Category: Blog

There has been much focus on the UK property market and whether house prices are rising or falling and whether this may or may not be due to Brexit.  What we hear less about is what is happening with property prices with our closest neighbour the Republic of Ireland.

Ireland is most often quoted these days purely in relation to the potential backstop. What few papers report on is the current housing crisis in Ireland.  Just a few years ago Ireland had one of the world’s highest rates of home ownership, but this ownership has dropped and both property prices and rents have risen dramatically. In fact, in May of this year, research by Deutsche Bank declared Dublin in the ‘Top 10 most expensive places to rent in the world’.

The shortage of affordable homes is a huge issue, with Ireland’s Department of Housing, Planning and Local Government in August announcing €84m in funding for 25 local authorities providing 1,770 affordable homes nationally. As a long-term solution, this is fine, but how does Ireland deal with this issue in the short term?

It is estimated that 685,000 houses were built in Ireland in Celtic Tiger years, between 1997 and 2007. Where have all these houses gone? Figures by the Department of Finance back in March of this year revealed that €24 billion of loans, including many substantial buy-to-let portfolios have been sold to funds at an average discount of 52%. Many of the sales were completed without the consent of mortgagees. Most of these were non-performing loans and the purchasing fund often wastes no time in foreclosing on the loans. This cycle still continues with Ulster Bank announcing the sale of 4,000 loans worth €900million as recent as July of this year.

How can short term lenders relieve this pressure? The answer is simple, they fill the gap where mainstream lending is simply not available. For example, Fiduciam has provided numerous loans which have allowed borrowers to buy their old portfolios back from the funders. The borrowers can negotiate with the funders directly, safe in the knowledge that they have a reliable funder supporting them through the process. The properties are then brought back on the market and rented out or sold.

Loans such as these have also enabled borrowers to complete outstanding development works on “ghost estates” that have been sitting dormant since the collapse of the housing market. This brings more properties into the market which, in turn, eases the housing crisis in Ireland. Borrowers can then refinance with a mainstream lender when their properties have been modernised and rents have been normalised.

Ireland’s businesses are also crying out for lenders to help them get out of a position where they might lose everything by restructuring their loans. This affords borrowers an opportunity to re-establish their business with a viable exit via mainstream finance, or the sale of the assets on the open market.  Such short to medium term loans provide the perfect ‘pit-stop’ for borrowers.  In essence, providing ‘mid-stream’ lending prior to the subsequent exit with a mainstream lender.

Loans for such purposes are relatively new in the Republic of Ireland, but they can be a positive life saver for borrowers whose loan has been sold and who are consequently at risk of repossession.

The opportunities within our industry are myriad, the trick is to attract the right people and then to make sure they are nurtured and given the chance to achieve their own goals, whilst also achieving your company goals.

Henry Ford, Founder of the Ford Motor Company, said “The only thing worse than training your employees and having them leave is not training them and having them stay”.

At Fiduciam we want our employees to stay for all the right reasons. When recruiting, whether it’s a graduate, an intern, or someone with years of experience, the most important thing is to ensure the people you employ have the right attitude and fit your business. 

With the right attitude you have the foundations for someone to build a career, rather than just turn up for work.

For career progression to be valid you need to provide explicit support to allow your staff to thrive and develop.   You can then uncover potential and assist your employees to progress to more senior roles.

Structured training is therefore vital.  Here at Fiduciam, for instance, we have a training and development programme that is designed with career progression as the ultimate goal. However, there are other benefits including increased motivation and engagement and most importantly a reduction in staff turnover. Giving employees the tools to upskill throughout their careers also means you can reduce supervisory needs and enhance satisfaction and confidence.

The way we run our training programme is on a module basis using the talents of existing employees in every department to carry out the actual training. This not only showcases the experience of existing team members it gives them an extra sense of worth as they pass on their knowledge to new team members and help them rise through the ranks. Our multi-faceted training programme consists of 28 modules, such as cashflow analysis, real estate valuation, legal documentation, credit analysis, etc. Career progression is supported by the successful completion of relevant modules. There has been over 110 hours of training provided for Fiduciam employees over the last 9 months since the inception of the training programme.

The key thing with recruiting is that when you get the right person you never let them forget that you believed in them enough to hire them, and that you continue to believe in them throughout their career.

Clint White, director, adds “The recent EY UK Bridging Market Study has highlighted ‘access to talent’ as one of the two most important challenges for bridging lenders.  We place a huge emphasis on our training programme to not only attract new talent but, equally importantly, to cultivate and retain that talent.  By doing this we enhance our company reputation and profile as an employer invested in its staff.”

Whilst the P2P model gained traction rapidly following the financial crisis, it exhibits a number of shortcomings.

Firstly, retail clients and investors are often simply driven by yield, not evaluating the risks sufficiently.

In some cases ‘mom and pop’ type investors are not sophisticated enough to analyse the risks, looking only at the headline rate of interest they believe they will receive.

Several P2P platforms also do not provide sufficient information to their investors for them to make a proper assessment of each individual loan, even should the investor be qualified enough to do so.

This information asymmetry between P2P platform and investor is easy to understand from a GDPR perspective, but it does make the investor very dependent on the assessment that has been made by the platform.

A key concern is that many P2P platforms position themselves as an intermediary, but then, unlike any other type of lender, they do not invest themselves into their own loans.

This can cause a lack of alignment with the retail investors and means that the platform risks comparatively little in relation to the investor.

Arguably it also means that some P2P platforms have less incentive to ensure that each loan is underwritten as diligently as it might otherwise be if the platform or lender had its own money involved.

The loan may also be managed less prudently as a result, this is clearly not the case with every P2P platform, but the failure of Lendy does highlight the shortcomings of this model.

With many P2P platforms competing for the same retail investors, the platforms often pursue the highest yield deals, which tend to be the riskier loans.

Lendy is a good example of this, but naive investors may well be oblivious to the fact that this is why they are promised the higher returns.

Finally, a number of P2P platforms also provide access to institutional investors at preferred terms. The question is, what downside such “preferred nation status” deals could cause for the retail investors.

There are obviously a number of high-quality P2P platforms out there, and the demise of Lendy has somewhat unfairly tarnished the image of this entire sector.

However, it is questionable whether a number of the P2P platforms can get to the necessary scale to operate profitably and to play a meaningful role in the lending landscape.

One could expect many sub-scale P2P platforms to have challenges and we expect further P2P lenders to disappear both this and next year.

Many developers who need additional finance to help fund new development projects have substantial equity tied up in Spanish holiday homes, but cannot take advantage of it as it is nearly impossible to get leverage against such assets from Spanish banks.

Very often the developer needs the money for a specific project in the UK for no more than three years, but the amount they can borrow or raise from property in the UK is insufficient to finance the entire project. While developers could raise mezzanine debt or preferred equity, the cost of such debt is often prohibitively expensive.

Borrowing against Spanish holiday homes

However, many UK developers own Spanish holiday homes, frequently at the top end of the market. As Spanish real estate prices have recovered, a lot of equity can be tied up in such properties. Spanish banks find it difficult to lend against them for two reasons: first, they do not have access to the credit profile of the UK owner, and second, as the owner has no regular income in Spain, other than occasional rent from their home, the Spanish banks would categorise such a loan as a commercial one. At the moment, Spanish banks are still reducing their commercial loan books, therefore, they are not eager to grant such loans. 

However, there is a solution. A small number of UK bridging lenders now offer Spanish bridging loans, allowing equity extraction from Spanish holiday homes. Typically with LTVs up to 50% of the RICS valuation and interest rates at levels similar to those in the UK bridging market at around 0.8% per month and a loan term of up to three years.  

Multiple drawdowns and repayments are often available, reducing the overall financing cost to the borrower as such facilities allow the borrower to ‘right size’ the loan amount at any moment in time. 

Personal guarantees are typically not required, although the lender will usually look for a corporate guarantee from the UK company using the funds for the development.  

The loan is secured by a mortgage taken in front of a Spanish notary and, in many cases, by a share pledge over the shares of the Spanish company holding the property. As the property is in the eurozone, the loan will typically be in euros.

A great advantage of the Spanish market is that conveyancing is much more straightforward and quicker than in the UK. A look at the ‘nota simple’ will give immediate insight into the land registry and planning status of the property.  

One challenge can be to get the valuation done rapidly, but when working with the right local valuers, it usually takes no longer than two weeks. If the borrower is efficient in providing all requested information, time from application to drawdown does not need to exceed three weeks.

Structuring aspects and foreign exchange

Spanish bridging loans can be granted directly to the Spanish company with a back-to-back loan to the UK development company, but can also be granted directly to the UK company.  

The advantage for UK borrowers who extract equity from their Spanish real estate is that the pound sterling is currently undervalued against the euro. This means a euro loan over Spanish property yields a larger amount of sterling than it would have done perhaps three years ago. Assuming sterling strengthens again in the coming years, the amount needed to pay off the loan could be less than the amount extracted today. Of course, for borrowers who do not want to take a foreign exchange risk, there are a large number of inexpensive foreign exchange hedging instruments available.

From my personal experience, I have been surprised by how many UK developers own holiday homes in Spain, and demand for the solution described above has been very strong.

Many bridging lenders are financed by a funding line provided by a bank or specialist debt fund.

Typically, these funding line providers will finance between 70–90% of the loan, with the remainder being financed by the equity of the bridging lender or through a junior funder.

While most bridging lenders use such funding lines, some are financed on a different basis. An alternative funding route is the P2P model, very popular a few years ago, but maybe less so today. The greatest risk with this is regarding investors’ money, rather than for the lender, which has increased FCA scrutinisation and the recent confirmation of new rules for P2P platforms.

Another alternative funding model is direct institutional funding, such as pension funds and institutional investors taking a direct stake in the loan book, but as there is no fixed template for this model, it takes longer to set up. Finally, there is the route of securitisation, but for such structures to be efficient, a large loan book is required. 

For that reason, many bridging and alternative lenders go for the traditional funding line model. There are many providers, it is a well-known template and it allows new bridging lenders to get out of the starting blocks easily. The problem is the funding lines are all quite similar in what they can offer, which restricts the options available to the borrower. 

In fact, many banks and credit funds have been attracted by the healthy returns of such funding lines and have been eager to find more interested bridging lenders.

The providers of the funding lines typically impose restrictions on the type of loans — for instance, the type of real estate, the loan term, loan size etc — that can be funded with the funding line and impose further risk parameters on the overall loan book. This is normal, after all, they are exposed to the risk of the loan book. Where the losses on the loan book exceed the equity buffer provided by the bridging lender, the provider of the funding line can start losing money.

Some restrictions stipulate that the lender has to buy back the loan after a period of time, say 90 days. In this case, the risk is greater for lender than for the supplier of the funding line. These restrictions mean the lender would need sufficient capital to be able to buy back the loan while continuing to support its business, as well as a robust internal process on the underwriting and servicing side.

Such risk management techniques become somewhat self-defeating, though, if all funding line providers impose similar risk parameters, creating a particular segment. This results in more money chasing bridging loans than the natural market demands in this segment, leading to an erosion of LTVs and interest rates. 

We believe that this is what we are currently witnessing in the UK market. Risk-return characteristics for bridging loans substantially improve when one moves outside of the segment that is backed by funding lines.