Author: Clint White

It goes without saying that the Covid-19 pandemic has caused significant upheaval in the lending markets, with many lenders impacted in terms of their ability to lend, particularly bridging lenders, many of which pulled out of the market for a period of time, but in the medium term the bridging market is likely to do well due to Covid-19.   

In the immediate term, we have seen disruption due to some lenders being unable to lend or their funding appetites changing due to the uncertain risks during this time. 

During the lockdown, new valuations have been difficult to obtain and solicitors’ response times have slowed, while some small solicitor firms appear to have shut down, all creating issues for lenders.  So funding right now is difficult and likely to be for the immediate future whilst the country gets moving again.

In the economy in general over the short term, it appears we are looking at a contraction which has not been seen in the UK for centuries.  The reduction in economic activity has already been compared to the Great Frost of 1709, and the bursting of the South Sea Company Bubble in 1720. 

I believe that the recession is likely to be a “V” shape contraction, with a sharp increase in economic output once business gets back up and running.  However, the right-hand side of the “V” i.e. the recovery, will probably be lower than the left-hand side – we are yet to see by how much.

Not all areas of the economy are impacted equally due to Covid-19.  For example, whilst the hospitality industry is being devastated, supermarkets have seen an increase in sales.  So what property will make for good lending security in the medium term? 

Take the classic bridging for refurbishment in order to let out a property.  I think that demand for this product may fall in some of the larger cities, such as London, as a number of holiday lets come back onto the market as standard rentals (due to a reduction in tourism requiring fewer holiday lets) – which will in turn reduce the housing shortage. 

In general, areas relying on large numbers of foreign tourists are likely to suffer the worst so we could see a sustained impact for example, if social distancing is required long term in bars, clubs, restaurants, theatres, a lot of these businesses will fail. 

On the other hand, domestic tourism is likely to rise when the government allows people to travel in Britain, so hotels focussed on the domestic market will probably outperform overall, particularly in British holiday resorts. 

Where I see more demand for bridging is where businesses require funding to fit the new demand – for example hospitality businesses serving domestic tourism i.e. cafes, pubs, hotels in UK resort towns.  Banks generally aren’t keen to support new businesses, so bridging finance is likely to be key here.  Towns serving domestic tourism are also likely to buck the trend and see an increase in refurbishments as people convert houses to holiday lets to accommodate the additional demand in these areas.

Refurbishment for longer term lets may rise in the medium term as prospective homeowners find it harder to buy now so rent for longer. Residential property in general should hold up better than some other property classes, but not all residential is the same.  Affordable residential in higher-employment areas is likely to outperform other residential.  An exception to this potentially, is London prime and super-prime; my view is this was under-priced from an international perspective prior to Covid-19, so this micro-market might hold up well.

Good security for bridging loans in the medium term are supermarket and minimarket retail with good tenant covenants.  This subset of retail is currently performing well, with the larger players reporting increases in sales.  

Industrial and distribution businesses are also likely to perform well, particularly as retail declines. Particularly those business with modern, good quality properties and well located.

Amongst the most difficult property types is general retail.  Retail has been on the decline for years, and Covid-19 will make this worse.  A combination of internet sales and high rents and business rates will continue to squeeze retailers and we will see a lot more vacancies in our local high streets. 

In the short and medium term, I think bridging lenders will see more enquiries.  I suspect some banks will look to leave some sectors, and so businesses will need to refinance their loans, and bridging lenders are likely to fit those gaps nicely. 

The key issue for these businesses is that banks might be concerned because of poor business performance, so understanding that poor performance is short term only is important.  In these instances, introducers could ensure that borrowers have a workable plan in place to improve business performance, so they can go back to the banks once the market improves.

Overall, as and when the banks won’t lend to businesses and developers, it is the bridging lenders which step in to help.

I recently found myself staying in a provincial budget hotel which, given the number of bugs flying around, was an experience I prefer not to repeat. I have encountered many cheap (and nasty) hotels on my travels and, especially as I hate spending money on accommodation, it upsets me that I continue to encounter them. The rise of Airbnb and other internet-based operators, that are offering rooms in private houses, means that lower starred establishments such as these are facing a new risk. Often private accommodation is superior and, as a result, some hotels are closing down and being converted to residential properties.

According to PwC research, hotel revenue per available room (RevPAR) is expected to rise slightly in 2020, but it is likely that much of the increase will come from hotels with better standards of accommodation. “Flying bug” hotels are unlikely to see an increase in revenues and will continue to lose market share to higher quality hotels and the likes of Airbnb.

One way to prevent this deterioration is for the hotelier to spend money to upgrade, to look at the hotel as a whole and assess how best to improve. Can they alter the configuration, increase room numbers and improve the overall standard of the hotel? If so, they can potentially increase revenue as well as the value of the hotel. The first step is design, then, assuming planning permission is obtained, funding needs to be put place to finance the works.

There are a large number of lenders who like to lend on hotels (although I have seen evidence some are leaving this market), and a sizeable number that are happy to lend on development works. However, the number of lenders willing to lend on ‘hotel developments’ is relatively few, particularly if the hotel continues to trade during the works. Fiduciam is a lender willing to provide hotel refurbishment loans to hotels operating during upgrades but, as a prudent lender, we also like to know that the works are properly managed and the risks associated with the works are mitigated.

Borrowers should engage with their lender at an early stage and this is when a lender can add real value. For example, we have in the past worked with architects, planning consultants, contractors and even have fire engineer contacts and have a suite of professionals who have worked successfully on previous hotel developments. Whilst we, unfortunately, can never make recommendations to our clients, we are happy to put them in touch with people we have worked with before, and provide suggestions on how a transaction may be structured and works undertaken to best suit the hotel owner.

For hotel owners that know it’s time to upgrade the most important step is getting a hotel refurbishment loan in place. Find a lender, like Fiduciam, that will work with them to engage with professionals, plan the hotel upgrade and fund the works through to completion. At the end of this, the owner should have a better hotel, with more stable revenue and they can share in some of the expected RevPAR growth that PwC is forecasting for 2020.

You might be forgiven for thinking that the opportunities in Europe will be under threat given our situation with the UK’s exit from the EU.

But, as a business that has been working in Europe for the past two years, we know that this is not the case.

Lending in Europe is not always easy, and in some countries not really possible, but we have made it our business to find ways to lend whenever, and wherever, we can. In some countries, other than local banks, there are very few lenders able to help investors and developers looking to obtain leverage over real estate in continental Europe. In fact, there are some countries where we are possibly the only other option.

When lending in a new country, the first step is to work out if it is indeed possible for a UK lender to lend, and if it is, then it’s a case of working out how. There are many nuances and almost every country has different rules and regulations, which can be quite different to the way we lend in the UK. There are similarities to the UK in Ireland, as you’d expect, but elsewhere lenders have to be very sure they are working in the right way. 

For instance, we can’t lend directly to French entities because French banks have a lending monopoly, but we can assist where borrowers have corporate entities outside France, but have French assets which can be used as security. 

In Spain, we face a different challenge. Although lending follows a more standard civil law process, assessing property values is much more problematic. Previous sales data is limited and often unreliable. This makes it difficult to compare anything but the most standard of property types. We set up our Spanish arm, with a full Spanish-speaking team, to deal with exactly these types of problems. 

In continental Europe, loan transactions are often cross border, for instance the loan being provided for a finance company in one country and the security being taken in another country. In Ireland and Spain, many loans are being used for debt restructurings, assisting in cleaning up the aftermath of the financial crisis.

One area we are particularly active in is enabling the directors of UK businesses to raise equity against their European property.

It has taken us a lot of time to develop our continental European bridging capability, but now that we are fully operational in Ireland, the Netherlands, Spain and France, we expect to double our lending volumes in these countries next year, with Germany, Switzerland and Luxembourg coming on top of that. Most of the jurisdictions we lend in are currently experiencing rising property markets, and the opportunities are multitude, as evidenced by the growing bridging market in Europe. We are there for the long run.

Based on observations and conversations over the past year, there appears to have been an increase in the search for international funding coming through London brokers.

A growing number of London brokers it seems, are being asked to access money by borrowers keen to do one of three things: either purchase an international property, carry out work on a property based overseas or, increasingly, release money from a property based in continental Europe in order to spend on property or business in the UK. In each of these cases there is another property that is being leveraged on a short-term basis in order to satisfy a development or business need.

There could be a number of reasons for this uplift, but it increasingly seems to be the case that if you have an international property and can’t find funds abroad then you look to London as an international finance centre. For flexible, short-term funding, London is still the place to come, even despite Brexit.

What is interesting is that the people turning to London brokers for help are not even all UK nationals, they are a number of different nationalities all of whom have property on the continent that they need to leverage on a short-term basis.

It makes sense that international brokers like Enness and Knight Frank will be approached for this business as they have international connections so may be contacted in multiple jurisdictions, but the demand seems to be wider than this with a much wider range of brokers being approached. It is not exclusive to London brokers either, but the demand does seem to be predominantly in this region.

The key reason seems to be that short-term finance is not generally available across the continent, but as awareness grows of bridging finance and how useful it is, this is increasing demand. And the key place to realise this demand for international bridging loans is in London and the UK.

There has also been an uplift in UK business people releasing capital from properties they may own abroad in order to capitalise on business opportunities here. Many UK business people, especially developers, will have unencumbered property abroad. They are now seeing the opportunity to leverage it for their business or for property development. It is this segment of the market that is showing the greatest potential. This fast turnaround of short-term money can really make a difference to businesses needing to invest, or even needing working capital.

International bridging loans is an exciting market segment and which looks set to increase throughout the year as awareness of the possibilities increase, not only in the UK but across Europe.

In part one, we discussed why it is important to know your lender. Now, we explain why this is even more relevant today and what can be done to reduce lender risk.

In our opinion, 2019 will be a challenging year for the bridging industry — for three reasons:

Widening credit spreads:

We have benefited from a very benign credit environment for the last few years and this will inevitably change. This may dry up the funding sources for some lenders.

Falling property prices:

We have not really had a proper real estate correction in the UK since the early 90s. We may be witnessing one in London right now. 

Brexit:

If there is a hard Brexit, we believe the UK economy could go into recession and major dislocations and disruption in the capital markets could occur, also directly affecting the credit markets. It is also possible that the can is kicked further down the road, in which case the ongoing uncertainty could cause investment to be subdued. The ongoing Brexit situation also means that politicians may come to power who otherwise would have no chance.  

As a result of this environment, we believe that other lenders could become more conservative, making it impossible for certain borrowers to refinance. 

In good times, the choice of lender may not be that critical but, in bad times, it is. 

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What can borrowers do to avoid lender risk? 

The key is to use a well experienced broker which understands the health and reputation of the different lenders, and which can lead the borrower to the right one. While as a broker, you need to really get to know the different lenders, to help establish those that will treat your client right.  

Pick a lender with stable funding

Lenders that are excessively funded by wholesale funding, hedge funds or leveraged vehicles may face serious balance sheet pressures when the going gets tough. They may therefore be more likely to trigger default as this is one way to reduce balance sheet pressures.  

Select a diligent lender

Yes, there may be a few more forms to be completed and information to be provided as part of the application, but a diligent lender’s loan book is less likely to get into trouble.  

Select a sustainable lender

Glitzy offices may be nice, but you want to make sure the lender is cash-flow positive.

Consider the reputation of the lender 

Choose a lender that truly cares about long-term client relationships. 

Resist the temptation to over leverage

It may make it more difficult or impossible to refinance if the lender which accommodated the very high leverage disappears.

Make sure the exit strategy is realistic with enough buffer embedded in the loan

Delays are normal, but you do not want to be in a situation where the loan expires before the exit has been achieved.

Have the borrower meet with the lender to develop a relationship  

Not only will this make it easier for the borrower to work out problems if they occur, it also helps to get a better feeling for who your lender really is.

Diversify across lenders

Never become too dependent on one single lender.

In conclusion, in the current environment, knowing your lender is as important as ever.