ISSUE 1 JAN/FEB 2019
BEHIND BRIDGING The funding story
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The billion pound dream p16
SPECIALIST LENDING SOLUTIONS REFURBISHMENT BUY TO LET
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Acknowledgments Editor-in-chief Beth Fisher beth@medianett.co.uk Creative direction Beth Fisher Caron Schreuder Senior reporter Tom Belger tom@medianett.co.uk Reporters Martin Greenland martin@medianett.co.uk Theo Osborn theo@medianett.co.uk Sub editor Geoff St Louis geoff@medianett.co.uk Sales and marketing Caron Schreuder caron@medianett.co.uk Contributing photographer Alexander Chai Special thanks Tom Clark, NapeX Finance Nick Parkhouse, EY Colin Sanders, Tuscan Capital Benson Hersch, the ASTL Printing Cambrian Printers Design and image editing Russ Thirkettle, Carbide Finger Ltd Bridging & Commercial Magazine is published by Medianett Ltd Managing director Caron Schreuder caron@medianett.co.uk 3rd Floor, 71 Gloucester Place London W1U 8JW 0203 818 0160 Follow us @BandCNews
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lmost five years ago – when i first stepped into Medianett’s buzzing (albeit much smaller) office in Kilburn Park – I remember questioning why our flagship online publication Bridging & Commercial did not have a print parallel. With its ballooning popularity within the specialist finance industry, it rightly called for another way to expand both its creativity and how it engages with its readership. However, for those of you that are running your own business, you will know that you can’t just jump into a new project without doing the necessary research. We hadn’t launched a magazine because statistics showed – and some industry professionals believed – that print was a dying breed in the face of digital revolution. And the facts are hard to ignore. From 2007 to 2018, the share of individuals reading or downloading online news, newspapers or magazines in Great Britain more than trebled from 20% to 69%, according to Statista. At the same time, the annual number of printed magazines sold fell from around 820 million in 2011 to just over 422 million in 2017. When we revisited the idea of the Bridging & Commercial Magazine early last year after noticing that our online longer-form features were garnering as much interest as our breaking news stories, some of the initial responses claimed that it was an unusual publishing move to start online and then expand to print. However, we now believe that a high-quality print product works well in a niche market. ABC’s Business Media Report from July 2017 to June 2018 revealed that six magazines had increased their circulation by over 50% year-on-year. If the content works and the readership is engaged, it shouldn’t matter how it’s published. Our slick, hardback broker bible, The Index, has also grown annually since inception because it gives brokers what they need in a tangible, easy-to-reference format. Successful content creators understand their market – and the people that power it – inside and out. That is why in our first-ever issue we unravel some of the biggest topics the sector is talking about and what they mean for you and the wider industry. On page p29, we look at the bridging conversion rate problem, while on p26 we discuss whether underwriters need to be based regionally or centrally - that is, if there are enough to go around. In the first of two exclusive interviews, find out why Cabot Square Capital decided to take a majority stake in MSP Capital, a lender which has been somewhat under the radar until now (p48). We also had the privilege of working closely with Octane’s Mark Posniak and UTB’s Gavin Diamond in an in-depth, tell-all interview highlighting their respective careers (p50). In recent times, numerous new lenders have exploded on to the bridging scene, however, not much thought (or commentary in the press) has gone into what’s behind this surge in liquidity. Our cover story on p32 provides an introduction to the critical importance of knowing how the bridging market is funded, why this could affect your business and the possible outcome as a result of a more institutionalised industry. Change is inevitable, but it’s the way you understand and respond to it that will keep you ahead of the rest. Beth Fisher Editor-in-chief
3 Jan/Feb 2019
Constantly learning from the best of our peers, I always felt confident we could provide something different in the market p16 4 Bridging & Commercial
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The cut Products Exclusive People Zeitgeist Cover story Explained Interview View Limelight Backstory
Happy 1st birthday
It’s getting regional
Underwriting from the moon / The conversion problem Lenders just want to have fun(ding)
Landlords’ place in the sun
Cabot & MSP / Gavin & Mark
Hindsight is a beautiful thing / Place your bets
Paula Purdy
Our pick of exclusive news
Words by
tom belger 6 Bridging & Commercial
The cut
Lendhub’s new broker portal MyLendhub has led to a “significant” increase in enquiries.The portal was launched at the Finance Professional Show in November 2018 and looks to speed up the deal process.Christopher Adamou, director at Lendhub, says there is a real buzz around the full release of the portal to all its broker contacts this year. “The select number of brokers currently working with the portal have provided extremely positive feedback. The portal has surpassed their expectations and they enjoy having full visibility at all stages of the loan process. We are always looking for ways to streamline the lending journey, making it a more efficient process for all parties involved. There are already a number of new features to be built into the system, but all will be revealed soon.”
ThinCats anticipates to secure further funding from institutional investors after recently receiving a £200m funding line.Towards the end of 2018, the SME lender partnered with BAE Systems Pensions to increase funding for SMEs.The benefit? ThinCats can do many more loans of larger sizes than it has done historically. “We will continue to support mediumsized SMEs (10-250 employees) across all sectors in all parts of the UK,” a spokesperson for ThinCats says. “In 2019, we could see – for the first time – more than 50% of small business loans being sourced from non-bank lenders. So, we expect further funding from institutional investors which will bring an increase in average loan sizes, enabling larger SMEs to source funding from alternative finance providers.”
Whitehall Capital is aiming to have a loan book of between £200m-250m in the next 24 months, according to its CEO, Anthony Bodenstein (pictured above). He confirms that the bridging lender currently has around £50m on its loan book and approximately £75m-100m ready to deploy. Around 50% of its originations are made through brokers, while the rest come through direct and repeat borrowers. Anthony says: “We’re looking to increase our network of brokers significantly. Our only limitation in terms of size is the amount of loans we can source.” However, he adds that Whitehall wants to be careful and avoid growing too fast by taking a stepped approach. The bridging lender started off doing £2-3m a month in loans but has now reached £10-15m a month.
7 Jan/Feb 2019
The cut
Knowledge Bank found that, for the first time, there were a number of commercial finance searches on its platform for interfamily transactions in November. Interfamily transactions are where parents sell their house to their child, where it could either be sold for a discounted price or, more usually, is linked to a ‘concessionary purchase’, which is where it goes through at a realistic price but parents gift some equity to make up the deposit and only want a lesser amount back from the transaction. Nicola Firth, CEO at Knowledge Bank, says: “Getting to the rationale behind this one would be fascinating, and whether this transfer of ownership is to avoid tax liabilities or to bequeath the buildings.” Meanwhile, semicommercial properties were the highest searched commercial criteria in two of the past three months. Nicola adds: “This bears out reports of an increasing number of landlords with buy-to-let properties looking to move instead to semicommercial to avoid the additional 3% stamp duty on second homes and the more punitive tax regime increasingly affecting residential landlords.”
Pitch 4 Finance is reporting that over 100 lenders have expressed an interest in being featured on its new lending platform. The company began the process of formal registrations in January and any new lenders can register their interest online through pitch4.com, while a soft launch for users has already begun. The platform aims to raise awareness of the growing availability of SME and property funding. Businesses can use the platform to search for a variety of finance options, including development, residential and commercial investment products. Matching lenders are then able to pitch for the loan, sending details of the terms they can offer direct to the borrower through the platform. “Pitch 4 allows customers to access all registered lenders and match their requirements with the lender criteria,” explains Miranda Khadr, founder of Pitch 4. “This gives them a better and fuller whole-ofmarket approach, greater accessibility and transparency of process, as well as greater choice and value for money. Throughout the process, our customer service agents are there to help.” Miranda adds that there will be an opportunity for brokers to use the Pitch 4 platform in the future.
8 Bridging & Commercial
At the time of writing, just over £110,000 has been raised through the Mortgage Sleep Out. The funding is being used by End Youth Homelessness to put a roof over the heads of young people and give them the healthcare, education and employment they need to turn their lives around. The charity single Take Me Home, recorded by MIC (Mortgage Industry Collective) and released on 12th December, continues to raise funds for the charity. There are currently no firm plans in place for further Mortgage Sleep Out events, but Rob Jupp, CEO at Brightstar, says: “We have been overwhelmed by the response from people across the industry and the country in supporting the Mortgage Sleep Out. We are determined to use the momentum gained from this to push ahead in supporting End Youth Homelessness make real progress in tackling this issue once and for all. We look forward to sharing our 2019 plans with everyone – if you want to get involved, then please get in touch.”
The cut
Aspen Bridging intends to grow its loan book by 100% during 2019 and hopes to add five new members to its team during H1. The news comes after Aspen received further funding support from its parent company S&U PLC towards the end of 2018, as well as seeing a rise in enquiries following the introduction of its winter offer. Jack Coombs, director at Aspen, says: “We hope to add an exciting new product the market has never seen before in Q1 and also launch a major reduction in lending timescales through automation.” Vatbridge also announces that it projects to lend over £50m this year. In 2018, Vatbridge grew its team by eight and reached £30m of new lending. The lender also secured a new £50m funding line to help it plug the lending gap in the commercial property market and allow property investors to secure short-term funding to fulfil VAT liability and complete purchases.
In 2018, Hope Capital increased its staff numbers twofold and reached its target of having 50% of its senior management team comprised of women. Going forward, Hope Capital is aiming to double in size over the next few years after relocating. The bridging lender’s new Liverpool home is more than four times the size of its previous HQ and will accommodate its continued recruitment drive. “Hope Capital is in the process of launching a raft of innovative new loans and will continue to bring new and innovative products to the market throughout 2019,” says Jonathan Sealey, CEO at Hope Capital. “New staff are needed to enable Hope Capital to cope with the significant uplift in demand for its loans, but still maintain the speed, flexibility and efficiency that it has become well known for.”
Connect for Intermediaries is launching a new training academy to support advisers with commercial, bridging and BTL loans. The network also hopes the academy will bring new people into the industry. The first training week will take place on 11th March and the specialist network is already seeing significant demand for places. “In the residential market, an adviser must hold a mortgage qualification and be supervised until they can demonstrate they are a competent adviser,” says Liz Syms, CEO at Connect for Intermediaries. “There is no such requirement in this part of the specialist market, so technically someone could be working as a builder one day and set themselves up as a commercial, bridging and BTL broker the next, without a qualification or – for most of the sales – without FCA regulation. Connect’s network provides its service to support this type of adviser, but is also keen to ensure all of its members are as knowledgeable and competent as can be especially when taking on trainee advisers, so this is where the academy comes in. The academy will help candidates develop their mortgage knowledge, with a focus on understanding the criteria and lender offerings in the specialist market [so] that they can always provide best advice.” 9
Jan/Feb 2019
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TRANSPARENT FEES AND INTEREST CHARGES
Octopus Property
Bridge-to-let and development exit • Rates now from 6.99% per annum • Minimum loan size of £500,000 • Option of 12-month, ERC-free period • Available to new and existing borrowers operating in the real estate market
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Bridging for residential property • Rates now 0.6% per month • Loan sizes £250,000-£25m • Up to 60% LTV • Loan period from six months to three years • Available to UK residential property investors
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SME business loan • Upper limit on its range of flexible finance facilities increased from £500,000 to £2m • Available to well-run SMEs looking to invest and grow
Where business & property lenders meet active borrowers pitch4.com is a new platform where businesses find lenders and lenders find business. Smart tech collects key borrower data and maps it against lender criteria to find suitable matches. Win-win finance Borrowers get a single smart point to find, chat and then apply to lenders. Lenders get a new source of pre-qualified leads that are actively seeking finance. You have to be in it to win it You need to register as a lender to show on pitch4 searches. It costs nothing at all and takes only minutes. Soon after, you will be seen on relevant searches for finance. You pay just a small fee when a deal completes. No catches. Intuitive lender interface Login to chat with leads, view uploaded documents and send approval. You will find everything moves quickly.
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Words by
beth fisher
The billion pound dream
Exclusive
As Glenhawk blows out its first birthday candle, we reflect on what it takes to make an impact and successfully claim a slice of the market
17 Jan/Feb 2019
Exclusive
18 Bridging & Commercial
Exclusive
My team and I are incredibly ambitious, we are all emotionally invested in the company
I
t’s been just one year since Glenhawk burst onto the bridging scene. However, considering its seemingly overnight growth and enthusiasm for diversification, you’d expect the company to have been in the game for much longer. With support from non-executive director Harry Hill – a founder and chairman of Rightmove and former CEO at Countrywide – the short-term lender was created by CEO Guy Harrington in January last year after he noticed a gap in the market as a property developer. Guy tells me that – as someone who had direct experience with shortterm property finance – he always questioned the unnecessary fees. “I also never experienced any kind of service where I felt I could partner longer term with a single lender,” he admits. “My ambition to become a lender simply came from these two frustrations. “Constantly learning from the best of our peers, I always felt confident we could provide something different in the market with how we approached our fees and service. “Seeing it now from the lenders’ side, I underestimated how thorough you have to be with each client; the KYC, DD and general underwriting. “We also realised very quickly it is easy to get the loans out, but equally important to get them back in – and on time! “We lend incredibly sensibly.” The young business started out as a team of three – including managing director Paul McFadyen and director of lending Nick Hilton – and, over the past 12 months, has expanded to nearly 20 people, some of whom make up the team across Europe who are working remotely on building its proprietary loan book software platform. Now outgrowing its current office in the heart of Mayfair –
19 Jan/Feb 2019
Exclusive
which overlooks Albemarle Street and the Burlington Arcade – it has imminent plans to find a larger space for up to 40 staff. “On a more personal level, I am incredibly proud that over 30% of our clients have been repeat business, which suggests we are doing something right,” Guy explains. “Our aim was to bring transparency, fairness and honesty to – arguably – a sector that needed this.” I ask Guy whether he expected to be competing against so many other new bridging lenders when the business first opened its doors. “Without sounding overly confident – yes,” he admits. “All we did was bring together the best people in the business with the best ideas and tried to improve what was already out there.” Guy tells me that if there is one thing he has learnt throughout his various business ventures, it is that intellectual capital is “critical” to innovative solutions. “I am a real people’s person and always open to expanding the team if the right person comes along. We are ambitious, but willing to learn from our peers and grow organically.
mortgages and a later-life offering. “The term and regulated products are definitely of interest to us, especially as we have found a few unique angles to enter a market traditionally dominated by high street banks and pension funds. “We are keen to build out the business as a whole financial services group. “It would operate under the Glenhawk brand, so any market where we see an opportunity to disrupt, we will look into – watch this space!” Guy says that it will commence regulated lending in Q1, which will bring Glenhawk more opportunities to grow its loan book and, in turn, the team. The lender secured a £75m funding line from Shawbrook Bank and Insight Investment during its first year and expects to see new funding lines this year. “The funding line has been ideal for us; Shawbrook and Insight are two of the best partners any company could ever wish for, let alone for [a young company such as ours]. “In 2019, we will certainly see new funding lines for regulated and term products. “We are in discussions with numerous potential funders at present with a view
We are exploring a number of M&A options across insurance, brokering and a couple of other really interesting complementary businesses “We have all bases covered for this in 2019, with highly experienced individuals in compliance, finance, data analysis and underwriting who are all keen to drive the business forward. It helps that they are all fun to be around, too!” I prod to find out what Guy’s longterm vision is for Glenhawk. “To be the best at what we do. My team and I are incredibly ambitious, we are all emotionally invested in the company, share a common vision and hope one day to be a £1bn lender.” Guy tells me that the business is “actively” considering M&A options and new offerings. “We are exploring a number of M&A options across insurance, brokering and a couple of other really interesting complementary businesses. We are always on the lookout for potential products that can add real value to our clients’ borrowing experience. Insurance is certainly a strong contender in doing this. We have the infrastructure in place to expand, it is just a matter of time.” I ask him what other possible acquisitions he would be keen to look at this year and he says other lenders in regional areas where it can take advantage of their local knowledge.” Last year, Glenhawk revealed that it was looking at releasing term products, homeowner
to having these in place for Q1/Q2. “I like to think we have [made] our mark within short-term lending and taken a nice share of the market, so we are confident we can disrupt in these sectors also.” Is the £1bn dream achievable? Possibly. Glenhawk passed its 2018 loan book target by early November and hit just under £40m by the end of that month. It has plans to more than double this to £100m in time for its second birthday. If it follows this growth pattern, by its sixth birthday it could have solidified its place as a modern-day specialist lending success story.
20 Bridging & Commercial
Celebrating one year. Property finance, done differently.
www.glenhawk.com
People
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22 Bridging & Commercial
People
Regional sales appointments dominate people moves
Specialist lenders strengthening their sales teams in the regions dominated recruitment news between September and November 2018. Out of the 57 appointments in the specialist finance market covered by Bridging & Commercial and Specialist Banking, 28 of them saw lenders appointing sales representatives. In September, 14 sales appointments were made by lenders, followed by eight in October and a further six in November. Regional hires – which we have defined as anywhere outside of London and the South East – made up over half of these. In the North (North East/North West) and the Midlands there were five appointments each, followed by four in the South West and one in the West. Three were made in London and the South East and the rest were not attributed to a specific area. In terms of gender diversity, a total of 38 men and 19 women were hired during the period, resulting in women making up 33% of the new recruits. There were 15 appointments from outside the specialist finance market, with 10 of them joining from high street banks. The additional five joined from a variety of professional working backgrounds, including payment companies and fintech firms. Of those that previously worked at a high street bank, four originated from RBS, two from Lloyds and one each from HSBC, Santander, Yorkshire Bank and Barclays. In light of the significant uplift in lenders’ sales teams, it is surprising to see an apparent lack of recruitment for underwriting, with just two being appointed throughout the period. This could be down to a number of reasons, including a lack of skilled people operating in the underwriting space, or that lenders haven’t prioritised this position as much as others. This poses the question: how is all of the additional business generated by these BDMs going to be processed and managed while maintaining quick decision times?
23
Jan/Feb 2019
People
I like the way you move A snapshot of the companies generating major motion in the market Market Financial Solutions Williams & Glyn
Affirmative Finance
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Castle Trust Octane Capital
Darlington BS
United Trust Bank
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Y
CM
MY
Lendy
CY
CMY
K
Kuflink Bridging
Together
HSBC
Santander
Shawbrook
2 3
Glenhawk
Octopus Property
LendInvest
24 Bridging & Commercial
Lloyds
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Zeitgeist
Words by
Tom belger
‘Underwriting could be done from the moon for all I care’ Ever wondered why underwriting isn’t region specific?We have
H
istorically, many bridging lenders have been based in the capital, with much of their lending occurring in London and the South East. However, 2018 seemed to be the year of ‘the regions.’ This evolution comes at a time when other areas of the nation are outperforming London in terms of house price growth. According to the ONS house price index for the year to September 2018, London posted the lowest house price growth, where prices fell by 0.3%. The second slowest area was the South East, posting a rise of just 1.7% for the year to September 2018. Elsewhere, the West and East Midlands grew by 6.1% and 6% respectively, while in Scotland the average house price increased by 5.8%. Typically, property investors and developers follow the money and – as a result – demand for bridging finance tends to rise in these burgeoning areas, thus encouraging lenders to expand accordingly. Increased competition within the bridging finance space may also have led to geographical diversification. Scottish-based specialist finance brokerYour Expert Group predicts that the specialist lending market in Scotland will double in 2019. Specialist lender Octopus Property has completed significant deals in the region, including a £10m commercial bridging loan in Edinburgh.
Over the past year, lenders based in London and the South East have grown their sales teams in areas such as Yorkshire, Lancashire, the Midlands and Wales, however there has been little news on regional underwriting hires. Despite lenders bolstering their regional presence, many still underwrite from one central base. Octopus Property operates across England – with a particularly strong presence in the North West – but does all its underwriting from its London office. Ortus Secured Finance provides a lot of deals in Northern Ireland but, again, carries out its underwriting in London. United Trust Bank works in areas such as Wales, but has one underwriting hub at its London headquarters. Kuflink, which operates out of Gravesend, also lends in Wales and states that it has an inhouse underwriting team which reviews all of its deals in and outside of London. Meanwhile, both Masthaven and Funding 365 lend across England and Wales, with all credit and underwriting decisions coming out of London. This poses the question: how important or necessary is it for lenders to underwrite in the local areas where they are lending? Do brokers find it easier working w i t h
regional underwriters? Nathan Ellis-Calcott, director at Your Expert Group, feels that with regional deals, where the underwriter is based is less important than where the broker is based. “As the person packaging the deal for the lender, you absolutely want the broker involved to be based in that region. “After all, they’re going to have a better understanding of the mechanics and risks of the area, and security, in question. “In the eyes of the lender, it instantly makes the deal more credible: the broker is on the ground and has the appropriate local knowledge. “That’s clearly not the case if the broker on a deal in, say, Glasgow is based in the Home Counties. “There’s a knowledge gap and that will always be a concern to the underwriter.” Adele Turton, director at Sirius Property Finance – which has offices in both London and Manchester – says that she isn’t concerned where an underwriter is based. “…A more important factor is often the lender’s strategy and appetite to lend in a particular area and I have
Zeitgeist
had negative and positive experiences with both regional and London-based lenders. “Some central London lenders still aren’t comfortable with the North and – even when they are – they might expect to see higher returns on a development than they would in London.” Specialist finance broker Loan.co.uk has a regional structure with eight offices across the UK, including locations in Wales and Northern Ireland. Paul McGerrigan, CEO at Loan.co.uk, believes that an underwriter’s experience lending in the area where the security is based and making a consistent decision is more important than whether or not they are based outside of that area. He also feels that, ultimately, these decisions will be made with technology, which will remove all bias and give complete consistency. “That said, the propensity for an underwriter based in a local area outside of London to know the local area is much higher,” he states. Agreeing, Stuart Milton of East Midlandsbased Reservoir Finance says it will not do any harm if there are more regionally-based underwriters, but, at the end of the day, he just wants consistency. “We have had bad experiences with London-based underwriters and those that are regionally based as well. “Underwriting could be done from the moon for all I care, as long as it is efficient.” However, Geoff Wilson of Yorkshire-based broker White Rose Finance says: “From the brokers’ perspective, I’m sure most would agree that it is much easier to work with regionally-based underwriting staff who truly understand the markets and can provide the necessary feedback quickly and effectively in order to progress the deal.” Peter Black, managing director at Snowball Alternative Finance, is of the opinion that it depends on whether the deal is vanilla or complex. “…We had a recent deal where a Londonbased funder just could not get their head round a property deal and the local market in which it sat because it did not fit the ‘London’ model that they understood, and as they also would not travel to see the project, the deal went elsewhere. “I, therefore, do prefer working with more local underwriters who
understand the region they work in. “It is also an advantage to the funder as local experience and knowledge can provide the underwriter with great insight into a particular deal that would not be picked up by a more remote underwriting department.” Are lenders planning to adopt regional underwriting teams? In response to the brokers’ comments, Bridging & Commercial asked several London-based lenders whether they will consider regional underwriters. Most of them have no plans to introduce regionally-based underwriters, although Octopus said that it is something it is thinking about. What did become clear, is that many are adopting, or have in place, specific underwriting processes which deal with regional cases. Funding 365 explains that its underwriters often visit brokers and undertake site visits across England and Wales. This ensures that they have on-the-ground knowledge of areas outside of London. LendInvest also does all its underwriting in London, but ensures it employs staff with a breadth of experience of underwriting deals across the UK. Sean Deacon, head of core credit at Octopus Property, adds: “We are piloting underwriters being associated with specific brokers in the regions, creating better regional broker relationships and local market knowledge. “With these factors combined, we believe our centrally-based team works well as borrowers get the benefit of consistency in the way credit decisions are made.” United Trust Bank has a regional BDM team, which builds and manages relationships with brokers in various parts of the country. “At UTB, we’ve structured our underwriting teams so that the same people support the same BDMs and the brokers they service,” says Gavin Diamond, commercial director of bridging at UTB. “This further strengthens the relationship between UTB and the broker, and streamlines the processing of proposals leading to quicker decisions and completions.” Liverpool-based Hope Capital operates across the UK, but conducts all its underwriting from one office and does not have specialist underwriters for different regions. “We have recently expanded our underwriting team, and ensure we do a lot of face-to-face meetings in order to build and maintain fantastic relationships with all our
stakeholders,” says Jonathan Sealey, CEO at Hope Capital. “If there is a particular broker we are doing a lot of business with, we will always take the time to meet them and put a face to a name to build up that trust. “Furthermore, we conduct a video call with each client prior to completion [and] this enables us to build a relationship from the start, which continues through to redemption of the loan.” Gavin doesn’t see the benefit of having small satellite regional underwriting teams. “This may make managing the functions more complex and possibly double up on operating costs. “There’s also a risk that decision making might lack consistency.” Sean agrees and explains that it is important to offer the same proposition across the board, regardless of geographical location. “When the underwriters sit together, they share best practice and consider creative solutions to bespoke challenges. “Working closely together ensures consistencies in the way they underwrite, so brokers receive the same experience no matter who looks at the deal. “Also, managing the team and prioritising workload is more effective when they sit together as a unit. “We see underwriters can easily communicate key topics among themselves, with sales, case managers and servicing to make sure the loan structure and experience for brokers and clients alike is the best it can possibly be.” What we can determine, then, is that while there may be a need for regional underwriters for more complex deals, lenders’ regional appetite, lending strategy and underwriting consistency seems to be more important. Based on lenders’ preference to have underwriters based together to ensure consistency, it is unlikely that we’ll see regional underwriting hubs crop up any time soon. Perhaps models such as the ones being trialled by Octopus, whereby regional brokers are assigned an underwriter with knowledge for that region, will take off. Either way, considering a number of bridging lenders had already expressed concern regarding the availability of skilled workers last year, the pool of underwriting talent may already be too small to insist on regional expertise.
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Find out how we do things differently at togethermoney.com/bridging or call 0330 127 2591 For professional intermediary use only. ‘Sue’ has been used for illustrative purposes only. *Other fees and charges apply and are variable based on the loan amount. 0.49% pm is applicable for the duration of the loan. 12 months as standard. No exit fee applies. Standard construction only. Any property used as security, including your home, may be repossessed if you do not keep up on repayments on a mortgage or any other debt secured on it.
Zeitgeist
In a growing market, it’s easy to assume that all aspects are buoyant and on the up. As it happens, certain metrics are not improving – namely, conversion rates. Against a backdrop of the enormous increase in the overall size of the sector, we explore the possible reasons behind the plateau in this one vital area
Words by
Tom belger 29
Jan/Feb 2019
Zeitgeist
M
easuring the growth of the bridging market is becoming increasingly difficult. According to the Association of Short Term Lenders (ASTL), over £690m more bridging loans were written between September 2017 and September 2018, compared with the previous year. The Association’s Q3 statistics highlight that loans written grew by 21.2% over the 12 months between Q3 2017 and Q3 2018. A strong performance, especially compared to the 3.7% rise in gross residential mortgage advances over the same period reported by the FCA. However, the ASTL figures only contain information from 34 lenders, with Precise Mortgages and Together – considered two of the larger players in the market – not contributing to the study. Also, between Q3 2017 and Q3 2018, Bridging & Commercial reported on more than 10 new lenders which launched, or were preparing to launch, during this period, and whose initial completions do not form part of the data. Meanwhile, the market is said to have a number of ‘unannounced’ lenders, such as private family offices, where business levels are not reported. This all means that there could be a lot more business being written than is being suggested, and therefore the size of the bridging market could be much larger than it seems. Despite the ASTL reporting a significant increase in loans written, the conversion rate has risen almost imperceptibly. Annual conversions between loan applications and loans written have only grown from around 17% in Q3 2017 to roughly 19% in Q3 2018.
These rates peaked in March 2015 at 28% and have steadily dropped since and have not been above 20% since March 2017. How can we fix the this? Between September 2017 and September 2018, several bridging lenders who are members of the ASTL posted a significant increase in the size of their bridging finance teams as they looked to cope with growing demand and capture more market share. Out of the 10 ASTL members Bridging & Commercial spoke to, six had expanded their bridging teams by more than 50% during the period. Market Financial Solutions had grown its bridging team by 300% and Aspen Bridging reported a 160% growth. Does a larger team lead to better loan conversions? “Expanding our team at a steady rate has allowed us to maintain this high level of professionalism, while also attracting new business,” says Paresh Raja, CEO at Market Financial Solutions. “The number of enquiries we receive has grown substantially as a result, and while naturally we cannot proceed with each of them, there’s been plenty of enquiries from brokers and borrowers in need of a bespoke bridging loan to help them address a complex financial situation, and we continue to excel in this area.” However, Steve Barber, managing director at Bridging Finance Solutions, adds: “The actual conversion rates I personally see are sitting below 25% on an ongoing basis irrespective of the size of the team – the conversion rate is not dependent on the size of the team, but on the quality of the application. “Unfortunately, the bridging market still has the historical stigma of being a lender of last resort and particularly in relation to direct client applications where we continue to see a large number of unfinanceable propositions.
“Disclosure is still not where it needs to be, some brokers 30 Bridging & Commercial
Zeitgeist
enquiries.” However, Stephanie Charman, specialist relationship manager at Sesame Bankhall Group, feels there is more to be done with both advisers and consumers to raise awareness of the areas where bridging finance can provide potential solutions. “Adviser education on seeing bridging finance as a relevant alternative for customers continues to be important, alongside dispelling any common misconceptions.” Meanwhile, Matthew Arena, managing director at Brilliant Solutions, adds: “Disclosure is still not where it needs to be, some brokers and their clients are also getting drawn in by unrealistic terms being issued only to see these deals turn into far more expensive outcomes for the customer. “Brokers still need to be wary and work with businesses they can trust – this remains a high-risk area.” While it is encouraging to see that more introducers are interested in the bridging market, the concern is whether the applications being generated by those new to the sector are less likely to be converted if they have misconceptions. For the market to experience sustainable growth, it needs an increase in distribution – but educating that distribution is key. This has long been seen as the way forward for the sector, with the need of a bridging qualification having been widely discussed since as far back as 2014. Almost half a decade later, will 2019 be the year?
“On this basis, the conversion rate will, therefore, always be lower than that of the mainstream mortgage market.” The ASTL reported that in the year ending Q3 2018 there were over £20.5bn of bridging loan applications, but just £3.98bn of loans were written. Benson Hersch, CEO at the ASTL added: “The increasing awareness of bridging is not always accompanied by knowledge of the sector, so deals which are not suitable (either due to risk or type) are being submitted.” Benson believes that the conversion rates can only grow if brokers are fully aware of the risk appetites of specific lenders and place business accordingly. Adam Tyler, executive chairman at the Financial Intermediary & Broker Association (FIBA), says that during 2018, it held a series of meetings involving lenders, brokers and solicitors in the bridging industry to come up with outcomes to improve two areas relevant to conversion rates. “First, the standard of initial enquiry to the lender and second, the formation of a professional partner panel. “The latter has been designed so that brokers can offer their clients the choice of an experienced solicitor who understands bridging transactions and the complexities and speed that is required. “These initiatives are only now coming into force, but should help to improve conversion rates in 2019.” How can packagers and networks help to convert more bridging finance deals? Phil Jay, director at Complete FS, says it is seeing a significant increase in introducers – both new and existing – getting involved in bridging finance. “The recognition that bridging is a hugely versatile product that can be employed in a number of ways as well as the increasing visibility of the sector have both helped to increase the number of advisers we are seeing with
and clients are getting drawn in by unrealistic terms” 31 Jan/Feb 2019
While there was a lot of talk last year about the eruption of new bridging lenders, little real discussion was had regarding the funders which support, shape and – ultimately – grow the market behind the scenes Words by BETH FISHER
BEHIND BRIDGING
The funding story
Cover story
A Bridging & Commercial poll found that almost two-fifths of brokers did not really care how bridging lenders were funded. Here, we seek to change this.
WHY IS BRIDGING THE CURRENT DARLING OF PROPERTY INVESTMENT? At the close of trading on the day that Theresa May announced that she was to defer the vote on her Brexit deal, the FTSE 100 dropped by 0.8% and the FTSE 250 by almost 2%. While some investments may be volatile amid political uncertainty, bridging appeals to funders mainly due to its shortterm nature. Deals – on average – have a term of 11 months. The opportunity for high returns on capital is also attractive. The range of returns can vary, with one expert claiming that institutional funders can achieve between 4-5% pa when taking into account set-up and non-utilisation fees. High-net-worth (HNW), private and family office money can expect around 7-10% pa, while equity funders can start as high as 10% pa. In October 2018, a report by global asset manager Insight Investment titled ‘A bridge to higher quality private debt’ revealed that the structural and credit protections on bridging loans compared favourably with higher-risk alternative credit assets. Bridging loans offer asset-backed security and, while annual house price growth slowed over 2018, average LTVs are conservative at 55.4% as at Q3 2018. The market is backed by institutional and non-institutional funders across a variety of debt and equity funding options, with the former enabling bridging lenders to grow their loan books beyond the means of equity capital. According to EY’s UK bridging market study last year, the number of funding options for a bridging business has grown in recent times, with unique pools of capital being accessed, such as retail bonds, private securitisations and capital raises on marketplace platforms. The report also stated it had seen more institutions willing to support non-bank lending due to the growth of the wider specialty finance market, better underwriting practices and a more stable regulatory environment. With the average monthly interest rate for bridging standing at 0.78% – the lowest level since Q4 2016 – the increasingly competitive market may start seeing more bridging lenders capitalise on the cheaper, institutional funding lines available. DIFFERING FUNDING OPTIONS To find out what key funding options the market is currently utilising, Bridging & Commercial contacted a sample of 45 UK bridging lenders (of all shapes and sizes) to find out how they were funded. It was a long, but interesting, week. We found that the majority of the lenders in the sample were financed via one or two funding models, however some used up to five different options. The most popular debt funding option was senior and mezzanine structures, with 44% of bridging lenders utilising that type of funding. The second most popular funding option – at 40% – was HNW/private and family office money.
Some 27% of lenders were principally funded or had their own debt fund – however this was mainly in conjunction with other funding options. For example, 58% of the lenders who confirmed they had principal funding or their own debt fund, also had at least one wholesale facility in place. The line of distinction between principal and nonprincipal lenders has become blurred, with some industry professionals claiming that lenders would often say they were lending their own funds, when in reality there were additional funding agreements sat behind their equity. Only two lenders out of the 45 contacted were entirely principally funded – so we would agree that the claim is correct. P2P and retail deposit models each fund 18% of the market. Of the bridging lenders that revealed they were funded via P2P (which was broadly made up of both retail and institutional investment), only 37% used additional funding models. Accessing funding through capital markets – in the form of tradeable notes or retail bonds – and ‘other’ types of institutional money were least popular, used by 9% and 11% of the market respectively. Some 16% of the bridging market was funded by forward flow arrangements (also known as correspondent lending programmes in some cases). Nick Parkhouse, partner – financial services corporate finance at EY – whose corporate finance team has advised and supported clients in raising over £500m in the bridging and development markets in the three years it has been active – says that as a wider macro trend, it continues to see liquidity come into the UK specialty finance sectors. “We expect the market will continue to attract more institutional funding going forwards, but we expect choice to remain wide and come from a varying range of funders.” WHO EXACTLY IS FUNDING THE UK BRIDGING MARKET AND WHY? Specialist global asset manager Insight Investment – whose clients include pension funds, corporates, local authorities, insurers, sovereign wealth funds, wealth managers, financial institutions and individual investors – funds a select number of UK bridging lenders. Most recently, bridging lender mtf raised up to £50m of senior debt from funds managed by Insight Investment. Insight’s funding lines range between £10m and in excess of £100m. Jeremy Deacon, senior portfolio manager – secured finance (London) at Insight Investment, says that it continues to see the bridging market offering good opportunities to both lenders and funders in 2019. “We will continue to remain selective in our approach to [choosing our] partners,” he adds. Specialist and challenger banks are also firmly entrenched in the sector. 34
Bridging & Commercial
Who’s backing bridging? In an epic quest to find out how the UK bridging market is funded, Bridging & Commercial spoke to 45 lenders to find out what funding models they used
HNW, private &
40% family office money
Forward flow arrangments/
16% correspondent lending programmes
P2P
18%
Senior & mezzanine
44% (wholesale facilities)
Retail
Capital markets
9% (securities & bonds)
18% deposits
Principally funded
27% or own debt fund
Other types of
11%
institutional money
Cover story
OneSavings Bank (OSB) has been providing senior secured funding lines to non-bank lenders across a variety of asset classes for over five years. As of its 30th June 2018 half-year report, total loans outstanding stood at £158m. In the bridging loan market, OSB currently has eight ‘clients’ – one of which is Oblix Capital – with two new opportunities said to be in the pipeline. The bank’s prospective clients need to be experienced lenders with a demonstrably excellent track record over a number of years. “We can consider both regulated and unregulated lending and both residential and commercial property,” a spokesperson from OSB states. The spokesperson explains that while it is still very much a market that it has appetite for, its risk committee continues to adopt a cautious approach, given the current macroeconomic uncertainties. “I suspect that we will be very selective until this uncertainty subsides.” Meanwhile, specialist bank Paragon’s structured lending team has expertise in designing revolving credit facilities to meet the needs of businesses and support growth, and will typically consider facilities of between £10m and £25m. Richard Doe, managing director of commercial lending at Paragon, says: “This, together with our extensive experience of lending on UK residential property, means that we have a great understanding of this market and can work with bridging lenders to achieve our respective objectives.” He adds that it has a “healthy appetite” for funding UK bridging lenders.
WE EXPECT THE MARKET WILL CONTINUE TO ATTRACT MORE INSTITUTIONAL FUNDING GOING FORWARDS, BUT WE EXPECT CHOICE TO REMAIN WIDE AND COME FROM A VARYING RANGE OF FUNDERS
“While the UK residential property market is facing some headwinds, we believe that specialist and experienced bridging lenders still have many opportunities to support customers needing short-term facilities.” In November, Aldermore announced that it planned to provide more wholesale finance facilities to independent bridging finance companies to help them grow their loan books, and appointed Eamonn Pearson as a wholesale business development manager responsible for the area which the bank refers to as ‘block bridging’. Block bridging enables lenders to release capital tied up in their bridging finance book by advancing a discounted value of a block of deals or an individual deal upfront, rather than collecting the repayments over time. This enables lenders to grow their book, support more customers and broaden their offering. “With the traditional banks appearing to have less appetite – along with what can often be lengthy and cumbersome decision-making processes – it was felt that this market has presented new and exciting opportunities for Aldermore to become involved with,” says Eamonn. “With a large number of new entrants into this area over the past few years, we see this as a key area where we can look to support business growth.” Shawbrook Bank also provides funding lines to a number of UK
bridging lenders, such as MSP Capital, Glenhawk and Pivot. Along with senior and mezzanine funding structures, HNW, private and family office money is the second most popular funding option in the bridging market, however, it tends to be used by smaller or new players. Boodle Hatfield – a private wealth law firm, which puts together syndicates of HNW individuals/family offices to do bridging/development finance (private funds mostly in the £50m-100m region) – believes that private funders often favour smaller bridging lenders, so long as they have clear track records and access to the right deals. “These smaller lenders can be more nimble in getting deals done, and tend to be more competitive on fees,” says Adam Chamberlain, partner in the real estate team at Boodle Hatfield. “As the bridging market grows, some of the larger lenders have increased the margin that they take out of a loan, which makes it harder for private funders to hit their return targets.” Adam claims that there has been pressure on returns in recent times, but that is primarily as a result of more private money entering the market and competing for deals, rather than more institutional money. Despite this, he thinks it is “not impossible” for the UK bridging market to become more institutionalised in the near future, although he is not certain it would be a good thing. Nick tells Bridging & Commercial that EY has noticed – across the last 18 months – the emergence of forward flow transactions, where loans are sold to someone else. He states that in forward flow, it has seen institutional players active as well as new entrants, such as Toorak Capital Partners. Toorak – which manages a correspondent lending programme offering lenders the ability to scale their business by having access to institutional capital for up to 100% of the loan amount – has acquired almost $2bn in bridging loans in the US and UK since August 2016. John Beacham, CEO and founder of Toorak, reveals that it has seen a large amount of growth in its UK loan book and expects that to continue. “We have heard from many of our lending partners that raising capital is a significant focus, both in time and resources, and they tell us that capital demands frequently take [them] away from operating their businesses. “As it stands, the bridging sector has a wide variety of lenders all with different credit standards and loan documentation requirements which certainly makes raising capital more difficult. “Toorak is focused on providing predictable capital that takes the guesswork out of lending by allowing our partners to make loans, while knowing that there is a consistent, reliable and efficiently priced funding source behind them. “In a marketplace that relies on speed, having a partner such as Toorak with no capital constraints and a predictable credit box enables lenders to be extremely nimble.” Toorak produces guidelines for loans that it is looking to acquire which contemplate a wide range of lending scenarios, are applicable across England and Wales, and are regularly revised based on market feedback. “Our partners are free to make loans that are not sold to Toorak that they hold or finance with other partners,” John adds. “We provide a tool to our lending partners which allows them to know in real time whether a prospective loan will qualify to be sold to Toorak and what the maximum proceeds are that are permitted for that loan.” Eight out of the 45 lenders Bridging & Commercial spoke to were funded via P2P. Max Lehrain at P2P commercial real estate lending platform Relendex said it is increasingly receiving approaches from potential 36
Bridging & Commercial
Cover story MAIN FUNDING OPTIONS
FEATURES
Retail deposits
Retail funding is the cheapest of funding options, but is subject to regulations and capital requirements
HNW, private and family office money
Whole loan funding by wealthy investors available at start-up, but more expensive
Senior and mezzanine structures
Wholesale facilities which are cheaper than HNW funding, but include a number of covenants
P2P funding
A mix of retail and institutional investors providing funding via a marketplace platform
Principally funded/own debt fund
A lender that lends their own funds or has created their own regulated debt fund
Capital markets
Accessing funding through capital markets in the form of tradeable notes or retail bonds
Forward flow arrangements/ correspondent lending programmes
Investors fund eligible whole loans from the originator, where the latter benefits from a set fee or share of future profits
Other institutional funding
Such as money from institutional asset managers
institutional funders attracted by the available interest yield in the sector. “While this is welcome, we at Relendex believe that a good mix of funding sources strengthens our business. “In challenging economic conditions, institutions can quite quickly withdraw from markets,” Max admits. “We aim to maintain a balance of funding split approximately 50:50, retail vs institutions.” P2P funding could also make a bigger impact on the UK bridging market this year. Michael Lynn, CEO at Relendex, predicts: “In 2019, there is a good chance that P2P lenders will start to radically change the UK commercial property lending market and, in the process, will improve the finances of both lenders and borrowers.” WHAT’S INVOLVED IN SECURING NEW FUNDING LINES? With a wide range of funding models in the market – and appetite from funders set to continue – you would think it would be easier to secure funding. It’s in the lender’s best interest to look to get cheaper and diverse funding arrangements in order to improve the reach of its criteria. However, while funding has become more institutionalised and competitive around price, covenants and structure, it doesn’t mean it’s any easier for bridging lenders to secure it. “Institutional investors tend to be more conservative in their approach, which means that the type of security they will accept is narrower and ‘safer’; this has to be compensated for lower pricing compared to HNW individuals and family offices, who have a higher return requirement,” explains Michael Dean, principal at Avamore Capital. “This comes from a willingness to be more open to risk and more unusual situations to maintain the return levels they want to achieve.” Bridging lenders with smaller loan books – around £30m – which have been mostly supported by more expensive HNW money – but which want to grow further – will need to raise institutional debt capital. However, this type of money will require lenders to be backed by private equity or well-capitalised shareholders. And while bridging lenders may have equity capital in place, they also need to tick several – if not all – the typical debt funder’s boxes. The following traits have been identified by a number of institutional funders as to what they are looking out for:
How does equity fit in?
» equity at stake » a strong, high-quality track record of lending » a well-organised business » error-free, good quality data » a well-established systems, policies, processes and internal controls
» an experienced team » a sustainable business model with a clear business plan
Bridging lenders can also grow their loan books with equity funding, which can include the following options:
and strategy
“We look for businesses that are on the journey to become an institutional-type lender,” Jeremy adds. “As a debt investor, we want to see the owners of the business prepared to invest in the loans they are writing.” A spokesperson from OSB states: “We like to see a pre-existing loan book of at least £10m-£15m with good growth potential supported by strong investors and robust governance policies, particularly around underwriting, risk monitoring and compliance.” John says that Toorak works with high-quality, established lenders: “We have a minimum volume requirement from each partner, but would not rule out working with a
» equity raised from shareholders
» sale to a strategic buyer » equity raised from
private equity investors
» public equity issuance
37 Jan/Feb 2019
“IF THERE IS ONE BUSINESS WHICH HAS PROBLEMS, THAT INSTITUTIONAL FUNDER IS LIKELY TO EXTRAPOLATE THEIR CONCERNS ACROSS THE OTHER BUSINESSES THEY FINANCE”
Cover story
limited number of smaller lenders: who are looking to grow if they consistently produce quality loans.” Nick explains that lenders need to show funders that they have an “institutional sheen” to their business, which can help overcome the lack of industry standardisation in the market. “For example, we have been working with clients to help drive high-quality data tapes (which are used to analyse and give comfort on credit risk and performance) which forms one way that funders can see historic performance and help them get more comfortable.” However, lenders looking to inherit this institutional sheen must consider a series of challenges. These include:
» how long it takes to put the deal together – this can
take numerous months and time away from what lenders do best: lend » covenants – one expert claimed that these can cover up to 14 pages of a deal » set-up costs – such as legal and arrangement fees – are said to sometimes run into the hundreds of thousands of pounds » utilisation and non-utilisation fees » guidelines and restrictions » monitoring The amount of time, resource and knowledge this requires has meant that experts such as NapeX Finance – which can arrange funding lines for lenders – have stepped in to help lend their experience in negotiating competitive funding facilities. On a positive note, it has been said that fees and expenses have reduced significantly as the market has become more liquid. Colin Sanders – who launched new bridging lender Tuscan Capital in early 2018 – says that the biggest challenge he has experienced at Tuscan is balancing portfolio covenants and restrictions in a growing loan book. “A lender isn’t in control of what comes in when and so can find itself with technical breaches of covenants even though its lending is fully compliant with credit policy.” Dean adds that funding lines will have restrictions or limitations around them, which are usually based around the asset class, the maximum or minimum loan size, maximum security value per unit and a host of other things in between. “Reporting to third-party investors can vary,” he mentions. “Family offices tend to be quite light touch, whereas banks and institutions often want monthly reports which create additional administrative burdens.” Bridging is known for speed, service and flexibility. However, if UK bridging lenders start to be brought into an institutional line, will this result in a slower, more rigid market?
“If everyone is funded by similar institutional players with similar pricing, covenants and restrictions, then it becomes almost inevitable that the go-to market products start to look the same and it becomes difficult for lenders to offer something different,” says Nick. “The second major issue is if there is one business which has problems, that institutional funder is likely to extrapolate their concerns across the other businesses they finance. “Clearly, the ultimate problem would be the full retrenchment from the market of an institutional lender who has a leading market position.” On the other hand, if further institutionalised debt is predicted to enter the space, more competitive funding might also mean lenders can offer better products in more underserved areas, such as the commercial property market. Or, they could negotiate better covenants which are less restrictive. However, Dean adds that more institutional money is likely to only be attractive to the more conservative lending strategies and doesn’t expect it to drive up LTVs in any way. “We would, however, expect pricing to continue to come under pressure in what we would call the core/core-plus sector of the bridging space. “The domino effect could be that certain bridging lenders are then priced out of the vanilla or core-plus sector of the bridging market and have to go further up the risk curve to achieve the same price or returns.” Colin thinks there is already an oversupply of institutional funding in the market. “This competition has also pushed funding criteria further than I can remember (not quite as extreme, but [reminds] me of pre-credit crunch funding activity). “I do expect further, more flexible institutional debt being made available to bridging lenders, however, I believe – with the economic backdrop we are living through – there is likely to be a period of relative inactivity as borrowers and lenders wait and see the outcome of the Brexit dance.” What seems to be most important is not just how the UK bridging market is funded – or how this may change in the future – but how reliable this funding is and whether or not it is fully committed – especially during such a long period of uncertainty. This is especially important for brokers to know. Brokers should be aware of how bridging lenders in the UK are funded as this affects lending decisions, product innovation, speed and costs – all vital parameters of a deal. They should be asking lenders: are you in control of your lending decisions? Is your funding committed? How reliable is this type of funding if ‘X’ happens? The way this market is funded dictates virtually everything about its outlook; as a broker operating in it, we urge you to look under the surface of lenders’ operations in order to understand the sector’s true trajectory.
THE FUTURE The upside of more institutionalised debt in the market could mean a further reduction in cost of funds, which could lead to even cheaper rates for borrowers. If more affordable products then capture the attention of more traditional mortgage brokers, it could potentially create a more ‘mainstream’ market. Will this infectious quest to appeal to institutional funders promote better industry standardisation and, therefore, result in more professionalism in the sector? Or does it mean the market will simply end up spawning more homogenised products? If a large number of bridging lenders are being funded by the same institutional funder, it could end up limiting competition and innovation. 39 Jan/Feb 2019
Explained
A golden opportunity Last year alone, the UK was predicted to attract a record 40.9 million tourists, meaning that while the nation is currently getting over the January blues, savvy buy-to-let investors looking at opportunities in the holiday let market have something to look forward to Words by
martin greenland
41 Jan/Feb 2019
T
Explained
he holiday let market has received a lot of media attention in recent months, due to both record tourist numbers and ‘staycations’ becoming an increasingly popular option for the British population. As a result, more traditional buy-to-let landlords may start diversifying their property portfolios by entering the space as tax and regulatory changes start to make an impact.
Over the last two years, buy-to-let landlords have been impacted by significant policy changes affecting the private rented sector (PRS) including the removal of mortgage interest relief for unincorporated landlords and the 3% rise in stamp duty land tax (SDLT) for buy-to-let and second homes. During the period from 1st April 2017 to 1st April 2020, the amount of income tax relief available on finance costs for let residential property will be progressively reduced to the basic rate of tax. A study in September 2018 commissioned by the Residential Landlords Association (RLA) – which surveyed approximately 70,000 landlords – revealed that while 55% of respondents would not be affected in the first year of tax relief withdrawal, 53% would be affected by these tax changes by 2020/21. Research from Paragon found that landlords were less optimistic about the future than at any time since 2010. Paragon’s 2018 report on PRS trends highlighted that just 11% of landlords felt optimistic about the prospects for their property portfolios, and more than twice as many (21%) expected to sell some of their buy-to-let properties than those who planned to buy (9%). So, what are landlords doing to mitigate the impact of tax changes? John Heron, managing director of mortgages at Paragon, says that landlords are looking at several different options/things. “These include remortgaging at a lower interest rate to reduce costs, greater use of incorporated structures, increasing rents to absorb some of the cost of the tax increase and even selling some of their less attractive properties to reduce overall gearing.” Rob Jupp, CEO at Brightstar Financial, explains that with landlords feeling the squeeze as a result of tax and regulatory changes, it’s only natural that they will look at ways of countering increased costs by investigating different types of investment that can deliver higher yields. These other types of investment could well be in the holiday let market. Ying Tan, managing director at the Buy to Let Club, says: “Holiday lets can earn considerably more for an owner than a long-term let would and, with the buy-to-let sector seeing an overhaul of late, it’s not surprising landlords are looking to this market.” According to a guide to unconventional buy-to-let from Castle Trust, a two-bedroom apartment on the quayside in Poole can earn £836 a week during the summer as a holiday let. Based on an annual occupancy of 28 weeks, this equates to an income of £23,408 per year. A similar property in the same location would earn £242 per week, or £12,584 annually, if it was continuously occupied on a buy-to-let basis. Kevin Thomson, corporate sales director at Connect for Intermediaries, adds that the tax changes affecting buy-to-let haven’t been applied to holiday homes. “For example, if the property is fully furnished and run like a holiday rental home, it can be viewed as a business venture, which means the owner could be eligible for receiving tax relief on the mortgage interest payments. “And just like any other trading business, any losses
incurred can be offset against future profits.” Kevin explains that to qualify for most of the tax relief benefits, the holiday property needs to be available to let for 210 days of the year, but only actually needs to be let for 105 days. “So, due to the fact that the tax changes do not apply to holiday homes, we have seen an increasing demand in this sector, including popularity in platforms like Airbnb.” The opportunities in the UK holiday let market Rob believes that the growth in the holiday let market has been driven on the sides of both demand and supply. “People are increasingly choosing to holiday in this country and Airbnb has changed the way people think about where they will stay when they’re away from home. In 2017, 56% of adults in the UK ‘staycationed’, according to the Sykes Staycation Index 2018, which surveyed more than 2,000 adults. Some 74% of respondents said that they planned to do the same in 2018. The study also revealed that in 2017, the total spent on staycations was £23.7bn, up 3% on the figure reported in 2016. The number of visits to the UK grew by 4% to a record 39.2 million in 2017, according to VisitBritain. It also predicted that 2018 would prove to be another bumper year for visitors to our shores, with a record 40.9 million tourists expected to visit the UK by the end of last year. Richard Tugwell, group intermediary relationship director at Together, says that this provided what could be great opportunities
42 Bridging & Commercial
Explained
for holiday let investors as tourists flock to see the UK’s beautiful scenery and take in its rich history and cultural heritage. “In certain cases, there may be higher costs associated with holiday lets, such as a weekly cleaner or management agents’ fees, and income can be seasonal in some locations. “But even after these factors are taken into account, savvy investors may still be able to make a good return on their investment.” Research commissioned by Precise Mortgages showed that almost one in 10 landlords (9%) with more than 20 properties own holiday lets in the UK, with a further 9% owning holiday lets abroad. Andy Elley, head of commercial at Mortgage for Business, says that many of its landlord clients with large portfolios have a broad mix of investments. “The market growth of holiday lets has been fuelled by the current economic situation and the popularity of websites such as Airbnb. “For many landlords, holiday lets are an opportunity to diversify into the commercial property sector. “This means that the tax environment is different, but so too is the financing of these properties, so landlords should think very carefully before taking the leap.” What brokers need to know about holiday lets Rob claims that a holiday let does not require an assured shorthold tenancy (AST) and has many different considerations to a standard buy-to-let, therefore, if you have clients who are investing in this market, you need to ensure they have a specialist product that enables them to do so. “Too many brokers think that it is okay for their
clients to invest in holiday lets with a standard buyto-let mortgage and this simply isn’t the case. “I believe that the holiday let market will become a significant sector for brokers who work with property investors and so now is the time to make sure that you are engaging with this market in the right way, for your clients and your business.” John added: “In terms of our holiday let criteria, we allow landlords to convert from a holiday let back to a standard buy-to-let mortgage recognising the fact that landlord strategies may need to change in the face of a fluid rental market.” Kevin believes that the number of lenders coming into this market is growing. “Holiday let mortgages have always been trickier due to the peaks and troughs of income and while there are specific products, there are restrictions, particularly around Airbnb. “For example, some lenders will lend in the Lake District or Cornwall, but not outside recognised holiday places, so an Airbnb in, say, the centre of Manchester would not be acceptable as a holiday let. “Overall, while Airbnb is still quite niche – both in terms of servicing by brokers and the lenders available – times are changing.” Following a lacklustre Budget and a period of change for landlords up until 2021, brokers supporting the financing of the ‘holiday let opportunity’ could bode well for boosting landlords’ investments in the coming years.
Holiday lets can earn considerably more for an owner than a long-term let would and, with the buy-to-let sector seeing an overhaul of late, it’s not surprising landlords are looking to this market
43 Jan/Feb 2019
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Why Cabot acquired MSP WORDS BY THEO OSBORN
After Cabot Square Capital acquired a majority stake in MSP Capital late last year, Bridging & Commercial Magazine spoke to both parties to find out how and why the deal took place and what it means for the future of the bridging lender
Interview
L
ast November, southernbased lender MSP Capital announced that it had sold a majority stake in the company to private equity firm Cabot Square Capital for access to a large amount of capital, which it can now use to fund the junior debt portion of its loans. As a result, MSP will be able to attract more senior debt funding in order to grow its book. From the company’s formation in 1981 up to March 2018, it had amassed a loan book of £100m, which then grew by 50% to £150m in the eight months from March to November 2018. Now, the bridging lender is planning further significant growth as it aims to double its loan book over the next three years. “Our overall ambition is to provide sustainable finance for our borrowers and ensure all stakeholders receive appropriate and fair, risk-adjusted costs and returns,” says Martin Higgins, managing director at MSP Capital. “The loan book will grow naturally if we retain these commercial principles through all market conditions.” Cabot – which has a core strategy of investing into and assisting speciality lending and other financial services businesses to develop and grow – has a portfolio that includes Signature Private Finance and Lendco, a lender created by the group behind SPF Private Clients. The private equity firm typically acquires majority stakes in companies and then exits, selling to both trade and private equity sponsor acquirers alike. In recent years, Cabot companies have attracted a range of buyers, from challenger banks – such as Shawbrook and OneSavings Bank – to US credit funds such as White Oak. Richard McDougall, partner at Cabot Square Capital, explains: “We typically take majority stakes in the businesses we invest in and allocate sufficient follow-on capital to fund the business’s loan book growth, typically over a five-year business plan.” To conduct the deal with Cabot, MSP appointed EY to advise on the transaction, 48
Bridging & Commercial
which completed on 13th November. David Capra, commercial director at MSP, says that the deal with Cabot was an easy choice and that Cabot has the appropriate resources. He also points to the interests of both firms being aligned in terms of the perception of potential within the sector. Interestingly, Cabot was actively looking into the acquisition of a few other bridging lenders before MSP approached the firm. Richard reveals that Cabot will often get approached when a lender is working with an adviser and they’ll meet a number of people to see who’s the appropriate counterparty. Occasionally, Cabot will reach out to companies, however, most deals are inbound. Richard believes that bridging is a fantastic asset class and market as it has the combination of relatively high yield, but low LTV. “We’ve been interested in increasing our exposure to the space for the last number of years,” he says. In order to close the MSP deal, Cabot decided to put some negotiations with other bridging lenders on ice. “The reason we were interested in working with MSP was partly driven by the company’s long and successful track record, but also – and this is very unusual in the bridging market – it has a predominantly direct origination model.” Richard cites three benefits of such a model: consistent repeat business, better asset performance and a tighter relationship with the borrower. He adds that this is part of the reason why he believes that MSP hasn’t had a capital loss in its history. The lender was also attractive to Cabot due to it having a good relationship with some senior debt funders and a demonstrated appetite to increase this capacity. In 2018, MSP announced it had increased its senior debt facilities to £60m, while £30m of additional senior funding had been earmarked for the launch of a new product. The debt facilities were provided by Shawbrook Bank and funds managed by Insight Investment, a deal which would form part of a diversified funding structure, including private loan note investors and a mezzanine debt facility. Late last year, it announced it had increased its funding line
Interview
to £90m, with the addition of NatWest. MSP claims to be able to make indicative decisions within 24 hours through its bespoke internal loan management system. It does this by having a set-up whereby all directors and decision makers are operating managers and multi-taskers within the business. Its underwriting team has a combined 150 years of experience in property lending and its terms offered are credit backed with no requirement for separate credit sign off. MSP says it’s due to these factors that 65% of its current book comes from returning borrowers. Despite this, MSP may move further towards the broker model as it plans to double its loan book. Richard feels it’s a strategic thought process – given the amount of volume that goes through the broker market – and will be a consideration for the company to look to intermediaries as a channel alongside the direct route they’re currently employing. With regard to the partnership, Martin states that MSP is looking forward to working with the expertise of Cabot on its business strategy, debt optimisation and enhancing its operational performance. The lender has re-capitalised its balance sheet, which has enabled it to obtain scalable funding lines. “MSP has traditionally offered short-term bridging and development funding, however, our borrowers have highlighted the need for longer-term bridging loans,” says Martin. “The new funding lines will enable us to provide these new loans, which will be, effectively, a hybrid of short-term bridging and buy-to-let finance.” Martin adds: “It’s important to note that all operational decision makers are remaining within the team and so [there will be] seamless service continuity for all current and future borrowers.” Cabot’s involvement shouldn’t affect MSP’s underwriting. The former will typically sit on the credit committee, but on a delegated authority basis for larger deals. Richard explains: “We wouldn’t invest in a business unless we thought the way they were going about doing their business was a good way to lend. We predominately back them to carry
THE REASON WE WERE INTERESTED IN WORKING WITH MSP WAS PARTLY DRIVEN BY THE COMPANY’S LONG AND SUCCESSFUL TRACK RECORD, BUT ALSO – AND THIS IS VERY UNUSUAL IN THE BRIDGING MARKET – IT HAS A PREDOMINANTLY DIRECT ORIGINATION MODEL
on doing what they’re doing. Our viewpoint is very much that we’re backing a team and a management and it’s their business.” Cabot has a range of in-house, functional expertise that will be available to the company, ranging from strategy, technology, systems and infrastructure capability, legal assistance, and financing and securitisation expertise. “We consider ourselves to be more than just a capital provider. We bring a lot of expertise, capabilities and functional support that can help our businesses execute on their plans,” he adds. Cabot – which currently has around 15 companies in its portfolio – typically exits such deals after around five years. However, Richard states that it is flexible with its underwriting time, with some deals lasting as long as eight years. “In general, our exit is to someone with deeper pockets and cheaper capital that can support the business – and the team – in the next stage of its growth.” At present, Richard believes there are three or four more lenders that could be acquired by other private equity firms. This could include some with loan books measured in the hundreds of millions. These will involve lenders that have been built off the back of high-net-worth-type money, which have reached a certain size based on their relationships but have hit a point where they’re struggling to grow further without institutional debt funding. Richard highlights the difficultly companies will face in raising this type of funding without the equity to support a facility of that type. He believes there needs to be market consolidation, not least because most of them are broker-introduced and, therefore, fighting for the same business. It is also claimed that there are a number of private equity firms looking at the bridging market, including more generalist private equity firms that have seen an opportunity within the space. Therefore, this year could see some big changes in the industry.
49 Jan/Feb 2019
&
Gavin Words by
caron schreuder Photography
alex chai
&
Mark
in conversation
G
avin Diamond and Mark Posniak share a history in this market, having both cut their bridging teeth at Cheval Bridging Finance. Cheval – later acquired by Alternative Bridging Corporation – was a lender which, we discover, proved to be somewhat of a breeding ground for many of today’s industry stalwarts. Both hail from South Africa and have gone on to forge significant careers in the UK short-term lending space. Mark is now MD at Octane Capital, a lender borne of Drawbridge (and then Dragonfly) stock and which charged on to the scene in May 2017 with its ‘productless’ approach. Gavin is commercial director of bridging at United Trust Bank, a 64-year-old veritable specialist lending institution. After a protracted photo shoot at Bridging & Commercial’s office, they sat down with Caron Schreuder and Beth Fisher to talk about living through the credit crunch, how increasingly sweaty this marketplace has become, building the dream team and (as much as we tried to dodge it) the ‘generational’ aspects of lending. There is a lot to be learnt from Gavin and Mark; they exude a rare balance of experience, optimism and heart for this industry.
Interview
Gavin Diamond: So, Pozzy, I think it’s fair to say that it’s been a long road [laughs]. Slightly longer for you than for me. I go back to walking through the doors at Cheval in September 2007, if I recall. Mark Posniak: I think I started in 2005. Do you remember how you came to Cheval? GD: I do indeed. We had a BBQ – a braai – on a Saturday evening.You came over to my house and we got chatting about work and life, as you do, and you mentioned that your FD had resigned, either the day before or that week. We were chatting about the fact that I was looking to move on from where I was, and you said: “How about a meeting on Monday morning?” [Both laugh]. MP: I remember the conversation well. I remember our FD, Ryneveld van der Horst– Caron Schreuder: Now that’s a South African name if ever I’ve heard one. MP: He had resigned, and I remember thinking: ‘Ok, back to the drawing board. We’ve got to find someone’, and I went to Gavin’s house – not knowing he was an accountant and a ready-made FD. It’s funny how things work out. And, so, a month later– GD: A month later, I’d resigned and thought about the opportunity. Interestingly, the MD of Cheval at the time was Ellis Sher, who, in South Africa, I grew up two houses away from. [Laughs.] It’s a very, very small world. MP: The bridging community as a whole is even smaller. If you think back to those days at Cheval and remember the board meetings.You had yourself, you had Alan Margolis, who is now at Masthaven, Benson Hersch, the chief exec of the ASTL, Allan Kay, ABC… GD: Yeah. MP: Gareth Lewis, now at mtf, and at Precise before. GD: And Tiuta before that. MP: I mean, there aren’t many bridging lenders today who don’t have an element of Cheval painted within them. GD: Even at UTB. Currently, we’ve got one underwriter and one loan servicer who I worked with at Cheval. There’s a lot of us dotted around. Even Anita… MP: Yes, she was at Cheval as well, even before us!
GD: I went in as FD and could never have reasonably foreseen: a) what was going to happen in the world not long after I joined, and b) where I’d find myself today.You go into a company as an FD knowing nothing about lending or loans or mortgages and before you know it, the world’s kind of turned on you.You’re sitting in front of God knows how many different banks that we had funding lines with, trying to explain to them what was happening in a world that nobody knew! As long as they knew you had a plan, that was the most important thing to them – no matter what that plan was! [Laughs] MP: That education that we all got by being at the coalface when the market turned and, wow, did it turn quickly… GD: Yeah. MP: You can’t go to university and study about that. I mean, you can, but actually experiencing it and living through it… Living through a period prior to the crunch where loan-to-value was the only thing you cared about, and it really was ‘back-of-afag-packet’ [lending]. I remember sitting in a credit committee meeting and my sales team would come in and present to us and say: “The value of the property is X and this is how much they want to borrow.” It was almost as basic as that, because you knew that in a market which was rising, LTV was your friend and even if you were at 7075[%], by the time you repossessed, you were at 60! [Laughter] But those days are long, long gone. It’s funny, I think the position we find ourselves in today is eerily familiar to that of 2009. Will 2019 be the new 2009? GD: I think, over time, unquestionably, rightly or wrongly, bridging lenders – and I use bridging lenders loosely, because I think these days it’s more about specialist lending rather than bridging lending – have always had the ability to spot an opportunity and to provide funding where the high street or more mainstream lenders have feared to tread. If you think back to that time – 2008, 2009 – that’s when Dragonfly, or Drawbridge, started– MP: 100%. GD: And that was an opportunity that Jon [Jonathan Samuels, founder of Dragonfly] saw. MP: Correct. In every cycle – in every market – in times of uncertainty, it’s often the best time to make the most money. Provided you’re well-backed, you’ve got the
right team and you’re there for the long haul – you can actually make a difference. GD: And you’ve got experience. Experience counts for so much in this market. MP: Absolutely, absolutely. GD: It’s the same when you look at a borrower; if a borrower comes to you and the borrower has experience of what they are trying to get funded, you look at that massively differently than [if it were] somebody with no track record. MP: I think 2019 is going to [be] the year when experience really counts. 2019 will definitely be the first year where there are true casualties and consolidation, because the people who’ve dipped their toes in, who aren’t funded properly, who don’t have the relevant underwriting experience of those who’ve seen it on the way down, will come unstuck. It’s been easy: in a market where it’s been rising and in a market where there’s so much liquidity, it’s very, very easy to lend. I mean, the amount of people I speak to – just in normal day-to-day life – who tell me: “Yeah, yeah, I invest in bridging now” and you’re like: “Really?! Who do you invest in?” and they start listing these firms that you’ve never heard of and you think to yourself: “How are these people getting their business? How are they underwriting? How are they protecting the client’s investment? And, more importantly, how are they going to get that money back?” GD: It’s very interesting what you say because – no word of a lie – last Saturday evening I went out to dinner and two tables down from me, I heard people talking about bridging lending. And one of them said exactly that: he was trying to suggest to the other people around the table that it was something that, if they had some spare cash to invest, they should consider. CS: Is it a concern that if certain lenders or parts of the market begin to crumble, it will have a take-down effect on the wider bridging industry? MP: I don’t want to be overly negative – because there’s still some fantastic lenders out there with good track records and good experience – but there’s lots that aren’t. I’m going to use the word ‘peer-to-peer’, but I don’t want to [tar everyone] with the same brush, because I’ve already had so many peer-to-peer lenders shout at me because of a comment I made when I was doing a presentation… But I have to raise my concerns: the barriers to entry for these peer-to-peer lenders aren’t high enough. The regulatory controls that are put in
53 Jan/Feb 2019
Interview
place for the peer-to-peer lenders aren’t strong enough and [I don’t think they’re] doing enough to protect investor money. I remember sitting on a panel – do you remember, it was a couple of years back … and one of the peer-to-peer lenders said: “It’s not our money.” I almost jumped across the table saying that’s exactly my problem! Until you treat it like your money and you feel the pain of a loss, it’s exactly the root of the problem. On the other side of the peer-to-peer funding equation, there’s a problem with the controls in place in terms of distribution and funding and the matching of the two. CS: Do you think the FCA has got it wrong? MP: I don’t think it’s that they’ve got it wrong, they just need to explore from an investment protection point of view. From a lending/underwriting point of view, you can put those controls in place, but, ultimately – if you’re going to take excessive risk with someone else’s money, there’s a problem. GD: I don’t profess to be an expert on peerto-peer lending and funding models, but there’s a perception that the people – some of the people – investing in peer-to-peer platforms may not actually truly understand the risks involved or what it is that they’re getting involved in. MP: I think you’re right. GD: Different lenders are funded in different ways and in certain platforms you can invest directly into a particular loan, you can see a particular transaction and say: “I’m going to invest in that one”, but I think in other ones, you invest into a fund – a platform – and that platform decides. MP: The real reason for the concern is twofold: number one, to protect investors, and number two, to protect our industry. Because it could be like a house of cards: when one goes, a lot of the time many follow. When you think back to when Tiuta went, there was some consolidation, there was a big ‘hang on, is this really an avenue we want to go down,’ the banks all took their foot off the gas. We’ve done so much to push bridging and short-term lending to the forefront. There’s still certain people who will try to push the boundaries, but
there are plenty that operate within a fantastic framework. A couple of people who want to play on the periphery, who want to push boundaries too hard, could have a massive impact in tarnishing the rest of us and we have to protect that. ON CHANGES WITHIN THE INDUSTRY GD: One thing – allied to what Mark was saying – is the underwriting standards. The way loans were looked at when I came into the industry is fundamentally different to how they are today. Today, the very first thing we have a look at is the customer outcome. Back in 2007, there were a number of people who came to that short-term lending market because they had nowhere else to go. They had exhausted every other potential funding opportunity they had, and they looked at the bridging market as somewhere they could go to get some money. Now – in a sense – it’s been flipped on its head. People are looking at the market as a genuine potential funding opportunity, not a last resort. In fact, in many instances, it could be the only place to get the deal funded– MP: Or the quickest. GD: Or the quickest place to get the deal funded. Most importantly, when one looks at the underwriting standards now, it’s about the outcome for that customer. So, it doesn’t matter what the LTV is, it doesn’t matter what the property is necessarily; what matters is: am I helping this individual to achieve whatever they’re trying to achieve, and do they have a plausible exit strategy? If they don’t have a plausible exit strategy – no matter what the LTV is – I cannot lend them any money because the customer outcome is not right. I cannot put somebody into a facility or a loan that with the best will in the world they don’t have the reasonable ability to repay. MP: The defining moment in my career was meeting Jonathan Samuels. He has been an amazing influence on me personally and professionally, he’s been an incredible mentor, a wonderful partner and boss and has completely changed my outlook on short-term and property finance, and on business as a whole. I started working
For me, my experiences within the industry and what has shaped me, I’ve learned from so many different people along the way 54 Bridging & Commercial
with him at Drawbridge, which became Dragonfly, and which was ultimately sold to Octopus.You learn a [lot] from working with people like that. The same goes for Matt [Smith, Octane’s head of credit]; being able to work and grow with friends is massive. Adding to what Gavin was saying about customer outcomes and responsible lending and the way people are treated today – it is a completely different world. We’re not a bank, we’re not regulated, but we treat customers exactly the same way [as if we were], so we will always look at a transaction and make sure that that client has a tangible exit strategy. And a tangible exit strategy isn’t a pie in the sky; it’s the loan making sense because the borrower has this need for this purpose and that is how you’re going to be repaid. If you break it down as basic as borrower, asset and how you’re going to be repaid, it’s not rocket science, but you have to have experienced it before. Just because you have the first charge on the property and just because you’re at 70% or 65% LTV does not mean that you are bulletproof, because there are so many external factors that can affect the loan and affect the outcome for the borrower and for the lender. ON DREAM TEAMS: WHO DO YOU LOOK FOR, WHO’VE YOU LOVED AND THE POSSIBILITY OF WORKING TOGETHER AGAIN MP: That is a loaded question! [Laughter] So, yes, I would love to work with Gavin again. I loved working with Alan Margolis, as well. We had a great working relationship when we were at Cheval. We just understood each other well. The person who I really would’ve loved to have worked with – who has unfortunately passed away – is my cousin Stuart [Epstein], who was the CEO of Spring [Finance, a second charge lender]. We always said we would do something together at some stage in this space and he would’ve been the most wonderful person to work with. Unfortunately, it’s never going to happen. In terms of assembling a dream team, for me, personally, I am essentially doing it right now. We’ve handpicked– CS: And have you…! MP: We’ve genuinely gone and handpicked stars. Have we asked certain other people to
join us when it hasn’t been quite the right time? I would be lying if I said we hadn’t. Would I love to work with certain other people? Absolutely. I would love to have Gavin work with us or do something with us at some stage. There’s so much opportunity out there still, but we’re on a journey [right now] which I want to focus all my energy on. GD: It goes without saying, I have learned a lot from Mark, particularly on the sales side and relationship-building side. I think he’s absolutely immense in that area. Alan Margolis – he was the one who brought me to UTB in the first place – which was obviously fantastic. I wouldn’t say that there is any particular individual per se that I would absolutely love to work with again. For me, my experiences within the industry and what has shaped me, I’ve learned from so many different people along the way. Whether it’s Mark or even Ellis at Cheval – who as an MD was an extremely charismatic guy – to Allan Kay, Alan Margolis. Even at my time at UTB, some of the individuals both on the credit side and the MD and on the director side of the bank – they’ve all shaped my outlook and experience. It’s amazing what I know now compared to what I thought I knew 10-15 years ago. I thought I knew it all! MP: You’re not alone! GD: But in retrospect, you knew very little and I think it all ultimately ties back to the whole experience thing: until you’ve been through situations and you’ve had to deal with things – whether you wanted to or not – they all shape your outlook– MP: And your decision making. GD: And your decision making. Absolutely. ON EXISTING ON THE TWO ENDS OF THE LENDING SPECTRUM FROM A RISK AND AGGRESSION POV MP: We set out our stall to be different. And the only way we can be different is because of the experience of our team. Not just the experience of Jonathan, Matt and myself; it’s the experience of all the underwriters that we’ve got, the sales people that we’ve got and the way we’ve structured the business. I know you didn’t want me to say it, but our third-generation approach to lending is completely bespoke and we don’t have a product sheet, we look at every deal… GD: First gen [everyone laughs].
Interview
Just because you have the first charge on the property and you’re at 70% or 65% LTV does not mean that you are bulletproof ... there are so many external factors that can affect the loan and the outcome MP: [Over laughter] No. MP: Often someone will come to us because they don’t fit a mainstream lender, but by the time they’re done with us, they do. But they need somebody who understands that there’s a quirk in the asset, there’s a slight quirk in the credit file, there’s a slight quirk in the security, in the title, but if you understand all three… The funniest thing is – in any transaction you do, whether you think it’s going to be straightforward or difficult – the lawyer is going to find something, and the credit file is going to spit something out. Third gen – at its heart – is: find an issue, deal with it, put somebody back into the mainstream, give them a second chance. GD: I think with guys like Octane coming into the market, I don’t want to say it’s easy, but you come in with a reputation, you come in with no legacy, with nobody having a preconceived idea of what they think you are. If you take UTB, it’s been around for 60 years. Whether I like it or not, people perceive UTB to be a particular way. Mark can come into the market and say: ‘This is who we are and what we are’ and if you don’t know already you’ll see it on Twitter, LinkedIn and everywhere else… [laughter] If you look at UTB, where it was when I joined five and a bit years ago, and where UTB is now – it’s fundamentally different. Not that we did things poorly before, we didn’t. But it’s how you adapt and change in a changing market with changing competition. We have to work that much harder to change people’s perceptions of what they think the bank is compared to what it actually is. The word ‘bank’ in many respects is both helpful because people think they’re dealing with a reputable, well-funded organisation, but they also think in terms of old school, very rigid, overly cautious etc, etc, which is actually everything we’re not. Now, we might not be as aggressive as some of the privately funded lenders out there, but absolutely do we look to lend rather than look not to lend, which is something that I’ve heard people say on occasion. I think that’s massively wide of the mark. MP: I don’t think people say that necessarily of you, I think what typically people say of the bridging lenders that are backed by the banks and that are banks, is that you have more restrictions in terms of what
you can and can’t do, because of your PRA guidelines and FCA guidelines and capital adequacy requirements and stress testing of your book etc. It’s different when you don’t have that. Not necessarily a bad thing, but there’s certain areas and opportunities that you simply can’t do as a bank. WHAT DO YOU WANT TO BE KNOWN FOR? MP: If you just want to compete on price, then you can’t compete. But we’ve never competed on price. We launched 18 months ago and have lent in excess of £300m in a very congested market and we’ve never, ever sold on price. So, it depends on what your strategy is.Yes, as Gavin said, we’re fortunate because we have the experience, we have the relationships and we have something we built over eight years, which is trust and certainty that we’ll deliver. As a new lender, something you can’t just magic out of the air is trust and relationships. So, are [new lenders] disadvantaged in that way? Yes. But it depends on what they actually want to do. GD: As Mark says, the market is congested. The question for every lender in the market is: what do you want to be known for? Everyone needs to have some sort of a niche. There’s a halo effect: you get well known for doing one particular element and, before you know it, you’re doing it very well, and then [people] start to come to you for other things that they might not have considered before because you’ve built a good relationship and delivered. At UTB, we had a defined strategy: let’s start to get business from that broker based on that particular area of lending, and once we can prove to them our worth and build up a relationship, then leverage that and do other things. Probably every broker has a new lender knocking on their door every day saying: ‘I’m here, please send me your business.’ What is it that you’re doing differently? MP: They’re all saying the same thing… ‘We can give you great service’ – if you don’t have great service, you’ve got nothing! ‘We can complete quickly’ – everybody does that. ‘We’ll give you a great price’ – everybody does that. The worry is when people start realising: ‘Ok, I’ve got to do something different.’ They start taking
excessive risk, doing 80% in a market that shouldn’t be supporting 80%. GD: Or [lending on] a particular type of asset class. CS: But what other types of innovation can you immediately see? Isn’t everyone already showing their best hand? MP: [Cryptically] There’s plenty more to come… If you wind the clock back two or three years, nobody had heard of bridge-tolet. There is always going to be innovation. There is going to be automation and fintech making a major play in the space, you’ve got AI coming in… Now, I can’t see AI working in our space for a long time, but never say never. GD: Some of it is product related, some is efficiency related. How can you do something better, more efficiently, cheaper or smarter? In 2019, I think that’s going to be one area where you’re going to see a lot of innovation, but not necessarily product innovation. If you’re Mark, you haven’t got any products, so exactly how are you going to do product innovation when everything’s bespoke? [Laughter] MP: I love it. GD: Jokes aside, I do think that is going to be one of [the] key areas for this year: creativity must come to the fore because it has to, because rates can’t go much lower. FINALLY, DESCRIBE YOUR PROFESSIONAL STYLE IN THREE WORDS GD: Driven, considered and likeable. MP: I would say passionate, competitive and personable. CS: So, you both think you’re very likeable. MP: [Excited] Is that three p’s? Passionate, personable, compet– Oh, no. It’s not. Thank goodness for that. I don’t think anyone is ready for another #3-anything.
57 Jan/Feb 2019
EVERYONE’S AN EXPERT
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We looked at predictions pre-dating the EU referendum and subsequent Brexit chaos right up until last year to find out whether the industry’s boldest statements were fortune telling or folly
June 2017 A lender warned that a hung parliament in 2017 would be disastrous for the short-term lending market and spook investors February 2016 A report in 2016 examined the impact voting to leave the EU would have on UK commercial property markets. Some 73% of property investor respondents claimed they would see the UK as a worse place to invest in if it was no longer in the EU January 2016 It was warned that 2016 BTL levels would fall below 2015 levels and then be even lower in 2017 January 2018 One lender claimed that as 2018 progressed, the housing industry could return to more substantial patterns of growth January 2018 The founder of a property investment agency predicted that there would be irresistible opportunities in locations set to benefit from Crossrail, which was due to open by the end of 2018 July 2016 There were warnings from one lender that a significant number of bridging lenders would disappear in the six months following the EU referendum March 2016 A senior industry figure claimed property investors are increasingly looking for capital growth outside London April 2017 A bridging lender predicted that P2P lenders active in the development finance space would reduce or shut down their activity August 2016 Some 50% of personal investors believed that Theresa May, Philip Hammond and David Davis would secure a positive Brexit outcome for the UK
Words by
theo osborn 58
Bridging & Commercial
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The subsequent hung parliament – in which the Conservatives teame d up with the DUP – was disast rous for short-term lending. In fact, figures show that the first post-election quarter (Q3 2017) saw a decrease of £7.32m in bridg ing volumes, while the next quarter (Q4) saw a £20.3 m decrease in bridging volumes. By comparison, the quarter in which the election was held (Q2) saw an increase of £3 1.2 8 m Figures have recovered somewhat, however. The first three quarters of 2018 all showed significant growth, with a £31.53 m rise in Q1, £43.9 m in Q2 and £1 5. 4 m in Q3. um year, those While the UK did notice a dip in commercial investment in the referend ercial investment into numbers bounced straight back in 2017. Figures show that overall comm bn in 2016, it bounced UK property in 2015 stood at £72.1 8bn, and while it dropped to £51.84 ry. So, it would seem the back to £65.57bn in 2017 – its second highest level in the 21st centu ercial property. However, vote to leave hasn’t truly jeopardised the attractiveness of UK comm e isn’t yet known. whether investors will flee with their funds following the final outcom Bank of England figures show the average percentage of new mortg ages in 2015 which were for buy-to-let stood at 16.4 %. This decreased to 15.87% in 2016 and then even further to 13.3% in 2017. This prediction was true. However, with the first half of 2018 seeing a slight rise to 13.6%, the market may bounce back. According to Nation wide’s house price index, annual house price growt h in November last year was 1.9 %, up from 1.6% in October. The October figure was the lowest annual growth since 2013. To put it in perspective, annua l growth in November 2017 was 2.5%. Not exactly substantial growth in 2018. in 2018. Just A study by Emoov found that buyer interest in Crossrail locations cooled The research also 31% of areas around the 39 stations saw a positive price increase. predicts a further decrease of 1.68% in these locations. can only hope it As for Crossrail itself, it didn’t end up meeting its 2018 deadline. We meets its autumn 2019 start date.
No notable bridging lenders left the market during those six months after the referendum while, two years down the line, more than 10 lender launches were covered by Bridging & Commercial between January and September 2018. Brexit clearly hasn’t affected the quantity of players in the game. Growth outside of London has been a key focus for many bridging lenders. This is proven with the number of lenders which have ramped up their regional teams . In 2018 alone, Glenhawk expanded into the South West, Roma entered the Scott ish market and Alternative Bridging launched a new Midlands office.
Despite Funding Circle’s exit from the market, we have seen the launch of BLEND Network, PropertyBridges.com, The House Crowd and CrowdProperty in the P2P development finance space since the prediction was made. that is Determining the definition of ‘positive’ here is uncer tain. One thing the UK. Maybe certain, however, is that David Davis didn’t secure any outcome for the UK. Oh the next Brexi t minister would’ve gone on to secure an outcome for wait, maybe the next one can... 59 Jan/Feb 2019
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…And here are the bets for 2019 2018 proved challenging on several fronts as political uncertainty left markets in a relative state of limbo.We asked several industry experts for their thoughts on what the next 12 months may hold for the various specialist finance sectors is often not [the] answer – but instead the lenders must prove their strength by having funds ready to lend.”
BRIDGING “I believe that 2019 will see lenders reducing the maximum LTVs that they are comfortable with, given the … enduring Brexit uncertainty,” says Mike Strange, director at Funding 365. He adds that it seems certain that some bridging and development lenders will exit the market and that loan portfolios behind these businesses will be purchased by a competitor or a distressed debt fund. “It may be the case that this does open up a gap in the market for a new entrant to emerge.” Gareth Lewis, commercial director at mtf, thinks any lenders who jump up the LTV curve without a great deal of consideration would be foolish. “[Last year, it was] no shock to see that the newer lenders have been the ones offering higher LTVs as they struggle to gain traction – this is undoubtedly a potential recipe for disaster.” He also wonders if consolidation had already started late last year and what it means for 2019. “With lenders all vying for market share, at what point will those lenders on the periphery of the market decide that the rewards no longer outweigh the risks and look to cease trading or consolidate with another lender?” Michael Dean, principal at Avamore
Capital, believes we have seen – and will continue to see over the year – bridging lenders diversifying their offering and moving into the ‘value-add’ space. “This includes offering products such as specialist buy-to-lets and – as more lenders move into more complex spaces – we will see increased pressure on rates. “Additionally, there is potential upwards pressure on the Bank of England base rate, which may cause bridging rates to move away from the floor they once reached.” Jack Coombs, director at Aspen Bridging, claims that there will be more funding challenges for highly geared lenders without banking licences. “If the lender does not have either a banking licence or substantial equity investment, they cannot control their funding reliably and their end funders may ultimately withdraw their support if the financial health of a business is threatened. “This risk can only be managed by having a strong performing book. “However, rapid book growth and insufficient numbers of trained underwriters means this represents an ongoing challenge.” Paresh Raja, CEO at Market Financial Solutions, predicts that more lenders will enter the market this year. “Increased competition means that lenders need [to] be more innovative in the services they offer in order to stand out from their competitors. “Importantly, this should not simply be seen as a price war – cutting rates 60
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COMMERCIAL Marc Goldberg, commercial CEO at Together, claims that it has seen a move from people who used to invest in residential property now looking towards commercial because of the various challenges, including stamp duty on second homes and the gradual removal of mortgage interest relief for residential landlords. “We predict that this current trend towards investment in commercial property will continue in 2019, with distribution centres, storage, warehouses and offices – near good motorway networks – proving attractive investments as the growth of online retail continues to overtake the traditional high street. “Over the last few years, we’ve seen larger offices converted into residential accommodation, leaving a shortage of quality office space; those in prime locations which come on the market will be snapped up quickly. “We believe that good quality, smaller, serviced offices – again used by internet retailers – will also be popular. “We also need to be mindful that there will be a lull in the commercial lending market in quarters one and two [in] 2019 because of the uncertainty surrounding Brexit. “However, we believe there will be good opportunities in quarters three and four in the sector for people looking for good quality commercial property.” Jon Salisbury, managing director at Ortus Secured Finance, explains that well-located
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and correctly priced commercial – even retail – properties will do well in the hands of experienced investors and operators. “Indeed, history suggests that if 2019 does prove tumultuous, it will give rise to new entrepreneurs who will look for well-funded and confident lenders.” Meanwhile, Darrell Walker, head of sales at InterBay Commercial & Prestige Finance, thinks there will be demand for higher LTVs in the commercial property market as well as interest-only and bespoke short-term lending products. BUY-TO-LET Ian Boden, sales director at LendInvest, says it’s important not to let the headlines dictate the sentiment of the housing market. “Although growth has slowed in the past year or so, it certainly has not stopped, and we are still seeing unexpected postcodes flag at the top of our index, such as Peterborough and Wolverhampton in the Midlands, and Stockport with its regional leader Manchester in the North West. “Keeping an eye on these hotspots for BTL investment will be key moving into the new year. “I feel we will see a clear trend in landlords making the decision to switch existing properties held in an individual name within their portfolios into corporate structures. “Given this, we should also expect to see more brokers acknowledging that while they should be aware of a landlord’s options, they should encourage their clients to seek out the advice they need that could make all the difference to the return on investment of their portfolio, rather than act as tax advisers themselves.” Jeff Knight, marketing director at Foundation Home Loans, adds: “We have seen house prices decline in London due to uncertainty over Brexit, while other areas of the country have seen less of an impact. “I expect this to be a new norm, with uncertainty still in existence even once Brexit has happened, as there is so much unknown below the surface. “Uncertainty will stagnate the London
market particularly, as people defer purchase due to fears over job security and investing in a property that may fall in value. “This will, eventually, have a ripple effect across the country, which is contrary to other commentators’ views, who believe the impact will be very London-centric. “Buy-to-let may buck this trend, as landlords see property as a longerterm growth prospect, but they will have growing concerns over current tenants leaving the UK. “This could be offset by other tenants deferring their first step on the ladder and remaining in the private rental space.” SME LENDING John Davies, director at Just Cash Flow PLC, outlines how the issue of ‘stacking’ is going to get much worse before it gets better. “Stacking – as the name suggests – is where a lender has made a lending decision based on all the information at hand, often in the main provided by the director/officer of the company who has omitted the fact they have previously borrowed funds elsewhere and pledged guarantees to those borrowings. “Hence, the borrower ends up with several facilities from lenders with the new funding often having to pay the repayments on the other loans – ie the loans are stacked. “However, I believe 2019 will be the year that lenders realise that the most effective way of combating this issue is sharing information and subscribing to a personal guarantee database.” Angus Dent, CEO at ArchOver, feels that a key change in 2019 will be the regionalisation of SME lending. “It’s no longer enough to operate out of London alone. “Lenders that focus their attention on regional outposts will reap the rewards, offering a personalised approach to help businesses grow, rather than lending from the City of London to struggling SMEs in Leith and Leicester.” John Mould, CEO at ThinCats, opines that 2019 could be the year we see more than 50% of SME loans being sourced from non-bank lenders. “We also expect further funding from institutional investors which will increase the average loan size and unlock alternative finance funding for larger SMEs. “And regardless of Brexit’s outcome, the banks [could] scale back on lending precisely
when businesses will need it the most.” Kevin Vendel, head of sales at Spotcap, claims that the term ‘alternative lending’ is dying. “With banks keen to innovate and no shortage of newer lenders, they are on a path to becoming synonymous. “Overall, the lending scene will become more collaborative and yet competitive – great news for businesses.” P2P “I expect huge changes and challenges in the coming year,” suggests Giles Cross, chief executive officer at Folk2Folk. “Technology is evolving at an extraordinary rate and we’re still discovering ways in which Open Banking can be used to improve our offerings and processes and, of course, how we can best transfer that value to the end user. “AI will come increasingly to the fore, but while this is very exciting and has the dazzle of ‘shiny things’, I also predict that we’re going to see something of a ‘digital backlash’, where customers are being pushed too far along that route without permission and will increasingly value human interaction. “Our market is increasingly crowded, and the pressure will be on to create valued, purpose-driven brands within the space; to develop defined customer expectation and association and to achieve and maintain relevance and salience.” Roxana Mohammadian-Molina, chief strategy officer at Blend Network, believes we will see more platforms focusing on niche markets and offering very specialised products. “2019 will see more specialist platforms and a trend towards specialisation. “I believe that, traditionally, lenders have very much focused in and around London (and the South East) because it is easy, convenient and ‘close to the money’. “…Potential niche markets are markets that have traditionally been under-serviced in terms of lending (ie the North, including Scotland and Northern Ireland).” Michael Lynn, CEO at Relendex, concludes with a positive note on the P2P industry. “We see 2019 as a watershed year in which our fledgling industry matures and there is [a] clear distinction between those P2P platforms exercising best practice not only in their dealings with the public, but also in their lending and investing criteria. “There will clearly be casualties in the industry, but we firmly believe that the best practitioners will be recognised, and the industry will grow from strength to strength.”
61 Jan/Feb 2019
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Limelight a glimpse into our ever-busy schedule
1 Who: Guy Harrington of Glenhawk, Chris Scott of Octopus Property and Ranjeev Kumar of Watson Farley & Williams, plus various brokers Where: Watson Farley & Williams’ offices, EC2 What: Our first filmed roundtable, where we discussed surviving in a competitive market, and the impact of regional lending growth on London and the South East 2 Who: Fiduciam Capital Where: Home House, Marylebone What: Banks likely to be the first to pull funding from the specialist finance market in a financial crisis and how to expand internationally
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3 Who: Capital Value Surveyors Where: German Gymnasium, Kings X What: Veganism and elevated PI insurance costs when it comes to bridging valuations 4 Who: VAS Where: 20 Stories, Manchester What: A market starved for real data and the everchanging landscape of the Rainy City 5 Who: Iron Bridge Finance Where: The Grazing Goat, Marylebone What: How to correctly check if a bottle of white is chilled and our wobbly political climate 6
6 Who: Vatbridge Where: Boisdale of Bishopsgate What: Skydiving and the rise of VAT funding products
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7 Who: Pivot Where: Carousel, Marylebone What: Who’s funding the market and why 8 Who: LDNfinance Where: Eight Club, Moorgate What: Getting in the festive spirit, meeting the team and coconut tequila 9 Who: Sirius Property Finance, Barclays Where: A car park, Enfield What: Mortgage Sleep Out – raising money for homeless youth with the help of some very deft Greek BBQers.
62 Bridging & Commercial
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A specialist short-term lender who gets the deal done. We pride ourselves on the speed and efficiency in which we take a deal through to completion, working with you, and your client at every stage. Rates from 0.99% pcm
Quick turnaround
Terms within 1 hour
Up to 75% LTV
Loans £100k—£5m
Access to underwriters
All broker fees paid immediately on completion
Complete transparency around fees and interest
CAL L
0345 494 0708
hello@hope-capital.co.uk
Hope Capital is a 100% privately funded specialist provider of bridging loans of up to £5m for a term of up to 12 months. Hope Capital does not offer regulated loans and is not regulated by the FCA.
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Backstory
Why Octopus property? ‘Gut feel’ Octopus Property’s BDM for the North of England on leaving Shawbrook, the growing opportunity in the regions and the challenges of scaling a business After spending over 14 years at Shawbrook Bank garnering extensive property lending experience, Paula could have had her pick of any specialist lender. In October last year, Octopus Property announced a significant coup by recruiting Paula. Now responsible for strengthening existing broker relationships and forming new ones in and around major northern cities – including Chester, Liverpool, Crewe and Warrington – her knowledge of the area is set to help replicate in the regions the success the business has achieved during the past decade. What has been your biggest achievement to date while working in the specialist finance market? The launch of Shawbrook Bank following the financial crisis and being part of the team which brought a new lender to market. What was the main reason behind your decision to leave Shawbrook? I wanted a new challenge. I’d been with Commercial First/Shawbrook for so many years and the business had changed significantly in the 12 months prior to my departure. I felt I could use my knowledge of the mortgage market and extensive broker relationships to build a strong proposition with Octopus in the North of England – an increasingly important market for its regional growth strategy. Why Octopus Property? I always think these things are largely [about] gut feel. It’s like buying a house, you just know when something is right! Having said that, I have always admired the business and its ambition, as well as the people – they ooze professionalism and a real desire to support brokers. What one thing would surprise people about Octopus Property? The size of the organisation. Property is one part of the wider Octopus group, which has built a reputation for innovation in a number of sectors. Did you know we have an energy company? How important is it to provide a local service to northern brokers this year and why? Very important. Brokers appreciate a good sales
person who understands their challenges and who can help them look at new ways of writing business. Being based in the area is imperative to helping them. For me, it’s all about service – returning phone calls, helping with difficult cases and looking for solutions. What do you expect will be the biggest challenges in your new role in 2019? Ensuring that I continue to execute the levels of service and support that brokers know me for. It’s a growing market with new entrants, so I need to ensure I remain focused on delivering. And opportunities? We are seeing more and more property professionals look outside of their traditional markets in the hunt for capital value growth and more favourable yields, the result being that the opportunity for specialist lenders across the regions – but particularly in the North of England – is only going to increase.The onus is on me to make sure that Octopus Property is best positioned to be a beneficiary of this trend. What key changes do you expect to see in the bridging market in 2019 and how are you preparing for them? The market opportunity is only going to grow as more traditional sources of funding remain unable or unwilling to meet borrower requirements.The challenge will be ensuring that we stay ahead of the competition. Alongside the continued professionalisation of the bridging sector – an area where I believe Octopus is a pioneer – we are likely to see some consolidation among both the smaller, newer entrants as well as some larger lenders.The [decision] is whether to scale in order to benefit from the economies this brings – but potentially lose that customer-focused service – or remain a more boutique lender and [face] the challenges that brings from a margin and loan book growth perspective. 64
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What did you spend your very first pay cheque on? A beautiful red dress What is your favourite spot for meetings? Piccolino in Alderley Edge Most memorable moment from your time in the industry? Winning Relationship Manager of theYear at the 2016 Loan Talk Awards What is your favourite industry event of the year? The NACFB CFE at the NEC in June Dream job if you weren’t doing what you do? Interior designer
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