building regulations can now be outsourced.You can have third-party companies doing the monitoring on building regs—we’d quite like to see that on planning, too.

Do we have an understanding of what

CG: Definitely?

DS: The new-build industry just doesn’t have an issue with EPCs. They do have an issue with other things, like gas boilers or ventilation. But, if it’s new build, it very safely meets that standard.

CG: I’ve spoken to a couple of brokers who have said that some new builds are rated D. Reece Lake: It is possible to end up with a D on something like a permitted development scheme, but certainly not on a new build. If you’re building to the standards—unless you’ve done something odd—I would be very surprised if you [don’t] get an A, B or C. DS: There’s an issue with existing housing stock. We cannot achieve net-zero targets unless we tackle the 19 million homes that are not new build and will need some form of retrofit. So, that’s an actual issue.

The regulation has just come in; we’ve got the Future Homes Standard—the bulk of which will come in 2025—the first part of it just came out in June. So, there is some regulation… It’s just been very slow.

BF: Retrofitting existing UK housing stock is much more sustainable than building new, in terms of how much carbon it produces, but there are so many difficulties around this.You could have an old property worth £300,000 that might take north of five figures to bring it up to an EPC rating of C or above.

DS: Yes. It’s an average of £20,000 per house.

BF: Considering the amount of old housing we have, how is this going to move forward without actual funding behind it?

DS: Well, there are two things: the government must play a role, but they’ve fallen short; they’ve put in place schemes and then withdrawn them. The latest one will tackle 90,000 homes, where they’re offering grants to retrofit boilers.

It’s just not enough. What they’re trying to do, which is quite right, is stimulate

55 Sept/Oct 2022

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the private industry to innovate and think, “If every single house in the UK is going to have a heat pump boiler, that obviously makes good commercial sense, so let’s invest and innovate”. Where the government can play a role is stimulating this with grant funding. I don’t think there’s a world in which they’re going to subsidise every single house in the UK. I don’t think that’s even viable.

So private industry has to step up.

BF: Do you think the cost of living crisis will increase the demand from homebuyers?

PB: This is an enormous commercial opportunity for somebody who can get it right. For me, this is the bit that’s missing and part of the reason why we wanted to create this forum, to think about how we can actually commercialise and mobilise this. As a consumer, developer or financier, if you work in the commercial space, it’s far easier. If you look at the progress that’s been made there with sustainability, building techniques, retrofitting and all the other kinds of good stuff, it is leagues ahead of residential. Why is that? Because it doesn’t have the granularity of residential.

It doesn’t have as many issues around affordability. The problem is there isn’t one unified standard that people can aim for. What exactly does building sustainably mean? I think that’s a big challenge as well.

You’re not going to get to net zero on retrofitting any time soon. It’s going to be a process of reduction. I think a lot of people have this unrealistic notion of that target. That is the eventual goal, but there needs to be intermediate steps.

CG: I was looking at some data from January, and the average selling price of a new build was higher than existing property. So, we always know that we pay a premium for new build. How much more of a premium do you pay because it’s got a heat pump?

BF: The thing is, we’re already far behind on what we need to do. Discussing that it could take 50 years to get to that ultimate goal is quite scary.

Smithi Sharma: Consumers aren’t demanding green housing, and that’s one reason why commercial is streets ahead. Blue-chip occupiers looking for premises will need a sustainable building. There’s evidence now from Savills and other agencies showing they will put that ahead of location.

BF: Interesting.

SS: They won’t say, “I have to be in the city and it has to look like this…” If it’s a sustainable building, the location is secondary. They will also look outside the city for a particular building that ticks those ESG boxes. We don’t have that in residential—affordability is the number one issue for buyers.

SS: Not if a sustainable home costs more. While it’s emerging, the evidence for a ‘greenium’ is really only for high-end property. So, if you have a Chelsea barracks and you’re LEED platinum certified, you’re going to get that. There’s a viable end buyer.

SS: With regard to the cost of the energy saving, it would take you 30 years to make that back.

BF: Does the issue lie with valuers, too?

Are they including green and sustainable housing as part of their valuation?

SS: They don’t have a methodology.

BF: Isn’t that the starting point?

SS: Yes. As lenders, we can ask for that.

We do, in our instruction letters. But they don’t have a formal methodology.

CG: But it needs to be based on evidence.

The whole premise of a regular valuation is on comparable elements. So, until you’ve got comparable elements, you won’t get a body of evidence to value.

When we were doing the R&D on Carbonlite, we worked closely with Savills, and they identified a premium for green properties. But what they couldn’t do is give the reason why. Was it because green properties are just nicely designed and extra desirable? Or was it because they’ve got heat pumps and other features?

Charlotte Wright: The end user also doesn’t know what to do with the sustainable property when they get into it. They don’t know what they’re looking for when they are moving and if a sustainable home could be better for them.

CG: There are some interesting conversations at the moment about the energy efficiency of a property playing into mortgage affordability, which we could see come into play. For example, 56

Bridging & Commercial

the energy consumption could be taken into account in affordability.

PB: Yes. Lower heating costs means more disposable income.

DS: Green mortgages have to be part of the solution.

SS: Just like we’re financiers trying to move the needle, mortgage lenders are also change makers. They can play an important part to incentivise the end consumer and take away some of the pain of a retrofit or buying a sustainable property.

BF: What problems are end borrowers facing when trying to seek finance for green properties?

SS: There are products out there, all of the main high-street banks have them, but I don’t know how much consumers have been educated about them and would know to ask for it.

PB: I’d agree with that. I don’t think it’s changing any behaviours. Properties that have already been built, that people were going to buy anyway, end up on a green mortgage. I don’t think it’s a change of behaviour—just a circumstance.

BF: So it’s not making any real difference?

PB: There’s no additionality.

BF: Do you think there needs to be more education in the broker market in terms of how borrowers and developers could benefit from green finance?

RL: Yes. When we were designing the Carbonlite Challenge, we knew that there was a limit as to how far we could run our measurement. Because we’re the financiers of it, we can take it to a point, but when it comes to post-12 months of occupation at a property, that becomes quite difficult as a lender to get your hands on something robust to measure and reward people. Mortgage lenders could play more of a part as more propositions emerge in that space.

DS: You need buy-in from the brokers because they’re the ones who can ultimately influence the end user. That’s a relationship they can use to educate, and I don’t think that happens enough.

“If we can come up with something which is plug in and play, which is what we’re hoping to get out of this, more people will join and get involved”

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We don’t have any brokers that are solely working on sustainable deals.

RL: There’s not enough of them.

DS: No. PB: The way we do that is by offering choice. I think you can only educate so much. A broker’s role is to inform their client of what is available. The amount of product knowledge and expertise around that is going to be limited. The purpose of this forum is for the choice to be made available to the borrower and that a comparison can be made between taking a standard and a green product, and encouraging uptake in that way. As financiers, there’s very little we can do to change behaviour quickly, but I think the lender and broker community can commercialise and mobilise these products and make them part of a mainstream offering. For a lot of lenders—us included—this is a bolt-on to what we do. We’re experimenting with it at the moment. Within the industry, some kind of unified voice needs to start to promote this and move it into the mainstream so it’s part of your core offering, not just something that sits on the outside.

BF: How else do we commercialise this market?

SS: First, it’s about what’s best practice, because there is a lot of, “My project is sustainable because I’ve got X”, and then you have to define, “Here are the green loan principles from the LMA [Loan Market Association] in order for us to classify this as a green loan. There’s a process and criteria, and we have to show that we have followed that, otherwise it’s green washing”. So, although you are doing something, it has to be qualified in a certain way. In my opinion, in three years’ time, all loans are going to be green because of the Future Homes Standard—everybody would have to build to that. It’s just a transition period that we’re in now, and our job is to help borrowers get ahead of that. We also haven’t touched on operational assets.

We’ve been talking about build to sell more so than operational assets and, just to digress a little bit, that’s probably where the problem is, where housebuilders are selling on the end product and then they don’t have to care about the long-term sustainability or capex it’s going to require to bring it up to a future standard. Where

there are operational assets and it’s built to rent, those developers are far more in tune with making sure their product is future-proofed against transition risk; they care because they’re in it for the long term and are going to hold that asset.

They don’t want to have massive capex.

We only do the development finance piece but, when they refinance us, the next investment lender will be asking them questions beyond yield and occupancy.

They will be asking whether it is going to meet the Future Home Standards.

BF: Are any of you seeing an impact on profitability for developers using your green products?

CG: We’ve not exited any sites yet. We’re only at three sites at the moment so, as a general observation, these are higher socio-economic, metropolitan-style properties. They are not price-sensitive sites and are aimed at a particular market: affluent and professional suburban Londoners. It reminds me a bit of Tesla in some respects, when it first came to the market.You’ve got an £80,000 car when you could buy a petrol equivalent for £45,000. The people that are going to buy that product now are buying it because of what it is. There’s a fair way to go yet before the actual product starts to become more mainstream.

BF: This comes back to the incentivisation from government. If you talk about Tesla, if you go to Norway, for example, most of the cars on the road are Teslas because of the tax incentives there.

SS: [Despite them being] one of the biggest oil producers in the world… [laughter] BF: My point is why can’t our government abolish SDLT when you purchase a property that has a high EPC rating? Surely that would bring in momentum? Moving forward, how much responsibility do you think the specialist lending market has in all this?

Because whenever I speak to finance providers about their ESG offering— present company excluded—it’s very much, “Oh, we’re still working on this”.

PB: You’ve got to take ownership, irrespective of your size and who you are. We see that quite a lot...

“I’ll wait for the big guys to do this stuff ”. The only thing you can control 60

Bridging & Commercial

is you and your business—you can’t control others or what’s going on.

When we launched our EPC range, I think we were the second BTL lender in the market to do so. And you get the critics saying, “You’re just greenwashing” and everything else. But we’ve made a start.

We’ve done something. So, you can criticise all you like. I look forward to you bringing out something better and more creative— just don’t just sit there and comment from the sidelines while not doing anything yourself. From our perspective, we’ll get more goodwill to us as a lender by the stuff we’re doing from an ESG perspective than saying we can do a 12-bed HMO. Our experience has been interesting in terms of just sticking our head above the parapet.

MS: We can sit and wait for the mainstream lenders to grab it by the horns but, speaking from our experience, we deal a lot with social housing and SMEs that have large contracts with different registered providers around the UK; there aren’t mainstream financiers giving them what they need. There’s a massive shortage. A lot of our clients deal with homelessness and drug and domestic abuse. There’s a massive shortage of accessing [finance for] property. They’re almost forced to go down a specialist route because there isn’t the option yet with the mainstream on scale.

RG: In our benefit, there’s no longer an understanding of what ESG green products mean, and I think there is a reluctance and a nervousness from a lot of the high-street banks to bring anything forward without being seen as some sort of marketing ploy.

I think we all sit in quite a good place, but it’s up to us to keep banging the drum and educating as best as we can. I don’t see the high-street lenders adopting these policies any time soon because of their own lack of understanding, guidance and governance as to what the expectations are in this space.

PB: We have to be careful what we wish for, Rob, don’t we? From a long-term perspective, as a lender that holds loans for 25-30 years, it’s about de-risking the loan book, especially in the BTL space with the EPC regulations that are set to come in 2025. I’m getting other lenders phone me and asking, “What are you doing about it?” I had a phone call from someone we all know just before I came to this meeting with that question.

I know that UK Finance is working on

“It’s an extremely competitive specialist lending market right now.

All the lenders are competing against each other, so surely there’s a gap?”

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this; we’ve had some conversations with them, too. If we’re not careful, we could end up sleepwalking into this. We’ve got to address and deal with it now.

CG: You made an interesting point a second ago, where you said that there is a window here before this becomes regulation. I don’t want to keep bringing up Carbonlite, but we started work on that two years ago. Why did we start work on it then? Because we wanted to try to do something green and we were thinking the same thing. I read an article about 18 months ago from a renowned journalist in the US who said that, for organisations that want to get into green finance, there’s a window of about five years to commercialise it and get a reputation for being a provider of that kind of finance just before it becomes regulation. That really got me thinking. We sat down and looked at what we were going to do in this space and how to develop a sustainable supply chain and build relationships with developers and brokers that were ahead of the game. There are three forces at play that are going to drive change here. First, it’s buyer demand. I don’t think there’s any evidence yet that there is mainstream or mass buyer demand. Second, we’ve got investor push; we fund our loans from alternative sources, and they are now wanting a little bit more. They want non-financial returns as well, so I think lenders are going to be pushed by funders and investors to go down this route.

Third is regulation. They’re the three things we need to be thinking about.

PB: For the funders that have their warehouses securitised, one of the main areas of questioning when they’re looking at books to securitise is in and around sustainability. So, you’re absolutely right.

RL: It’s something that’s going to impact us all. This is a massive, complicated question. We need to bring it back to what can we do? I think it’s partly how we approach the media so that we speak with a unified voice. Individually, we need to start promoting our products more aggressively as our mainstream offering. Whenever you do a deal, shout about it, issue a press release. In this market, it’s herd mentality.

If you see somebody else doing something and they’re winning deals because they’re doing it green, other people will adopt it.

Marketing and PR have an enormous part to play in this. That whole piece about

education isn’t about issuing complicated documents on how to go green. It’s telling people, “We’re doing this over here and it’s working. We’re making money from this—we’re commercialising it”. Other people will then get involved. And that’s how we start accruing that momentum.

DS: It’s an extremely competitive specialist lending market right now.

All the lenders are competing against each other, so surely there’s a gap?

CG: It’s about differentiation.

BF: Can we move forward with sustainable housebuilding if we’ve still got a housing deficit? There’s growing poverty in this country and people aren’t looking at homes and thinking, “Yes, I’m going to spend extra on this”.

PB: I think you’ve made a really good point there, Beth, but, you’ve got to start somewhere. Do you say this is the market we’re initially aiming at, and hopefully that will filter through?

DS: You can take the Tesla example again—it trickles down. It starts off with [a particular] audience which then flows down to everyone else, because it’s a trend.

BF: Do you think that just because that’s worked in the past, it will work for this? The housing most affected by climate change are in poorer areas.

People on the poverty line can’t afford to power fans during a heatwave and it’s typically more dense, with little cover, making the situation even worse— PB: —And no insulation.

BF: Exactly. I know we’re steering off the topic of the commercialisation of green finance, but do you not think it would have a much bigger impact if a lender came in and retrofitted housing in the areas that need it most? Surely that would hit the news? Does anyone care about a fancy eco building built for the middle class? I think the general public want to see those in need given better and sustainable living standards.

SS: Social housing providers have got a massive problem in their existing portfolios. Most of the housing you’re talking about is probably owned by a registered provider, and they’ll need

“For the funders that have their warehouses securitised, one of the main areas of questioning when they’re looking at books to securitise is in and around sustainability” a huge amount of finance. So, yes, can the finance industry fund them to do that type of mass retrofit that’s needed? It has to happen but, for us, it makes no financial sense because their access to capital is so cheap.

PB: It needs to be government backed.

CW: Doesn’t this go hand in hand with regulation?

CG: We are in a very inequitable market. We have to focus on the bit we’ve got some influence over and, at the risk of sounding harsh, not worry about the things we can’t control.

BF: On a positive note, the younger generation seems to be more tuned into climate change and sustainability.

This group of people will likely be first-time buyers at some point, so they will also be an engaged audience.

CG: If they start their journey renting, I think they will start to be more discerning.

BF: Absolutely. Especially with the prices they’re paying.

PB: And to the point discussed earlier, they may be thinking, “If I go for a property that is sustainable, my heating bills will be less in the winter”.

DS: This is where technology can also play a part. Some of the build-to-rent operators are really clever with their apps. They can show you how to make savings by turning off your lights or lowering your heating.

These are behaviour changes from the end consumer; the more they see that data and how much they’re saving on their

63 Sept/Oct 2022

“In three years’ time, all loans are going to be green. We’re in a transition period and our job is to help borrowers get ahead of that”

Cover Story

electricity or heating bills by dialling down a notch, that’s what will make real change.

green products, raising green money, and then not following through.

BF: We talked a little bit before about greenwashing. How can brokers and developers cut through the noise and utilise products that will actually benefit them and the end user?

BF: Until there is more data around how these products work end to end, it’s difficult to see the final green benefits.

SS: We’ve got the Competition and Markets Authority which has a green claims code—that’s a really good guide for how to not greenwash. It’s a good place to start on the journey if you are just getting involved in it. A lot of it is about transparency and substantiating your claims. Greenwashing is just marketing gone wrong. If you’re doing something, you just need to back it up.

That’s it. It’s so simple as a concept.

DS: If you’re a lender, you would follow the framework. We have the green loan principles from the Loan Market Association. There are acronyms and different standards but, as a lender, there is some guidance and best practice out there. So just stick with that.

CG: I’m an optimist; I don’t think many organisations just go out with the intention of greenwashing. I think sometimes it’s easy to stray into it when you’re trying to articulate a message. Most people go out with their best foot forward. I wouldn’t want fear of greenwashing to stop somebody having a go, because this is a frontier market; you’re not going to get it right all the time. Trying to do something with good intentions and putting resource into it should be your first priority.

RL: Greenwashing can be a clumsy criticism. We’ve been working really hard over the past few months to bring something out that will assist people in getting up to an A, B or C. But it’s not simple when you’re a lender.You’ve got finite parameters to work with in terms of LTVs and, with the likes of us, you’ve got funders and covenants. The financials work, but they may not work out over a longer time than you would normally be used to—but you can see the benefits. I think that’s what really happens in lending when people talk about greenwashing.

SS: If you’re regulated and raising money for a green purpose in a regulated environment, there is a reputational and commercial risk to putting out

RL: That’s where we’ve placed a lot of investment. With the Carbonlite Challenge, we’ve got EY’s sustainability and reporting team overseeing the scheme. Everything is outsourced to a third party to be able to report accurately.

But that’s because our end intention is if we prove the pilot works, we’ll go to the market and raise green bonds. It needs to be done on an institutional scale.

BF: Absolutely.

SS: The regulators around the world are just catching up with this. They don’t know how to properly oversee it, I mean, not at our level, but where there are enormous funds being raised by institutions, that’s where the regulation needs to be a little bit more sophisticated.

RG: We are educating ourselves as we go along and learning on the job, but there has to be some guidance for us to follow.

SS: Nothing has been standardised. A lot of the reporting standards do try to align with each other, but they aren’t really aligned yet. When there is that standardisation, it’ll feed into what you need to follow in order not to greenwash.

BF: When you talk about sustainability, it’s seems too altruistic. But it can only work and become mainstream if it’s commercialised. Why do you think there is hesitancy around commercialising the green finance market?

CG: I think it’s because it’s big and complicated. Everyone’s busy with other things at the moment. I think there’s tons of goodwill, but there has been some hesitancy to join this forum. I think that’s simply because we’re in an incredibly demanding market right now, and there are other priorities. If we can come up with something which is plug in and play, which is what we’re hoping to get out of this, more people will join and get involved.

The mark of success of this forum will be when it’s no longer needed, because it’s simply just part of the mainstream offering. This forum has probably got a life expectancy of no longer than three years,

because one of two things will happen: It’ll either just embed in the mainstream, or regulation will dictate it. Either way, there’s a window of 3-5 years. That’s it.

BF: Is that how long the finance industry has to get this right?

DS: Maybe the question should be “how long does the homebuilder market have to get this right?” Because we can only finance the schemes that come forward, and most of the sustainability can only be put into a scheme at the design phase.

If you haven’t done it but have gone and procured your contractor and lender, it’s very difficult for a finance provider to then influence the design and spec.

You’re asking them to open everything up, causing months of delay and additional costs, and the developer will just go to the next lender and place the deal there.

The homebuilder market really has to step up in order for us as lenders to do so.

CG: That’s fundamentally why we’re part of RIBA. We went down the route of designing our own standard and looking at some of the LMA stuff. When we stepped back and looked at it, it felt completely incongruous in terms of our role as a financier to come up with our own standard. That’s when we realised this needs to be done at the design stage, which RIBA is doing. That’s when we engaged with them and adopted their standard. And it’s independent, of course.

For me, it’s about keeping it simple.

Let’s not worry about the bigger picture here. This is about coming together as a finance industry and doing what we’re good at—which is promotion and being fleet of foot with marketing and awareness, and trying to mobilise through one single voice what it is we do—so that people understand these options are available. This is about offering choice to the market and making sure people realise this thing exists, that it is growing and that you can make money from it.

That’s what we can do to play our bit.

BF: I think the main message from this is that it’s not an individual lender approach.

It’s about the industry coming together.

CG: Yes. No one’s got all the answers, but there are things you can do with the products that are available.You should get involved because, if you’re not, the broker or lender down the road will be.

65 Sept/Oct 2022

This is a paid Advertisement Feature.

How bridging finance can support the UK’s ESG targets: social housing.

Paula Purdy Head of Intermediary Sales for Commercial Finance – North

Paula Purdy, Together’s Head of Intermediary Sales for Commercial Finance – North, says: “In working together to plug the financial gaps for those developing safe and affordable homes, lenders and intermediaries can make a tangible difference.”

Social housing: what do brokers need to know?

“With such a wide variety of uses, bridging has fast become a vital source of funding for property professionals; its speed and flexibility offers these borrowers the support they need to seize opportunities and grow their businesses. But bridging finance has another vital role to play.

Social housing plays a major role in giving security to millions across the UK. It’s a term given to safe accommodation, provided at affordable rates, to people with low incomes or those with particular care needs.

“Britain is currently experiencing a housing crisis. And we know there’s a real demand to accelerate the delivery of affordable homes.

Social housing properties are usually owned or leased by local councils, or one of the 1400 housing associations known as Registered Providers (RP’s).

The majority of these are not for profit, however there are over 60 for profit RP’s who have been involved in the sector since 2008. On top of this there are huge numbers of private landlords who now lease their properties to RP’s, charities or Community Interest Companies locally to provide much needed housing to those most vulnerable in their local areas.

“In its latest study into the UK’s ‘broken’ housing system, the charity Shelter announced that despite this huge demand, only 6,644 social rent homes were delivered last year - a decrease of 85% from a decade ago. Moreover, there is a particular lack of social and secure housing for those in real need; those with high dependency care, the homeless, elderly and vulnerable, as well as NHS key workers.

“As property finance specialists, our responsibility is clear.

In this ESG issue of Bridging & Commercial magazine, we explore how bridging finance can be used to tackle the government’s housing targets and support communities across the UK, by helping to deliver homes that transform people’s lives today whilst meeting the needs of the future.

And why, for social landlords and housing providers, we’re making access to vital funding as straightforward as possible – enabling more projects to get off the ground and continue into completion.

It’s important to note that social housing serves more than the ‘social’ element of ESG. In fact, environmental sustainability is a huge consideration for many social housing providers, as homes must be of good longterm quality, energy efficient and have a low EPC rating to ensure comfort and affordability for tenants.

And in terms of Governance, the Regulator of Social Housing has a very important part to play and holds significant power (rightly so) to ensure providers are compliant and have the tenant’s best interests at the forefront.

“I’ve invited Alex Bodie who heads up our Social Housing program to explain the challenges facing this underserved sector and how, in working together to plug the financial gaps for those developing safe and affordable homes, lenders and intermediaries can make a tangible difference.”

“Currently the level of housing need stands at around 145,000 affordable homes per year, although only 52,000

66 Bridging & Commercial

were delivered in 2020/21. There are around 1.2 million households waiting for such housing, and the shortfall between supply and demand is only increasing.

“I expect that as the cost of living crisis continues and more low-income households are affected, this shortfall will become even wider over the coming years.

“The British Property Federation (BPF) estimates that in order to meet this demand, £34 billion in additional capital is required. This is where for-profit housing organisations can help and add huge value to a sector that is crying out for investment. Their emergence has raised some eyebrows, but the cost of housing they offer to the tenant or owner is no more than that provided by non-profit housing associations, and their addition to the sector can only help in the supply of new affordable homes for rent and sale.

Alex Bodie Head of Social Housing at Together

“With the right finance, they are able to scale up quickly, relieving pressure on the not-for-profit sector while still facing the same rigorous scrutiny from the Social Housing Regulation watchdog.

How we helped one of our customers support 18 local authorities in delivering social housing.

“We recently partnered with HSPG, one of the UK’s leading social impact real estate firms, to deliver 592 units of lowlevel supported housing.

“But finance isn’t always so readily available – especially for smaller providers.”

“The landmark deal – HSPG’s largest single investment to date of over £70million – will see the firm work with six housing providers across 18 local authorities in delivering this vital accommodation.

How could bridging finance help to plug the gap?

“Where government funding isn’t available, privately secured finance offers a way for developers and landlords to purchase land or properties suitable for refurbishment or change of use.

Once any works have been completed, they can refinance onto a term loan before leasing the property to supported housing providers or housing associations. Of course, they could also sell the property and exit the bridging loan.

“With all 592 properties to be delivered with a minimum EPC score of C within the next 12 months, this transaction forms part of HSPG’s commitment to delivering Supported Housing which is sustainable. Considering the UK’s built environment is responsible for 25% of the UK’s total greenhouse gas emissions, the provision of this sustainable housing is vital.

“Guy Horne, CEO and co-founder at HSPG, said: “We are delighted to announce the completion of this deal which represents our largest single investment yet. With households currently facing significant financial instability at the very same moment house prices continue to rise, the need for supported housing has never been more pressing. This deal will go a long way towards achieving our ultimate goal of helping to solve the UK’s homelessness crisis and ensuring the most vulnerable members of our society have access to a home.”

“After proving their ability to create good quality housing schemes, these small-to-medium providers may be able to refinance with or secure investment/government finance for future projects.

“Social housing developments can also run into many of the same challenges as other property projects, for which bridging finance may offer the solution. For example, many developers have experienced severe project delays, material and labour shortages, and bridging finance to exit more-expensive development loans has proven particularly popular where additional time is needed to finish the project off or sell the assets.

Paula Purdy continues: “Whether you have clients who require finance to start a project or complete one, our specialist underwriters and intermediary team will work closely with you or your packager to understand their circumstances and make a common-sense lending decision.

“We are very much of the opinion that anything worth doing is worth doing right, so working with a lender who understands this approach and the complexities and timescales associated with each step is crucial.

“If you’re keen to learn more about social housing finance, whether bridging or a term product, we’re here to help. Just get in touch with our sales team on 0161 9337 101 or watch our Q&A videos produced with Alex Bodie.”

“As an experienced lender established in 1974, we’ve been providing specialist bridging finance to developers and landlords for many years, and this includes social housing providers. In response to the current crisis, we’ve spent the last few years researching and working closely with the Regulator of Social Housing to develop a new, unique proposition for this underserved sector.

For Professional Intermediary Use Only.

“By doing our due diligence, we’re able to offer the same level of understanding and expertise as we offer for all other property transactions, and can deliver the same levels of certainty around speed, service and transparency.”

67 Sept/Oct 2022

Putting the

ESG is a huge area, so parts of it can be missed. Here, we take a look at formal and fun activities that firms are doing to improve their social stance—and we hope this inspires you to do the same

Words by

andreea dulgheru

Feature

Healthy minds When it comes to mental health in the financial sector, a lot of work is still needed—almost half of brokers (46%) report their businesses still have no mental health strategies, according to the latest Mortgage Industry Mental Health Charter (MIMHC) report. However, that’s not to say there has been no progress here, with some specialist finance firms leading the charge.

One of these is Crystal Specialist Finance, a long-time advocate of improving workplace mental health in our market.

In addition to being a founding member of MIMHC, the brokerage has implemented provisions for all staff, including mental health first aiders and training for all line managers.

The company also runs regular wellbeing campaigns and activities to boost the mental health of its team, such as sleep and healthy eating campaigns and fitness challenges.

“We started our mental health initiatives internally to start with as a way of supporting our staff, particularly during lockdown when we were all away from each other and could not use the normal social interactions to check in with each other,” explains Jason Berry, group sales director at Crystal Specialist Finance.

“This then developed into a wider campaign around mental health in the mortgage industry, as we identified that support was needed for lots of people and that we could make a difference.

It is now part of our central column of strengths and success.”

For those looking to implement mental health provision for their teams but may not know where to start, Jason offers simple advice: listen to your staff. “Ask your employees what they need help with and what they would like to see put in place.You can spend lots of time and resources on wellbeing—but it needs to be tailored to the needs of your team or it will be fruitless. It doesn’t have to be difficult or costly to put initiatives in place, but it will have a huge impact on engagement and happiness in the workplace.”

Inclusion Back in October 2021, the Association of Mortgage Intermediaries’ diversity, inclusion and equity report shone a spotlight on the state of the industry, and the results weren’t great. From little transparency over pay and rewards to income inequalities and a lack of representation within the industry, things were not looking bright.

Since then, firms have taken a few strides towards improving diversity, inclusion and equality in the specialist finance sector. In addition, the FCA implemented rules requiring listed companies to report information and disclose against targets on the representation of women and ethnic minorities on their boards and executive management.

When it comes to diversity and inclusion, there is one step that is crucial to get right: recruitment.

It seems the industry still has work to do in this area. According to Adam Massie, head of recruitment at Willisia, one of the biggest issues businesses face when looking to recruit a diverse team is conscious and unconscious bias on the part of interviewers. To combat this, he recommends that all businesses conduct coaching sessions on inclusive hiring practices for interviewers —a step that Gatehouse Bank has implemented. In addition to offering interview skills training to all line managers, the Islamic finance provider also uses blind CVs, where demographic details are concealed to reduce the potential influence of conscious or unconscious bias.

Once past the recruitment stage, a firm must then ensure it continues to maintain and promote diversity and inclusion. This is why Pepper Money carried out a series of events and discussions to mark D&I Awareness Month, and team members participated in various activities. These included a panel discussion on banter

and stereotyping, an event on demystifying neurodiversity, a workshop on inclusive leadership and unconscious bias for managers, and a session on being an ally in the workplace.

“We’re incredibly proud of all our people, and we want to keep doing everything we can to make Pepper Money a place to belong and an even better workplace,” says Atlyn Forde, chair of the D&I committee and senior manager for data insights at Pepper Money. “Our programme of activity for D&I Month has helped people to increase awareness of their colleagues’ lived experiences, share views on thought-provoking topics, and take time to reflect on their role in creating an inclusive work environment where everyone feels a sense of belonging.”

A culture for wellbeing When it comes to building a successful business, it’s not enough to get the top talent to join your firm—one must also ensure employees are treated well and enjoy working in their role.

This is exactly the mentality that Mark Harrison had when launching his own lender, Breeze Capital. “One of my main aims when setting the business up was making sure we not only attracted the best talent but also retained them in the long term.

“I don’t want to be in the position of replacing staff every 18 months or so because it’s expensive and, quite frankly, mentally draining and impacts on you achieving your business goals.”

To Mark, keeping employees happy, creating the right work environment where new thoughts and ideas are welcomed, and ensuring they have a good work-life balance is as important as the salary they are paid. This is why Breeze Capital prioritises faceto-face open communication between teams and a good work/ life balance—and encourages other firms to do the same.

These views are shared by Brightstone Law, which believes that a good business culture is the base for employee wellbeing, social responsibility and, ultimately, commercial success. To create a great work environment, the law firm set up its Culture Club programme, which aims to identify, protect, and promote the unique culture of the business. To make sure the initiative would benefit all, Brightstone Law started off with a survey to find out people’s views on the firm and their work environment.

“Culture cannot just be about token values decided by senior management and promoted in the office—it has to be embedded in the behaviours of an organisation and its people,” says Penny Michael, trainee solicitor at Brightstone Law. The results of the survey were then used to develop the activities of the club, including sending regular staff emails for Motivational Monday and Wellness Wednesday, arranging special activities for national and religious days, and celebrating staff accomplishments, such as exam results and significant career progressions.

As part of the club, Brightstone Law offers mindfulness workshops and a wellbeing coach who is available to everyone on an anonymous basis. “As the running of Culture Club is independent of the firm, with little to no partner involvement in the decision-making process, it provides a great development opportunity for individuals to take a leadership role in driving the firm forward and making a tangible difference,” adds Penny.

“Our aim is to create a rewarding environment, not just financially but also personally, helping us to create a culture that is welcoming and attracts the best talent as the firm continues to grow and thrive.”

Charity begins at work The specialist finance industry is definitely no stranger to charity work and, this year, firms have yet again gone above and beyond to give a helping hand to those in need, raising money for a variety of causes.

69 Sept/Oct 2022

Feature

For instance, Hope Capital annually supports the Sunshine Group—a local charity for women going through breast cancer—by organising its Sunshine Ball fundraising event, something the firm is very proud of.

“This is not only rewarding for us to be able to support such a worthwhile cause, but it is also a great opportunity for us to strengthen relationships and ultimately grow closer as a team,” states Jonathan Sealey, CEO at Hope Capital.

Others have chosen to raise funds in creative and challenging ways. As part of its work to support the Destination Florida charity, MS Lending Group not only challenged the team to run the distance between Manchester and Florida—during the Manchester 10k marathon, as well as on a treadmill in the office—to raise money, but also created a mascot for the organisation, Jet the Bear, to help its fundraising activities.

“This is always a collective decision—we try to choose local charities where we feel what we do can have a greater impact,” explains MS Lending’s marketing and partnerships lead Alexandra Stratton. “This is not just fundraising but also dedicating our time to the charity and the local community, and raising further awareness of the amazing work the charity does.”

Others, such as Propp, decided to put their physical skills to the test and tackled the Three Peaks Challenge—for which the specialist broker raised over £11,000 for WellChild. “The real benefit of doing the Three Peaks Challenge as a business was slightly more unexpected—it drove a cultural shift at work from the usual socialising outside work in an alcohol-centred environment to a culture where we meet up to exercise and train in nature ,” says Abbie Dickson-Davies, marketing manager at Propp.

“Our team members were spending evenings and weekends training together all over the place, in the Welsh mountains some weekends and all over the South Downs. A number of our team commented on how lovely it was to spend so much time together outside work getting fit and healthy, and it’s continued despite the challenge having been done.”

Meanwhile, Hodge has a different approach to fundraising. As the bank is 79% owned by the Hodge Foundation, it uses its funds and dividends from the group to award grants to charities or causes both in the UK and overseas, as opposed to regular fundraising initiatives.

“For more than 50 years, we’ve shared the same simple mission—to have a positive impact on our customers and communities,” says Hodge’s CEO Dave Landen. “We don’t want to just donate to charities, we want to make a real difference, and I think that stems from the fact that the foundation and Hodge as a bank go hand in hand.”

If fundraising is not your thing and you prefer more hands-on activities, volunteering might be better suited for you—as TAB staff did this year, spending several days helping Borehamwoodbased charity Gratitude with its numerous activities.

The lender’s team contributed by manning the charity’s people’s pantry service, as well as advising on marketing, its website, development and legal issues to help the cause achieve its goal: fight waste by redistributing surplus produce in the area.

“We have already seen the positive contribution we have been able to make when our team has been on hand at a time of real need. For our staff, this is an opportunity to get involved during their working hours, and I can see that everyone is enjoying it,” says TAB CEO Duncan Kreeger.

With so many options, it can be overwhelming to pick which route to go. So where can firms begin? According to Duncan, it’s simple—just get on with it: “Start making a difference now and adapt later when you realise improvements can be made.”

“You can spend lots of time and resource on wellbeing—but it needs to be tailored to the needs of your team or it will be fruitless” Duncan Kreeger, CEO at TAB, and Sheila Carlisle, project manager and trustee at Gratitude

70 Bridging & Commercial

Feature

Gifts with inspirational messages given to staff as part of Brightstone Law’s Culture Club

The MS Lending team with Jet the Bear The Propp team during the Three Peaks Challenge

Some of Crystal Specialist Finance’s team members during a workshop

71 Sept/Oct 2022

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How G S E is built into Islamic finance ESG values are embedded in Islamic finance, which is defined by its strong religious and cultural principles. So why is this not better known as finance companies routinely burnish their ESG credentials to attract customers?

75 Sept/Oct 2022

Feature

ith activities from charity work to carbon speculative investments and transactions. offsetting and mental health provision Second, they carry out extensive stress for staff, numerous specialist finance testing and budget checking to ensure lenders are strengthening their ESG clients can afford funding arrangements. stance. Yet, one group has been left Treating customers fairly is key for Shariaoutside the limelight, despite a strong compliant finance firms, which is why their ethical stance: Islamic finance providers. products do not include early repayment When it comes to ESG, Islamic fees. Should the customer struggle with late firms have been one step ahead of payments or go into default, all penalties conventional finance providers, as go to charity or socially responsible ethics and sustainability are deeply investing—as, under Sharia law, profiting embedded in the principles of Sharia. from another’s misfortune is forbidden.

“Islam covers a Charity itself is c o m p r e h e n s i ve also a big part of code for life. As Sharia-compliant Muslims, we need finance providers’ to be conscious ESG stance, again not to waste, to deeply rooted treat everyone within Islamic law. fairly and equally, “One of the five “As Muslims, to help those in pillars of Islam is need and to give to give to charity we need to be back to society. (zakat), so a So simply through minimum of 2.5% conscious not the purposes of of your wealth has to waste, to treat Sharia, ESG is to be given each built into Islamic year to a charitable everyone fairly finance,” explains cause, if you are in Sagheer Malik, a position in which and equally, to chief commercial you can do so,” officer at Offa. explains Sagheer. help those in One of the main “At Offa, we ethical stances have set up a need and to give that underpins digital waqf, an back to society” Islamic finance endowment fund is that it should that is used to not cause harm to support good society. For that domestic causes, reason, Islamic such as elderly financial firms care and youth do not invest in development. several areas deemed unethical, including We also strongly encourage our staff and alcohol, tobacco, arms and gambling. management team to give time for charity In addition, Sharia finance values as well, so we offer them time off to do so.” stability, transparency and sharing risks Perhaps the biggest difference that sets and reward in an equitable way, and Islamic firms apart from conventional these are reflected in Islamic finance lenders is the existence of an independent providers’ funding activities.

For Sharia supervisory board within each one, they do not take part in highly company. This committee, comprising 76 Bridging & Commercial

Feature

“One of the ways for companies to avoid being accused of greenwashing is by being accountable for delivering their ESG policies, and that is an area where they can learn from Islamic finance providers” a panel of Islamic scholars, has one main role: to assess whether a product, practice or service is Sharia compliant. In other words, it keeps firms accountable.

Sagheer explains that if the committee identifies any unethical activity conducted by a finance provider that does not comply with Islamic laws, it can ultimately take away the lender’s Sharia accreditation.

“It’s a good way of doing it because sometimes you might get different departments with different types of motivations, and that’s where you need balance and somebody to keep everyone in line,” he says.

Growing green All of this is only scratching the surface, as many Islamic finance providers have implemented additional initiatives to boost their ESG stance, including Gatehouse Bank.

As part of its environmental strategy, the firm—which is a founding signatory of the UN Principles for Responsible Banking—introduced a Woodland Saver account for personal banking.

For every account opened or renewed, the bank plants a native UK species tree in one of four woodland projects across the country through its tree planting partner, Forest Carbon. Since its launch, the Sharia-compliant bank has planted over 17,000 trees across sites in Scotland and northern England.

“More than half of Woodland Saver customers say the planting of the tree ranks as a nine or 10 in importance for opening the account in the first place, which is quite amazing, because we didn’t expect it to have this much of an impact,” says Andy Homer, chief customer officer at Gatehouse Bank.

In addition to this, the Shariacompliant finance provider is looking to introduce a sustainable product to support landlords to improve the energy efficiency of their homes.

Support for staff Gatehouse Bank is also continuing with efforts to improve its workplace culture and promote diversity, inclusion and wellbeing among its staff.

In terms of employee benefits, the bank has set up an employee assistance programme, which provides financial, wellbeing and counselling support of up to eight one-hour sessions per employee, per issue, per year.

Gatehouse Bank employees have access to a 24/7 confidential helpline for personal and legal issues and a mobile app and an online portal with a comprehensive library of self-help tools, webinars, factsheets and health checks.

While it is still has room to improve when it comes to ethnic and gender diversity across all levels, particularly within senior leadership and its board of directors, the bank is making a conscious effort to address this.

For example, it is using blind CVs when recruiting staff to reduce the potential for biased recruitment decisions, as well as providing interviewing skills training to all line managers, covering topics including unconscious bias and the impact of various questioning techniques on recruitment results.

Low profile After learning about the ethical and sustainable practices of Sharia-compliant finance providers, one question plagues my mind: why doesn’t our sector know more about the strong ESG stance of Islamic firms? According to Bedford Row Capital’s CEO Scott Levy, there is one main reason: a lack of recognition.

“The Islamic finance industry doesn’t align itself to the conventional ESG discussions.

I’ve had talks with Islamic firms asking them what they think of ESG, and they said it’s not really a thing they do—yet they provide on-site childcare, prayer facilities and flexible working hours. They hire a lot of women and they’re paying a fair wage.

They don’t think of these as ESG because it’s implicit to Islamic finance,” says Scott.

In his opinion, Islamic finance providers need to showcase their ESG stance using more mainstream terms to increase awareness.

Sagheer shares Scott’s school of thought, adding that, apart from raising awareness of their work in terms of ESG, Sharia-compliant institutions should also educate customers on what ESG means and its importance when choosing their finance provider.

Another area where there’s room for improvement for Islamic finance firms is governance—more specifically, reporting ESG facts and figures.

“Although Islamic finance is embedded in Sharia, it’s not always explicitly applied or measured, in terms of reporting what percentage of our business supports social organisations, or how much time staff are given to work on social initiatives.

This is something that we need to get better at, ultimately,” says Sagheer.

While there is still plenty to do in this area, it seems that some Islamic finance providers are already working hard to promote their ESG stance, including Gatehouse Bank, which has recently published its first Sustainability Report for 2021.

And, according to Andy, we’ll see more Islamic institutions do the same, as consumers are becoming more aware and concerned with the ethical position of businesses they engage in.

Moreover, Sagheer is hopeful that work by Sharia-compliant finance firms will inspire conventional lenders to further improve their ESG stance.

“As public awareness of ESG picks up, organisations will be under pressure to prove their credentials are more than just words. One of the ways for companies to avoid being accused of greenwashing is by being accountable for delivering their ESG policies, and that is an area where they can learn from Islamic finance providers.”

77 Sept/Oct 2022

breezecapital.co.uk hello@breezecapital.co.uk 01244 565095

People you know. Experience you trust

One Day

Work in progress at the Murrayburn development

ONE DAY

At the Green Home Festival With the climate crisis biting and the clock ticking ever closer to the net-zero deadline, I spent a day at the inaugural Green Home Festival in Edinburgh and discovered how community engagement is crucial to the success of energy-efficiency upgrades

Words and photography by

Kit Million Ross

I

t’s not exactly controversial to say that Scotland is leagues ahead of England in terms of its approach to climate change and the environment.

In 2020, over 97% of Scotland’s electricity consumption was from renewables (mostly wind), and the country has set its individual net-zero deadline for 2045—a full five years ahead of the overall UK target. But, as with the rest of the UK and the world as a whole, there is so much more to be done, and fast.

This is one of several points I’m mulling over as I walk through an uncharacteristically hot Edinburgh, on my way to the first of two events I’m attending as part of the inaugural Green Home Festival. This is organised by the Construction Industry Collective Voice as part of the Edinburgh Festival Fringe, targeting both construction professionals and eco-conscious homeowners.

It occurs to me that the timing of this event—a week-long series of free seminars and talks taking up the cudgels for the energy-efficiency battle in UK homes— could not have been more perfect.

Following a one-two punch of the most severe heatwave in British history and a warning that skyrocketing energy prices could push half of the population into fuel poverty, the need for energy-efficiency upgrades in our homes has never been clearer.

The event has taken off in quite a significant way; more than 350 delegates have registered for the mix of webinars and in-person presentations. It’s going so well that the organisers announce their plans for next year’s festival mere days after the event concludes.

I’m met in the city centre by Gordon Nelson, director at the Scottish arm of the Federation of Master Builders (FMB), and we chat about the week’s events so far before we and several other delegates are swept into a blissfully air-conditioned electric minivan laid on by Mercedes-Benz.

While this is my first day attending in person, I’ve already listened in on a few webinars in the previous two days, covering issues such as flood protection measures and the use of sustainable materials.

The talk on demystifying heat pumps has been one of the most popular so far, Gordon tells me. This comes as little surprise, given that air source heat pumps have been dominating the energy-efficiency conversation on every platform—from industry forums to illuminated billboards in city centres—for some time.

One Day

Mark Connelly, building surveyor manager at The City of Edinburgh Council

Major works around residents This morning, we’re touring a development site in Murrayburn, where contractor AC Whyte is regenerating 29 blocks of four-storey flats for the City of Edinburgh Council, as part of the city’s Mixed Tenure Improvement Service (MTIS).

The MTIS, managed by The City of Edinburgh Council, helps organise repair and maintenance to the common parts of blocks where flats are owned by private owners and the council. All owners, including the council acting as a social landlord, are responsible for paying their share towards such repairs and improvements.

While the main purpose of the service is to fix and maintain these buildings, energyefficiency improvements can be included in the scheme. The city council also arranges works that have been agreed on collectively.

Our party is a group of roughly 20 delegates representing a broad spectrum of industries ranging from construction to 82

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One Day

academia and local government. We don hard hats and hi-vis before being led around

by Sean McGuire, senior contracts manager at AC Whyte, Mark Connelly, building surveyor manager at the City of Edinburgh Council, site manager Zoltan Istvan and AC Whyte’s managing director Jennifer Phin.

We are shown three parts of the development, each at a different stage of construction, illustrating how works are progressed.

As Sean and Mark speak, peppering their explanations of the technicalities of the project with anecdotes from throughout the process, it becomes increasingly clear that much of the success of this project is attributable to the effort AC Whyte and the City of Edinburgh Council have put into engaging with residents.

“It’s not uncommon that we have residents saying, ‘It’s a bit warm since you put that insulation in’,” Sean says, laughing.

The developers had a case manager on site to deal with the concerns of the people who live there and act as a point of contact between residents and the development team.

The case manager’s work begins long before development starts, and includes explaining the significance of it, connecting those eligible to grants and funding and, crucially, educating residents on how best to use their new energy-efficient homes.

We’re told how this approach solved various problems and prevented many more, but its importance is made clearest by Mark, who tells the story of a similar project he visited in Dundee where no such person was employed.

“It was bizarre—it was the middle of winter, and all the windows were open.

You go in and you think, why are all the windows open? It’s because people hadn’t gone through that learning process of

A sample of the insulation system used in the Murrayburn development

saying ‘Right, my house is better insulated now, I don’t actually need my heating on so high’. They just kept the thermostat up at the same the same level.”

Grants—for some Scotland has a number of funding options available for those who wish to make energy-efficiency improvements to their homes, most notably the Energy Efficient Scotland: Area Based Scheme grants available to private owners in these blocks.

However, difficulties arise when private landlords become involved, as most are ineligible for this type of funding.

“Some of the most difficult conversations we have are with private landlords—we’re asking them to put their hand in their pocket for £25,000-30,000,” Mark notes.

“I think there’s a greater understanding that if you don’t address the energy need now, it will cost you more in the months—literally, months, if not years—to come,” Sean adds.

This presents an opportunity for the specialist finance sector to serve landlords who have fallen through the gaps of government support. One only has to look at the recent surge of green refurbishment loans hitting the market to see that lenders are seizing the opportunity with both hands.

Heritage retrofit Returning to Edinburgh city centre, I have a moment to catch my breath and review my notes before making my way to the RICS headquarters for my second event today—a presentation by the architects behind the successful retrofitting of an eight-home tenement block in Glasgow.

I’m a confessed outsider to what tenements even are, beyond some brief preparatory googling. However, it soon becomes apparent that these buildings are a part of the architectural make-up of Scottish cities in the same way as grand, white Georgian houses are to Bath, and thus retrofitting these buildings necessitates a delicate balance on the tightrope between preserving their look as part of Scotland’s culture and history, and upgrading them to meet modern green standards.

As Drew Carr, senior architect at John Gilbert Architects and today’s keynote speaker, puts it: “In Scotland, we all love our sandstone tenements— there’d be riots in the streets if you put insulation over them, and rightly so.”

He explains that it’s about the balance between heritage and energy efficiency.

As an example, he describes the lowered ceiling required to fit an energy-saving

83 Sept/Oct 2022

One Day Drew Carr, senior architect at John Gilbert Architects

ventilation system. “If you really love your coving, then you might not want to do it. But, if in our house we were going to chop our energy bills by 90%, I would sacrifice one elevation of coving.”

The scheme was set with the ambitious goal of meeting EnerPHit energy-efficiency standards. This is a collection of metrics specifically for retrofits, roughly equal to the Passivhaus Standard for new builds, which is considered by many to be the leading one for efficient new homes.

These standards go far beyond the comparatively basic EPC ratings, placing strict limits on the overall power required to heat or cool a building, the materials used in the retrofit, and the airtightness of the property.

Balancing the exacting standards of planners determined to preserve history and the precision required to meet EnerPHit standards was a major challenge, but definitely not the only one, Drew explains.

As the impressive 3D virtual tour at the heart of this presentation pans through the cut-away view of the block, he points out various key structural issues that the team uncovered as they began the building works.

These needed to be repaired before any energy-efficiency upgrades could begin, immediately chipping into the project’s contingency budget and placing much tighter financial constraints on the entire redevelopment.

Any questions?

The talk is followed by a Q&A with Drew and Scott Abercrombie, associate director and architect at John Gilbert Architects. It’s a lively discussion from a diverse and engaged audience, among whom are construction specialists, environmental experts, a Green Party councillor for Edinburgh wanting to know how to encourage her constituents to upgrade their own tenement homes, and one woman who has a lot to say about the design choices of the windows.

Naturally, the first question is: how much did this all cost? The answer is a sum in the region of an eye-watering £900,000.

As Drew points out, it’s important to put this into context. “It sounds like a lot—it’s more than we’d started out with.

[Initially, we had] a pretty fixed budget and, as you can see, it grew arms and legs pretty quickly. It was all about adapting 84

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and reacting to what was there. The one major caveat to take away from this is: don’t be scared by the cost. That was split into three. One-third of that was preparing the building, making it safe, and maintaining it. The next was the energy-efficiency upgrades. The final piece was the ‘nice to haves’—the kitchen, the bathroom, the floor finishes, the decorating.”

“It’s really important that we don’t get to the end of this and tell people the cost and they say, ‘No, not doable, we can’t apply this’. There are aspects that can all be applied, whether that’s to a whole close or to an individual flat. There’s lots of learning we can take from this.”

As Drew is in the process of explaining how each future tenant of 104 Niddrie Road will be provided with a “quick start guide” explaining the efficient heating and ventilation systems and how to use them, I can’t help but recall the earlier conversations about resident engagement at Murrayburn. Clearly, I’m not the only one drawing this comparison, as Gordon jumps in to make a similar comment.

For Gordon, taking a holistic approach to encouraging retrofit projects is key, including promoting the range of green

One Day

“It’s about this balance between heritage and energy efficiency. If you really love your coving, you might not want to do it. But, if we were going to chop our energy bills by 90%, I would sacrifice one elevation of coving”

The Sun and Moon Two things you can always depend on being there.

Well now there’s a third.

finance products on the market. “For the FMB, we’re trying to campaign around the UK on a broader scale about the retrofit strategy, which will include a whole range of approaches from green finance to addressing planning and conservation issues,” he explains.

West One’s fast, flexible, and reliable service, gets the funding your clients need, when they need it, even in a changing marketplace.

C

People at the centre So much of the conversation around decarbonisation and retrofitting has focused purely on the technical aspects— the challenges of upgrading a housing stock comprising around 35% pre-1945 properties—but this is only one piece of the puzzle. Human engagement, communication, and flexibility are equally, if not more, important factors to consider, and this is where the specialist finance industry has a role to play.

We need a flexible and communicative industry to meet the needs of those retrofitting projects— lenders incentivising green development with preferential rates, brokers who are willing to build an intimate understanding of the challenges, risks and needs of each borrower’s project, and an industry eager to consider each individual circumstance in context to adapt to financial challenges as they occur.

The day has made one thing abundantly clear: social and community engagement— the S in ESG—is crucial to the success of decarbonisation initiatives, and one that cannot be ignored.

At every level of the process, from explaining the benefits of these upgrades through connecting homeowners with funding and all the way to cultural shifts in how we use more efficient homes, we cannot forget the human communities at the centre of it all.

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Interview

‘ESG is an integral part of strategic investment analysis and decision-making’

Georgie Crocker Lenders in the specialist finance market are realising that ESG is not just a nice to have but a vital element of underwriting and decision-making Words by

BETH FISHER

G

eorgie, an asset finance adviser at Arc & Co, joined the business in April 2022 from fintech brokerage Capitalise, where she focused on structured finance advisory. She has worked in various sectors of the property market— including logistics/industrial, residential, student, office, hotel and retail—and aims to bring her vast knowledge of the commercial and development sectors to the debt advisory business. I sit down with Georgie to discuss why ESG will be imperative to the longevity of real estate assets and investments, and how it can enrich the industry all the while.

88 Bridging & Commercial

Georgie Crocker

Interview

“The funds are under the most scrutiny to provide transparency over their sustainability investment criteria. This impacts the types of opportunities they will assess for long-term investment”

Any topic on this discussion will, inevitably, lead to some level of scepticism and misconception. For instance, there has been significant scrutiny regarding the most appropriate ways to measure ESG; some question how investors and lenders define their credentials and whether they genuinely have a positive impact in the long term. Previously, some have gone as far to ask whether there is a tradeoff between creating truly positive social and environmental impacts and obtaining attractive investment returns.

Do you think there are misconceptions when it comes to ESG in real estate?

Why is implementing ESG into business models becoming increasingly more important in the specialist finance market?

Real estate as an asset class is in a unique position; it is integral to the creation of community and, to an extent, influences the economic health of the area and is therefore intrinsically linked to ESG. For example, it impacts businesses, offices, housing, students, healthcare, leisure and retail.

Although macroeconomic affairs within the real estate industry have shifted from the global pandemic to rising interest rates, inflation, the energy crisis and the conflict in Ukraine, ESG has continued to be one of the main focal points for both investors and lenders when analysing new opportunities.

However, we are seeing these presumptions lessen as more clients achieve favourable terms and opportunities owing to ESG-related lending and investments—whether that be reduced finance rates for development schemes with high EPC ratings, or higher sale prices for assets that are self-sufficient.

All areas of the real estate industry are impacted by ESG regulations and initiatives to a certain extent. However, arguably, the funds are under the most scrutiny to provide transparency over their sustainability investment criteria.

This, in turn, impacts the types of opportunities they will assess for longterm investment, which incentivises developers as they can benefit from cheaper finance and attain a suitable exit, whether that be a refinance onto an investment facility or a sale.

Sustainable finance is generally understood to consider ESG aspects, resulting in increased socially and economically responsible projects and enterprises. Forms of sustainable finance have increased significantly in the past few years, as funds and institutional investors create specific ESG targets to contribute to global improvements and long-term value.

Government and international bodies are calling for communities and businesses to take responsibility when it comes to their actions and decisions. For example, the UN’s 17 Sustainable Development Goals have depicted the most urgent challenges for our communities and businesses and 90

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call for private and public bodies to take more responsibility in their roles. COP26 further highlighted the importance of some of these issues and has accelerated action towards these goals.

The real estate specialist finance market therefore needs to continue the internal and external focus around sustainability and social impact. ESG has moved on from being a topic of discussion to an integral part of strategic investment analysis and decision-making.

It is becoming more embedded in the underwriting process for specialist finance providers for many reasons, such as environmental impact, criteria to adhere to from their funding lines, transitional risk, likelihood of refinancing and appetite of investors for a sale.

It is imperative that ESG is approached as something that enhances our industry and the longevity of real estate assets and investments. It is hoped that, by having targets, processes and policies, the specialist finance market can transparently deliver sustainable outcomes. This framework should allow the specialist finance market to analyse risks and opportunities for all stakeholders, taking into consideration the wider long-term effects. Ultimately, it is important as it aims to create measurable positive impact.

What practical steps can investors and developers take to make a noticeable change?

There are various practical ways to do this. Many investors have aligned their existing portfolios with wider social initiatives, and we have seen examples of assets being used for the benefit of the broader community, especially through the global pandemic and recent political unrest.

Healthcare facilities and business centres have been used as Covid-19 care centres and vaccination stations, hotels have taken on asylum contracts and retail premises that were left empty after lockdowns have tackled vacancies by lending themselves to pop-up shops and events spaces.

There are arguably more regulations and criteria in place to measure environmental impact in the real estate sector, such as the Building Research Establishment Environmental Assessment

Interview

Method (BREEAM), the National Australian Built Environment Rating System (NABERS) and the requirement to improve EPC ratings to at least a C by 2028 across all rental properties.

These regulations are aimed predominantly at the institutional market, and set out clear targets to guide strategies over the next few years. It would be easy for these bodies to focus on acquiring ESG-compliant assets moving forward. However, they must also evaluate their existing portfolios to establish the refurbishment costs required to make necessary improvements.

There has been a significant increase in funding requirements for this and we predict this will continue to climb.

As such, lenders are bringing more products to the market specifically designed to fund these capex works.

Net zero by 2050 will play a significant role in how future developments are approached; the UK’s largest housebuilders have agreed a delivery plan to meet the government’s climate targets via the Future Homes Task Force, which will see the first zero-carbon homes being built by 2025. Research

by Knight Frank in July 2022 revealed that 20% of respondents would pay more for an energy-efficient home. This is especially relevant now, with energy prices rising and household income being stretched. The report also found that almost 40% said access to a charging point for electric vehicles was more important than a year ago. Ultimately, practical steps taken by developers and investors to create ESG-focused properties will benefit the end purchaser.

Focusing on build methods and materials can also be impactful for developers.

According to the 2021 Global Status Report for Buildings and Construction, the industry accounted for 36% of global final energy consumption and 37% of energy-related CO2 emissions.

Timber construction typically requires significantly less building time than steel, which can mean less machinery use and fewer emissions. The Stadthaus, a ninestorey block of flats in Hackney, London, is thought to be one of the tallest timber residential structures in the world. By using timber, the developers reduced the construction time by six months and costs by an estimated 15%.

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Words by

TOM HIGGINS

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ore than five million homes and businesses are at risk of flooding and coastal erosion in England alone, according to the Environment Agency, making it the most serious and costly natural hazard faced by the UK. A record £5.2bn is set to be spent on flood defences before 2027, yet the number of homes in danger of flooding is set to rise, with the Environment Agency anticipating an increase of up to 50% in the number of houses built on flood plains over the next 50 years.

This problematic scene is being played out against the backdrop of climate change, which raises specific concerns for insurers and other parties within the lending market. More extreme rainfall is anticipated in the UK and overseas, forcing the insurance industry to balance the needs of a growing population with the consequences of climate change.

THREE-PRONGED PROBLEM

“Climate change is undoubtedly creating increased flood risk for the UK property market,” says Sam Howard, co-chief executive and cofounder of Magnet Capital, pointing to instances of flash floods “devastating parts of the country in the last year”.

The problem, he notes, is rooted in three

A County Councils Network survey found two-thirds of councils feel that the pressure on their local infrastructure, including roads, health centres, schools and public services, is excessive because of new housing developments. This can only increase, with an additional 3.9 million people expected to be living in the UK by mid-2045.

To meet the demand in England alone, 340,000 new homes must be built every year until 2031, according to the National Housing Federation, including 145,000 affordable homes.

The Lords Built Environment Committee’s inquiry into meeting housing demand found that targets would not be met unless local barriers, including skills shortages, resources for local planning authorities and support for social housing providers, were addressed.

While many UK councils, such as those on the flood-prone east coast, do not have

More homes are going to be built in areas prone to flooding, but is the insurance industry ready and able to cope?

The rising tide of competing tensions: the need to build residential property, local authorities under pressure to hit targets for new homes, and the government not investing enough in building flood defences.

The result of these combined factors is simple: “We will see more new homes being built in zones with a high risk of flooding.”

The need for new homes comes with seemingly endless headwinds.

much choice when it comes to building on floodplains, others do.Yet local authorities are still turning to land that is at risk.

Two factors in particular drive this: cost and policy. Land on floodplains is generally cheaper to acquire and, owing to its flat nature, requires less groundwork to make it suitable for development.

For local authorities, increasingly scarce resources are forcing them to make savings wherever possible.

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This extends to the skills and capabilities within local authority planning departments, with the defunding of local authorities since 2010 having “an impact on the ability of councils to manage this complex issue”, a report from think tank Localis states.

Meanwhile, government policy does not prohibit local authorities and developers from building on floodplains, advising that it should not be done “unless unavoidable”. While there is a limited capacity to meet housing demands, Localis’s research recommended that such developments should be accompanied by flood defences, alongside funding for a task-force focused on flood risk.

And with new, accessible homes being built on cheap flood plains, the consequences of flooding may be disproportionately felt by poorer households.

TOO MANY COOKS

More broadly, complexity in the number of bodies and groups involved in flood risk management hampers meaningful progress.

In England, local authorities are responsible for overseeing housing. In areas with two-tier authorities, this is handled by district councils, with the county council responsible for surface water drainage.

At the same time, the Environment Agency is responsible for flood risk and an area’s private water company is responsible for managing drainage.

In times of emergency and crisis, the district council may be responsible for evacuation, while the county council oversees the provision of alternate accommodation, but responsibilities vary across the country.

Only 12% of local authorities strongly agree they have the skills and expertise to take account of flood risk now and in the future in planning decisions, Localis found.

Owing to the intricacy of the issue, it is clear to see why authorities are strained.

PEAK PERIL

The third factor Sam points to is the lack of spending on critical flood protection infrastructure. In July 2021, the government outlined how £5.2bn would be forked out to improve the nation’s resilience against flooding, targeting 336,000 homes with better protection.

Flood risk is considered a “peak peril” in the UK, meaning it is one of the “major natural catastrophe event exposures”, says Phillip Martin, risk director at GeoSmart.

To address the threat, more than 850

new flood and coastal erosion defence projects have been completed since 2015.

Over 232,000 hectares of agricultural land, as well as thousands of businesses, communities and major infrastructure – including more than 8,000km of roads – also benefited from improvement schemes. Analysis by the Department for Environment, Food & Rural Affairs found these measures had reduced national flood risk by an estimated 5%.

Phillip points to several studies showing the variation in national and regional responsibilities via the Environment Agency and how local councils manage flood types. In short, no one has the overarching responsibility, necessitating localised expertise to best implement flood defences efficiently.

“This is not new,” he says.

“What is concerning is the effect of climate change on flood risk,” he adds.

“Flood events are becoming both more frequent and more severe.

This is happening all over the world and is associated with increases in temperature and the ability of the atmosphere to hold more moisture.”

This means investment in flood defences and related technologies and infrastructure will need to be continued.

INSURANCE: NOT A GIVEN

For insurers, the stage is set for the potential for rising costs and stranded assets on the back of flood risks.

Phillip says most property owners have access to flood insurance as part of their buildings’ insurance policy. However, this is “not a given” since terms may vary and because certain buildings are not covered

by Flood Re—the UK’s not-for-profit, publicly accountable flood insurer of last resort—such as housing association properties and farm outbuildings.

However, for homes built before 2009, there is guaranteed access to insurance via the Flood Re scheme—a joint initiative between the government and insurers to protect against losses due to flooding.

For insurers, homeowners and businesses alike, the potential of not having access to flood insurance amid more frequent extreme weather events is a major cause for concern.

The Bank of England’s Climate Biennial Exploratory Scenario addressed this issue directly, noting that some properties could become stranded assets when lenders and insurers consider the risk of financing or insuring not acceptable.

“At present, there is no simple 98

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answer to this potential problem. It is a challenge faced around the world, not just in the UK,” Phillip adds.

Flood risk is already a key part of underwriting practices, Magnet Capital’s Sam says.

“We are focused on not only protecting our interests but also protecting our borrowers and, accordingly, we ensure that the borrower has flood cover included on their contractors’ all-risk policy,” he notes.

On the flip side, some borrowers do not view flood risk in the same light, yet those who have been “extremely resistant” to taking out flood cover have been quick to offer their gratitude when developments are hit with “significant” flooding, he adds.

MANNING THE PUMPS

For insurers, the need to provide coverage amid a worsening climate crisis compounds the conundrum of how to assess the flood risks for new and existing buildings.

“Insurers use a variety of data sources to determine the associated risk of properties that may be in flood-risk areas and whether they can provide an insurance policy,” says Anthony Mellor, head of home insurance at Atlanta Group, yet it remains at the discretion of the financier or insurer how they treat each building.

Several flood data providers are operating in the UK insurance market, providing information to users. The FCA’s Climate Risk Products Providers Database lists many of them.

However, the availability of flood information is “probably less of an issue than its integration in the lending and insurance markets”, Phillip says, although he anticipates this will improve in the next few years as commercial and supervisory pressures increase.

“The tools GeoSmart offers its clients include spatial data at individual property level for all sources of flooding, including groundwater. This contains information on the intensity and likelihood of flooding, based on flood depth and flood return period. This data is calculated into average annual damage estimates for each individual flood source and for all sources in combination,” he says.

But climate change is a significant variable in the equation. GeoSmart’s own data is adjusted to reflect the Intergovernmental Panel on Climate Change’s scenarios.

“This allows an understanding of the flood hazards affecting the property and an estimate of the financial implications.

This is presented as a current-day view of risk and time frames into the future

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to assess sensitivity to risk increases under the common climate change reporting scenarios. Data are linked to a lender’s book of business and are served through webmaps and analytics dashboards,” Phillip explains.

The backbone of Magnet Capital’s flooding assessment stems from the Environment Agency’s online flood information service, as well as the flood risk section of the location’s environmental report.

Sam says: “The key for us is that we don’t want to be building in areas of high risk of flooding and the onus is on the planners to not give planning permission to such applications.

“If there is a risk of flooding we want to see that the planners have included specific flood protection measures, such as raised ground floor levels.”

CLIMATE CONUNDRUM

The complexity of climate change forecasting, ESG data and localised flood hazard predictions creates a landscape where the use of data is every bit as paramount as it is perplexing.

Anthony says the early 2000s were “the tipping point for the industry” as

the cost to insure flood-risk properties continued to rise. “That’s why the Flood Re scheme was introduced, in partnership with insurers and the government, to make flood cover more affordable for homeowners,” he explains.

The decision to exclude post-2009 properties from Flood Re coverage was to deter developers from building in floodrisk areas, but the rising number of homes being built on flood plains may suggest this policy is not working as intended.

As such, some “very high-risk areas” will no longer have protection measures funded into the future, says Phillip, with the process of a “managed retreat” away from high-risk areas inevitably leaving some property becoming “uninsurable and unfinanceable”.

Likewise, “mortgage ghettos” are a possibility, Ceri Sansom, consultancy director at environmental reporting firm Groundsure says, as high-risk areas may become “unmortgageable and uninsurable” and could form part of “a forced migration in extreme circumstances”.

To alleviate this problem, the industry will also need to look at “better factoring in flood risk mitigations, such as property-level flood defences and

flood-resilient designs,” into insurers’ pricing algorithms, Phillip suggests.

Consideration must also be given to physical flood defence schemes, such as the Thames Barrier, which can come into existence only with “significant state financing”, he adds.

Ceri says it is “almost certain” that lenders and insurers will base their decisions on the expanding supply of climate risk and cost data as information around climate events “becomes more apparent, including the rate of warming and the consequent impact to property”.

Such forms of analysis will be “increasingly relied upon through more mandated climate due diligence between lenders”, while conveyancers will need to be “more prescriptive about verifying the risks as part of the conveyancing transaction”, she adds.

As climate change brings about more devastating floods, as seen recently in Pakistan, the need for the insurance industry to adapt to a changing world is growing in prominence.

As GeoSmart’s Phillip says: “This is certainly a risk and one that is being faced around the world.”

10:30am

Panel - Buy-to-let inc. HMOs, MUFBs and Ltd Co Lending

11:00am Panel - Commercial Lending

12:30pm Rapid Fire - Bridging inc. Auction Finance

Visiting the FP Show on 10th November?

Why not sign up to attend a live Criteria Clinic?

A panel of experts will answer questions - either on the spot or ones that you and others have pre-submitted - and seek to place deals right there and then—an invaluable experience for any broker, adviser, investor or developer.

1:30pm Panel - Development Finance

2:30pm Rapid Fire - Second Charges Oct/Sept 2022

Providing tailored support through changing times

#LovetoLend Book an appointment with your local BDM today: enquiries@romafinance.co.uk 0161 817 7480 For introducer and professional property trader use only.

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POINTING YOU IN THE RIGHT DIRECTION We’re more than just a principal lender; we have the in-house development expertise to support your clients and collaborate with them to make sure their projects progress as planned.

At Pivot we are passionate about providing our clients with the financial independence they require to meet the business objectives they desire - finance to enable progress. For more information please contact +44 (0)20 3695 5510 or visit pivotfinance.co.uk

FINANCE TO ENABLE PROGRESS

The B&C Awards 2022 winners Best Solicitor

Service Excellence – Brokers

Best Valuation Partner

Service Excellence – Lenders

Best Bridging Broker Newcomer

Lender Relationship Manager of the Year

Best Bridging Lender Newcomer

Underwriter of the Year

Specialist Product of the Year

Best Specialist Distributor

Specialist BTL Lender of the Year

Best Commercial Broker

Best Specialist Bank

Best Development Broker

Winner: Fletcher Day Highly commended: Fieldfisher

Winner: Method Highly commended: Capital Value Surveyors

Winner: Propp Highly commended: Fluent Bridging

Winner: MS Lending Group Highly commended: Spring Finance

Winner: 80% LTV bridge-to-let – Aspen Bridging Highly commended: Part-complete development – Avamore Capital

Winner: Hampshire Trust Bank Highly commended: LendInvest

Winner: Allica Bank Highly commended: United Trust Bank

Winner: Clifton Private Finance Highly commended: Pure Property Finance

Winner: MT Finance Highly commended: Funding 365

Winner: Annaliese Melvin — Glenhawk Highly commended: Allegra Penny — Funding 365

Winner: Nikhil Shah — Funding 365 Highly commended: Raphael Benggio — MT Finance

Winners: Brightstar and First 4 Bridging

Winner: Synergy Commercial Finance Highly commended: Watts Commercial

Winner: Aureum Finance Highly commended: Sirius Property Finance

On 15th September, B&C welcomed 770 guests to its 15th annual Awards, in association with InterBay and Precise Mortgages, at the Hurlingham Club in Fulham The event was dubbed the ‘opening night’ of a spectacular 1930s venue, complete with music, dancing, delicious food and drinks and, of course, the very best company this industry has to offer.

The Thirties represented a post-prohibition return to glamour and decadence, and a sense of freedom. With many of the past couple of years’ worries now firmly in the rear-view mirror, it felt fitting to celebrate, albeit under somewhat sombre circumstances following the Queen’s sad passing. The current economic and global environment, however, does present us with a fresh set of challenges. But, if there is anything this sector knows how to do, it’s finding triumph in times of adversity—the night’s 27 award winners were testimony to that.

The two judging panels had their work cut out for them as they determined who has truly excelled in the past 12 months. We are confident the process has revealed a fair and transparent picture of the future of the market, paved by the outstanding firms and individuals who have done themselves and the sector at large very proud.

Thank you to InterBay and Precise Mortgages for supporting the Awards and our vision for a night of untold fabulousness—we could not do this without you. Our gratitude also goes to MFS for the generous drinks’ reception and thrilling delights of the after party and band, and to all the supporting companies for their role in making the occasion so special.

Regulated Bridging Broker of the Year

2022 ESG Award

Best Bridging Broker

Marketing Partner of the Year

Regulated Bridging Lender of the Year

Editor’s Choice Award

Commercial Lender of the Year

Outstanding Contribution

Winner: Clifton Private Finance Highly commended: SPF Private Clients

Winner: SPF Private Clients Highly commended: Clifton Private Finance

Winner: United Trust Bank Highly commended: MT Finance

Winner: Allica Bank Highly commended: Shawbrook Bank

Best Development Lender

Winner: Avamore Capital Highly commended: Paragon Bank

Mezzanine Lender of the Year

Winner: Crowd with Us Highly commended: Clearwell Capital

Bridging Lender of the Year

Winner: Glenhawk Highly commended: United Trust Bank

Winner: MS Lending Group

Winner: OSB Group

Winner: Atelier

Winner: Harley Kagan — United Trust Bank

Backstory

‘I now have the opportunity to make the “what ifs” a reality’ Ashman Bank’s new senior relationship director discusses ESG product choice, putting the customer journey under a microscope and influencing a fresh lending proposition In August, Neil Molyneux joined the new bank—which received its authorisation with restrictions licence this year—to lead the team responsible for originating new lending and building the broker panel. Having held roles at Masthaven Bank, Cheval Bridging Finance, Sequence, Forces Financial, Swift Group, Lehman Brothers and Advance Finance Group, he plans to use his three decades of experience to help shape the funding and service SMEs deserve.

Congrats on your new role. Why did you decide to join Ashman Bank?

The offer just stood out—they were creating something special. Building something from the ground up presents challenges but also fantastic opportunities. Having worked for a lender that became a bank, I knew I had the skills and understanding that would enable me to add value. Also, being able to work with some of the brightest in the industry in an environment where we can challenge tradition and bring innovation was not to be missed.

What has been your biggest accomplishment?

To be invited to be part of a group building a bank from the beginning is a privilege. Having the opportunity to influence the entire lending proposition is as daunting as it is exciting. We’ve all said,‘Wouldn’t it be great if…?’ I now have the opportunity to make the ‘what ifs’ a reality.

Think of it like building your home from the ground up. A door is where you want it, a plug is in the most useful location. I’m taking 30 years of experience and incorporating as many plugs and doors in the most useful places as I can.

How will you help Ashman Bank take market share in a highly competitive market?

I have seen every situation you would expect and more—from the highs and lows of the market to weird and wonderful client challenges.This means I can speak confidently and competently to introducers; I’ve been there, done that and understand their daily challenges. It’s easy to be the lender who is the cheapest or pays the most commission, but what happens when a competitor reduces rates or pays more? It’s far better to be trustworthy, simple to work with and have products and a service that customers need and value.

You will be leading the team responsible for originating new lending and building the broker panel. What are your ambitions for the first 12 months?

To deliver a targeted, market-leading proposition.That is about much more than product fit. It’s about delivering the best possible experience through innovative technology and a laser-sharp focus on customer experience.

We have put the customer journey under a microscope to ensure it’s as simple as possible.

This will include a focus on what is required in current times—nobody has cracked this yet.

Is there enough choice in terms of ESG offerings in the specialist finance market?

Over time, we hope to meet the changing expectations of SMEs. Energy efficiency is critical, and it would be great to see innovation that supports the SME landlord. Many products target retail and, while the specialist space is getting there, it has some way to go. SMEs have to want products for lenders to offer them, and needs will likely become apparent as ESG regulation evolves. I feel ESG has been more of a ‘nice to have’ than a driver of financing.The changes in the BTL space from 2025 will totally alter this.

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

To embrace the lender-introducer relationship.

We are a team, and the best work together seamlessly, with a mutual understanding of roles.

I have often had to mediate between underwriters and introducers. Communication is key.

108 Bridging & Commercial

How did you spend your very first pay cheque?

I bought driving lessons.

Most memorable moment from your time in the industry?

Winning the B&C award for Marketing Campaign of the Year. I took an idea from inception and beat some of the most talented ad agencies in our sector.

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

I would have a deli and coffee shop on the seafront in Port de Pollença, Mallorca.

What was the worst job you ever had?

I worked in a shoe shop over the summer before college. Nothing can prepare you for being low down near a hot foot in an old shoe on a summer’s day.

What is your karaoke song?

More than one…

Cher, If I could turn back time,Westlife, Flying without wings—it’s that big note—and the Spandau Ballet classic, Gold.

Refurbishment buy to let

Customer looking to refurbish their buy to let property?

Along with two loans combined in one application, our refurbishment buy to let proposition now has a choice of three exit products: Standard refurbishment Energy efficiency refurbishment EPC C+ refurbishment

Contact your local specialist finance account manager An OSB Group lender

FOR INTERMEDIARIES ONLY - Product and criteria information correct at time of print (20/09/2022)

precisemortgages.co.uk

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