Author: Fiduciam Team

Fiduciam, the institutionally funded short-term lender, has just completed a Coronavirus Business Interruption Loan Scheme (CBILS) loan for £840,000.  The loan was to a children’s nursery in Leytonstone, in North East London, called Harvey House. 

The CBILS was designed to support the continued provision of finance to smaller UK businesses (SMEs) that have been impacted by the COVID-19 pandemic. The loans are delivered through lenders accredited by the British Business Bank (BBB).

CBILS has been playing an important role in supporting local business and communities throughout the Covid-19 crisis, as the case of Harvey House demonstrates well.  Navneet Bansal, who has been a child carer for many years, took the initiative to open up her own children’s nursery, addressing a shortage of childcare in Leytonstone.  It was a proud moment when Harvey House opened in December 2019, but only four months later it was forced to close because of Covid-19.     

This hit the owners hard as they had to make debt service payments of £113,000 per annum, which quickly became unsustainable as the nursery waited months to hear when children could return to nursery care.

Fiduciam provided a two-year CBILS loan which decreases the debt servicing cost by 64% for the next two years.  This puts the nursery on a stable financial footing, also allowing it to deal with potential future Covid-19 hurdles.

The nursery qualified for the CBILS loan because it met the requirement of being a viable business before the outbreak of the pandemic and one that is expected to do very well in a more normal trading environment.  The nursery employs 17 staff to provide a high-quality childcare service, which is reflected in its 9.5/10 rating on daynurseries.co.uk.

Despite such rapid success and Navneet having an excellent personal history in the childcare sector, the high street banks were unable to provide a CBILS loan as the nursery businesses did not yet have a track record for the required length of time.

For Fiduciam, as an alternative lender, this was not an obstacle. The lender got to know the owner, Navneet, and inspected the nursery in operation. Having witnessed the professionalism and passion of the staff and owner, it was clear that such a nursery was very much in need in Leytonstone and therefore offered a very strong proposition. 

The Fiduciam CBILS loan now allows the nursery to establish a track record the next two years so that it can then refinance with a cheap high street bank loan.

Johan Groothaert, CEO of Fiduciam commented, “As a start-up SME, it is difficult to get finance in the best of times.  Thanks to CBILS we have been able to lower the financing costs for such SMEs.  Harvey House is run very professionally by experienced and passionate staff – we love to lend to such enterprises.

“It is thanks to the brave step of Navneet, setting up their own children’s nursery that Leytonstone’s shortage of high-quality children nursery places is being addressed.  We are confident that Harvey House will be very successful and provide an excellent early learning experience for hundreds of children in the coming years.” 

Navneet Bansal, owner of the nursery, commented, “We are very glad to have received the Fiduciam CBILS loan.  Without it, finance costs would have been overbearing and we did not want to pass on the cost to the parents or cut the quality of our childcare.  The Fiduciam CBILS loan puts our nursery on a very stable financial footing and ensures that all children continue to receive the discovery and learning experience they deserve.  We were also impressed by the efficiency of the Fiduciam CBILS loan application process.”

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.

As many entrepreneurs and SMEs discover to their despair, it has become difficult to count on the traditional banks when they need a loan for a new project or to expand their business.  Traditional banks across Europe continue to reduce their commercial loan books as a result of the Basel III rules.  A check-the-box culture, a sharp reduction in number of relationship managers and lengthy and unwieldly loan application processes make it increasingly difficult for many entrepreneurs and SMEs to rely on traditional bank finance.  This void is being filled by a number of alternative lenders, such as Fiduciam.  2019 has been a good year for Fiduciam. We continued our rapid expansion by hiring 25 additional staff members. Our loan book surpassed €260 million in size and monthly production has been increasing rapidly through the year. October was a record month with over €51.7 million of new loans provided to entrepreneurs and their enterprises. In 2019 we also successfully expanded into Germany by opening an office in Frankfurt and we closed our first Scottish loan.

We are looking forward to an even more successful 2020 and wish all our clients a happy and prosperous new year.