Category: Blog

Fiduciam is used to dealing with the unexpected, so while Covid-19 has been a particularly unwelcome shock – both for people’s health and for the economy– it is something we have tried to take in our stride as far as possible.

Successful short-term lending is all about being flexible and adapting to circumstances as you find them, so our team has been well placed to react to the challenging situation presented by the coronavirus.

Fiduciam was quick to see the potential of the UK Government’s Coronavirus Business Interruption Loan Scheme (CBILS). The scheme is designed precisely to help businesses whose plans and finances have been hit by the coronavirus outbreak, and this seemed to us to be an excellent match for the flexible short-term finance options Fiduciam offers. The construction sector has been particularly hard hit, with figures from the Office for National Statistics showing that output fell by around two-fifths at the height of lockdown. The restrictions put in place to prevent the further spread of Covid-19 have derailed a number of development and refurbishment projects. When Fiduciam was accredited for CBILS by the British Business Bank last month, we therefore anticipated strong demand from this sector.

As it turned out, it was not long before we were approached by a housebuilder, who had seen a development project thrown off track by Covid-19. They had taken out an initial loan to purchase two adjacent properties in an up-and-coming town on the south coast of England, with a plan to convert them into a range of residences attractive to both first-time buyers and families. Covid-19 threw these plans off track and they came to Fiduciam aiming to refinance their existing loan and to procure additional funds to complete the conversion project.

From the borrower’s perspective, there are clear advantages to taking out a loan under CBILS. Firstly, the loan allows the housebuilder to resume the construction works immediately which were halted when the lockdown was introduced. Whilst the housebuilder had obtained leverage at the outset of the project, none of the housebuilder’s usual lenders were willing to finance the continuation of the project. Furthermore, under CBILS, the Government pays the fees and interest for the first 12 months. This turned out to be critical to make the loan affordable, in light of the much lower profitability of the project than the pre-Covid projections.

The scheme is also advantageous for lenders, who benefit from a partial guarantee from the Government, enabling us to unlock institutional funding more easily. This also means we are able to offer a lower interest rate, which also provides an added benefit to our borrowers. Through the CBILS scheme, we were able to offer this housebuilder a £1.1 million loan topping out at 70% loan-to-value at an interest rate of around 0.8% per month, which is low for higher-risk development loans to small family-run housebuilders.

There are also direct benefits for the Government from the CBILS scheme. As well as helping to keep the economy moving and providing jobs, which is the primary objective of CBILS, this loan also served another Government objective, easing the current housing crisis by tackling the undersupply of residential accommodation. This project will create four new flats and three houses in place of one habitable property and a derelict farmstead.

The loan was not without complications, as the deal requires the transfer of land between the two properties, and the farmstead, although derelict, is also a listed building. However, Fiduciam is accustomed to dealing with all manner of complex lending scenarios and overcoming tricky issues, making us the perfect lender for this situation.

Our experience of CBILS so far has been extremely positive. Over the coming weeks Fiduciam is looking forward to helping many more high-quality businesses across the economy to get back on their feet, and return to growth, as the country gradually recovers from Covid-19.

The phrase ‘know your customer’ (KYC) is bandied about across many industries, but in the financial world it is mostly used in terms of identity verification and money laundering.  However, knowing your customer is important for other reasons.

From a lender’s point of view it is much easier to make decisions if we can really get to know our customers, understand their needs and work together for our mutual benefit.  However, with many of life’s necessities available at the click of a button it appears that relationships between providers and their clients are becoming a rarer and rarer. At Fiduciam we believe there is little substitute to knowing our borrowers well and understanding their businesses. Our relationships with our clients and their agents are what make us stand out from the crowd and are a major factor in the amount of repeat business we enjoy. Fostering long term relationships is therefore at the heart of our business, which is ultimately about helping our clients grow theirs.

Over the last few years, we’ve assisted a number of developers to organically upscale their businesses.   From a credit risk perspective, we like to see repeat borrowers build a niche of projects and experience. Those who know their market and seek to expand on it.

Growth can come from gradually upscaling the projects taken on and carefully building the capital required to invest as equity.  However, as a lender we can also work with developers to accelerate this cycle and increase the number of projects undertaken.

In one recent transaction we helped a client who had originally come to us several years ago for a £200k development loan.  Since then he has continued to expand his business, working on bigger projects that require different types of funding.  We recently completed a £1.6m loan for a permitted development facility in South London with this client using our ‘Stepping Stone’ loan.

Having just completed a scheme, but not yet sold the available units, he was ready to start a new project.  However, without the sale of units he didn’t have the funds to move on.  Knowing this client, and his development capabilities, over a period of years meant we were confident in his business and wanted to ensure he was able to move forward and continue to grow.

Using the ‘Stepping Stone’ development loan we enabled the borrower to transfer equity from the recently completed development to his new project without the need to wait for sales. This meant the new project could start earlier, and the developer would be able to take on more projects.  The borrower therefore grows by simply using the same capital more efficiently.

As COVID-19 slows the sale of completed projects it is also likely to generate attractive opportunities to purchase new sites.  The ‘Stepping Stone’ development loan ability to transfer equity from one project to the next is something that could keep projects flowing more easily. Importantly, it starts with really getting to know our customers.  That way we are not only providing creative borrowing solutions and mitigating credit risk, but we are helping businesses to grow and cycle forward.

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.

Fiduciam has started 2020 with a substantial increase in new Irish bridging loan business, both north and south of the border, and is bullish about the prospects for rest of the year. 

It aims to lend €50 million in Ireland this year, an increase on its original projection and building on the strength of its Irish bridging loan offering.  Fiduciam will also start offering Irish development loans and be opening a Belfast office.  The company has already hired a new Irish case manager to help with the increase in enquiries. 

Overall, the Irish property market has been improving with property price rises seen in the main centres. This is now spreading to commuter towns and some of the key county towns throughout Ireland. Northern Ireland, which is in a unique economic and political situation, should benefit significantly from Brexit and is likely to continue to perform well over the next couple of years.

Although the main banks in Ireland are still negotiating debt settlements with borrowers, Fiduciam has been proactive in providing exit solutions for many of the thousands of borrowers left in debt following the financial crisis.

Fiduciam began lending in Ireland in early 2017 and to date has loaned a total of €72,244,088 in the Republic and Northern Ireland, across residential property, hotels, farms, care homes and other commercial enterprises.

Kenneth Duffy, country manager for Ireland, says: “From an Irish perspective, the past three years have been incredibly challenging. The country has navigated Brexit and is now dealing with an outbreak of the Coronavirus. Throughout all the economic uncertainty, Fiduciam has remained fully committed to the Irish bridging loan market. Fiduciam’s investment in Ireland continues into 2020, our team is growing, we are introducing Irish development loans as part of our offering, and we are opening a Belfast office.

“Our commitment has paid off thus far, our market share has increased year on year and we fully expect this will continue into 2020, when Coronavirus has run its course”.

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.