For the majority of real estate developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project., gone are the days of enjoying first name termsThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Loan Term. with the bank manager. Since the 2008Used to refer to the 2008 Financial Crisis (or Crash), which is recognised as the worst financial crisis since the 1930's depression. With its origins in the US sub-prime mortgage market in 2007, it counted established industry titans such as Lehman Brothers and Bear Stearns among its casualties, leading to government bailouts of banks around the world and protracted economic downturn. crash, tightening regulations have forced many high street banks to loosen their grip on the lending market, letting go of the riskiest loansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More altogether.
A fragmented market
This has paved the way nicely for a David and Goliath-esque scenario, whereby non-bank lendersA company or person that lends money to another. enjoy greater flexibility in their loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More offerings than the larger, highly-regulated commercial banks. This equates to a healthier appetite for lending, and crucially for developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project., the ability to close a deal far quicker.
The rise of STEM (Science, Technology, Engineering, Medicine) businesses has also helped boost the emergence of the non-bank market. Without the restrictions of the time-consuming and costly regulatory reporting required from the banks, alternative lendersA collective term to describe the Lenders that are not traditional banks. Peer to Peer Lenders, non-bank Development and Brideging Lenders would all be examples, but there are many more. can offer bespoke termsThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Loan Term. with fewer covenantsA contractual stipulation in a Loan Agreement which needs to continually met, so that the loan does not fall into Default. Cure Rights may apply. If the Loan continues to be in default for a period of time, then the Lender may exercise their rights to recover their loan..
Challenger banksThe UK banking sector has historically been dominated by the 'Big Four' of; HSBC, Barclays, Lloyds and RBS Group. Newer entrants have concentrated on areas that are underserved by the more established players, such as; Development Finance, Commercial Mortgages for SME's and Residential Mortgages that cannot be easily automated (such as those for older applicants or the self-emploted). Challenger Banks include; One Savings Bank, Metro, Oak North, Aldermore, Shawbrook and Starling. Although their loans are more expensive, you are less likely to get a 'computer says no' as loans have more manual underwriting input than the Big Four (in our opinion)., peer-to-peer and specialist lendersWe use this term collectively to describe non-Mainstream Lenders; predominately Private Banks, Challenger Banks and Alternative Lenders. The Big 4 UK banks tend to serve the ordinary Borrower very well, but for anything a little more complex that can't be automated, then it's often the case they are not the best solution. have emerged to claim their stake in the UK’s £200bn+ CRE lending market. In 2008Used to refer to the 2008 Financial Crisis (or Crash), which is recognised as the worst financial crisis since the 1930's depression. With its origins in the US sub-prime mortgage market in 2007, it counted established industry titans such as Lehman Brothers and Bear Stearns among its casualties, leading to government bailouts of banks around the world and protracted economic downturn., pre-crash, 95% of all commercial real estate lending in the UK was from the banks, whereas according to Bloomberg, by 2017, ‘shadow’ and international banks had swooped in to take a 54% share.
Visibility is king
Opening up the market undoubtedly brings more choice when it comes to commercial propertyAn asset, normally to be held for the long-term and to produce an income, and / or Capital Growth. Examples include; Hospitality (hotels), Retail (shops), Leisure (pubs), Student Accommodation, Medical (GP Surgery), Light Industrial (Shed / Logistics), Heavy Industrial (Manufacturing Plant), HMO (House of Multiple Occupancy; e.g. Bedsit), Office, Care Home / Retirement and Educational (University / Private School). finance, but a lack of visibility also means missed opportunity. By banging on the door of every UK bank on the high street, developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. are still only scratching the surface of the overall market. Yet many simply aren’t aware of the myriad of non-bank lendersA company or person that lends money to another. around, or how to access the key decision makers.
The breadth of the market is far more expansive than the majority of developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. perceive. Poor transparency, little or no marketingTypically used in Development Finance to describe costs incurred directly by the developer to go towards the promotion of the site to sell it (brochures, hoardings, website, photography, etc.). It is viewed as a legitimate Build Cost by the majority of Lenders, and should therefore be included in the Development Appraisal as it will have a lending value (i.e. you can borrow a percentage of this cost if you want to). capability and a subsequent lack of brand awareness mean that credible, non-bank lendersA company or person that lends money to another. with large and flexible development funds become overlooked.
Whilst experienced developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. could perhaps identify five to 10, a mortgageAn agreement that allows a Borrower to borrow money from a Lender, by using a property as security for the Loan granted. The Lender will take a charge over the property to secure their Loan. brokerAn agent that negotiates situations for others. For us, this definition goes much further. A good Broker should be indispensable and add considerable value to you. I've not met any Property Professionals who do not recognise the importance of Brokers. Think of a broker as an extension of your business; like another employee but they are variable cost not a fixed cost, the FD you can't afford to hire. will have access to nearer 100, with the necessary expertise to ask the right questions, unearth the most suitable property finance solution, and minimise undue risk.
Better the devil you know
With the economic cycle in its latter stages, and financial uncertainty forecasted for the coming years, minimising risk should be high up on the business agenda. Yet the fragmented market of non-bank lending institutions inevitably brings risk, and navigating it without sufficient knowledge, contacts or expertise can prove a perilous manoeuvre for developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project..
If the rate and termsThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Loan Term. a lenderA company or person that lends money to another. is offering appear too good to be true, they probably are. Especially if the operator has been lending in the real estate arena for a short period of time. The likelihood is they won’t be around after the next economic downturn, leaving development projectsThe Site or Property that a Developer wishes to improve or re-build, in order to add value. It is quite common for someone to refer to a 'Development' instead. hanging in the balance.
To maximise equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity. efficiency, or for developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. looking to mobilise quickly, borrowing from the big UK banks isn’t an option. Yet finding the right alternative in the form of a non-bank lenderA company or person that lends money to another. undoubtedly carries a greater element of risk, alongside the potential of greater returns. Using a brokerAn agent that negotiates situations for others. For us, this definition goes much further. A good Broker should be indispensable and add considerable value to you. I've not met any Property Professionals who do not recognise the importance of Brokers. Think of a broker as an extension of your business; like another employee but they are variable cost not a fixed cost, the FD you can't afford to hire., and letting us do the due diligence, will not only open up the CRE lending market exponentially, but help mitigate undue risk by filtering out the unreliable entities.
Whilst the market may feel like a minefield, it’s really a case of knowing where to look; be it by yourself, or with the help of an expert.
July 2019
