The 2018 Cass UK Commercial Real Estate Lending Report, formerly the DeMontfort Report, revealed that non-bank lenders, which have been gradually building market share since the financial crisis, had increased their share of new lending from 10% to 14% in 2017.
Furthermore, the annual lending report showed a 13% increase in development lending, with the majority going to residential developments. Up until recently the British Property Federation had highlighted lenders’ reticence to offer development financing as an issue for the industry.
However, with the continued macro-economic backdrop of uncertainty hanging over the UK, lenders would be forgiven for being more cautious nearly a year on, despite there being no end in sight for the housing crisis in the UK. So as the market becomes more comfortable with targeted lending – and demand continues to support further residential commitments – what is the role of specialist lenders in 2019?
The line between specialist and mainstream lenders has become a bit more blurred. A specialist lender is a more flexible lender, with the ability to look at more complex circumstances – which is what we have done since we set up the business in 2007. But we also have the mainstream element of what we do, where we can offer competitively priced buy-to-let mortgages, which compete with the high-street lenders.
Flexibility of specialist lenders
Following the global financial crisis, and increasingly subject to regulation, banks are more reticent to go up the risk curve. There is still a perception that they are less flexible than specialist lenders, which means they may be less able to deal with unforeseen economic events.
The ability to be flexible helps navigate macro-economic conditions. If things change in the application process; if there is a change of circumstance for whatever reason, we will be able to look at it from an underwriting perspective and assess the merits of the individual application. This is opposed to a more system-based lending, where the lender would not be able to proceed because the application no longer fits the necessary criteria. We are able to look at it and think: does this deal have merit? Does it make sense; is it a good deal for the client and for us? Whereas the mainstream market has traditionally done that less.
For borrowers, turning to a specialist lender can also mean a closer relationship compared with the one they may have with a larger lender, allowing them to better navigate changing market conditions. The ability to pick up the phone, as a borrower, and speak directly to a lending director who knows your business and your plans in-depth is one of the key drivers to specialist lenders.
One lender from start to completion
Furthermore, the ability of specialist lenders to guide borrowers through their project from beginning to completion – with the use of several different lending products – means borrowers do not have to bounce between different providers over the course of their development. Staying with one lender increases the efficiency of the process, brings down costs and reduces uncertainty about the likelihood of achieving all refinancing to get to the end stage.
At West One Loans, we can begin working with a client when they have land – even without planning permission. We can offer a bridging loan of up to 70% loan-to-value on the asset at the very beginning of a development. Once planning permission is achieved, we can switch the borrower over to a development finance product and lend the money to do the development.
We can offer loans of 65% loan to gross development value, 85% on the loan to cost up to a maximum of 70% day one loan to value – so it is quite a competitive product. In addition, the rates are competitive starting from 7% per annum. Another significant benefit is that once the development has completed, we can offer a short-term bridging product that may enable the developer to realise a higher sale price. We have plans in the very near future to launch other longer-term products, which would bring further synergies to the lifecycle of a development project.
We know the client, they know us. We can get updated valuation reports from previous milestones, which just gives the client more certainty that we understand their requirements and their journey
This spectrum of products underpins our granular understanding of the development process and allows us to be a valuable partner to property professionals bringing projects to fruition.
We know the client, they know us. We can get updated valuation reports from previous milestones, which just gives the client more certainty that we understand their requirements and their journey.
Looking ahead, despite it playing to our strengths, uncertainty is still the main issue impacting specialist lenders this year. This macro-economic backdrop is further complicated by the possibility of a downturn in the real estate sector, putting increased pressure on the market.
A downturn is a constant discussion at West One Loans but ultimately it is an unknown. Ask 10 different individuals in the sector and you will get 10 different answers. However, if you are a lender who operates in the right way, is selective in your approach and knows the markets then there are always opportunities.
Despite the conditions, our strategy is not changing and we still believe in the property market.
Data and technology are key to our 2019 strategy. We are committed to becoming a leader in delivering innovation through technology to further support our business partners and borrowers and create streamlined processes to bring about a much-improved customer experience.
For the remainder of 2019, despite the conditions both inside real estate and in the wider market, specialist lenders will have an increased role to play this year and into the future.
We are more relevant for property professionals because looking at circumstances that might be less straightforward or need a more ‘on-the-ground’ view is very helpful – and there is still a shortage of housing. There are still requirements to build, there are still lots of people who want to trade property, buy property and who have buy-to-let portfolios – and they want lenders who understand their circumstances.
West One is the publisher of the Bridging Index, which has become one of the industry’s most respected and relied-upon analyses of the bridging loans market. West One specialises in making it easy for intermediaries to secure short-term finance for their clients. Renowned for super-fast applications and quick turnaround on loan decisions, the company is one of two separate but complementary trading divisions of Enra Group.
PW Perspectives: the structural changes affecting the industry
- Currently reading
What role will specialist lenders play in 2019?