Category: Blog

 ‘Fiduciam’ is Latin for “mortgagee” and the accusative singular of fiducia, which has as its root fido, which means “I trust/I rely upon”. 

Fiducia cum creditore (which should not be confused with fiducia cum amico) was one of the earliest types of Roman mortgage, in essence the property would have been transferred to by the borrower to the lender on trust as security in order to demonstrate good faith (bona fides). Today we might use the term bona fide to mean “genuine”, however a more technical translation might be “reliable/reliability”. 

The fiducia cum creditore created a system of mutual trust between borrower and lender because: 

• under the pactum fiduciae the lender agreed to return the property when the debt was satisfied; 

• the lender had possession of the property, their ownership of which would be perfected if the loan was not repaid; and 

• there was a further clause requiring the sale of the property in the event of default from which the lender, as trustee, would deduct the debt from the proceeds of sale, so that the lender would not be able to keep property with a value of more than the debt owed. 

For this to work there had to be a trustworthy borrower and a trustworthy lender. 

So successful was fiducia cum creditore that despite the advent of pignus (a “pledge”) it not only survived until the late Roman Empire, but it has more or less survived into the modern Dutch law, as bewind, and German law, as treuhand, and in 2007 fiducie was reintroduced into the French Civil Code in a form which require the property to be held by an independent trustee; Fiduciam sometimes uses fiducie when lending against security in France. 

This concept of fides or “trustworthiness”, “faithfulness”, “confidence” (which itself derives from the Latin for “with faith/faithfulness”), “reliability” or “credibility”, was so essential to Roman law that it became a principle virtue of the Roman moral code (the mos maiorum/“ancestral custom”) and deified into a goddess with a temple on the Capitoline Hill, near the Temple of Jupiter right in the spiritual centre of the ancient city between the Forum and the Field of Mars. Fiduciam seeks to embed this virtue right at the very core of who we are and what we do, right in the DNA of the company. A reliable borrower will always find in us a reliable lender with whom they can deal with consistently from one transaction to the next. 

There appears to be a growing trend of borrowers looking to refinance a development before it is completed.

This could be due to multiple reasons – the current facility is expiring and the lender does not want to carry on; there have been cost overruns which the lender is unwilling or unable to fund, or because the borrower is looking for a discounted interest rate.

Developments can be challenging even under the best of circumstances, and a ground up development carries a different set of risks to refurbishment or conversion works, while new build extensions are slightly different again. Even the best planned development undertaken by the most experienced of developers can experience issues.

On refurbishments or conversions, there can be issues with the building, including underpinning requirements, asbestos, or structural issues with the property.

On ground up developments, there is ‘in-ground’ risk including potential contamination on brownfield sites – while all developments can suffer from the need to increase specifications on developments. Issues with developments such as these, can result in cost overruns associated with the build and also cost overruns from time delays.  Time delays can become a real issue when they extend beyond the term of the loan with the developer still building when the loan term runs out.

From a lender perspective, it is important to make sure the developer has the extra time needed to complete their development as this presents the best opportunity for a successful outcome for both the borrower and the lender.

Despite this, some lenders are unable to roll, or extend, their development loans, or may be unwilling to do so.

Across the market there is anecdotal evidence that some credit lines are tightening.  Sometimes therefore, the best solution for a borrower can be to refinance the part-complete development with a new lender.

Lenders such as Fiduciam are happy to provide development refinancing for part-complete developments, and we have on multiple occasions provided funding for this type of scheme both in the UK and abroad.

However, it is important the developer can show that the works to date are in good shape and that they have the ability to complete the remaining works.

If a developer wants to take this route, the new lender will want to check that the development works to date are compliant, with both planning permission and building regulations.

If you have a client in the situation of refinancing a part-built development therefore, it is wise to advise them to have a building surveyor and their architect ready to provide this evidence.

Often, a new lender will be happy to take this advice from the current lender’s monitoring surveyor.

The role of brokers has arguably never been more important than it is currently, in understanding who the savvy lenders are: which are the ones that truly understand what is involved in a development and have the financial strength to support the borrower.

While interest rate is important for the development refinancing, what is more so is for a borrower to be with a flexible lender who understands the risks, can help a borrower to complete a development if they hit difficulties and who is flexible enough to ensure that they have a loan term that really is long enough for a project to be completed, no matter what unforeseen events may befall.

Metro Bank’s share price dropped to a record low earlier this month, down 75 per cent compared to January, a consequence of an error in risk weighting its commercial buy-to-let loans which came to light earlier this year.

As an alternative lender we were in a good position to observe some interesting developments in the commercial buy-to-let market over the past three years.

For example, in 2015 the majority of the bridge loans Fiduciam provided were related to buy-to-let. But progressively during 2016 and 2017 we lost this business as the challenger banks, including Metro Bank, became more aggressive in this segment, offering substantially lower interest rates.

This was incomprehensible to us as the international banking regulation framework, Basel III, requires a substantially higher risk weighting for commercial buy-to-let loans than for residential mortgages.

Basel III increased these risk weightings following the financial crisis to ensure that banks have sufficiently strong capital buffers when they have to write down loans during recessions and continue to have the confidence of savers at all times.

Eight per cent interest needed

According to reports, Metro Bank had erroneously put a risk weighting of 35 per cent on its commercial buy-to-let mortgages, which it had to increase to 100 per cent, as required by Basel III.

Considering the Basel III risk weighting and capital requirements framework, and assuming a 70 per cent cost-income ratio, which is an average for the UK bank sector, we have calculated that a bank would have to charge interest rates of approximately 8 per cent per year on commercial buy-to-let mortgages.

This would achieve a return on equity of 20% which would be a fair expectation set by bank shareholders.

Basel III did open a window for alternative lenders such as Fiduciam, which are financed by institutional risk capital rather than bank deposits or bank funding lines, to enter the commercial buy-to-let market, thereby reducing the demand on banks to provide such commercial buy-to-let mortgages, and consequently to lessen the risk on banks’ balance sheets.

More risk re-weightings to come?

We now understand better what has happened, at least at Metro Bank, however questions remain.  Some challenger banks continue to offer very low interest rates on commercial loans, which appear to be inconsistent with Basel III.

As an international lender we also observe that Basel III is implemented differently across the E.U., which is hard to understand considering there is an EU regulatory framework.

For instance, in the Netherlands a low risk weighting for commercial buy-to-let loans is standard, fuelling a frothy real estate market.

Finally, we notice an increasing number of challenger banks are lending to alternative (non-bank) lenders at low interest rates, which raises the question how those funding lines are risk weighted.

Metro Bank has tackled its Basel III risk weighting issues and has since raised more than £375m in equity, assisting in a recovery of its share price, but based on the above observations the question arises whether we will see similar risk re-weightings in the wider challenger bank sector and even internationally.

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.