ISSUE 10 JUL/AUG 2020
HOW THE MARKET TURNED UPSIDE DOWN THE STORY SO FAR
+ Happy birthday, Precise Mortgages p8
Celebrating 10 years of specialist lending solutions
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Acknowledgments Editor-in-chief Beth Fisher beth@medianett.co.uk Creative direction Beth Fisher Caron Schreuder Illustration Ling Tang Sales and marketing Caron Schreuder caron@medianett.co.uk Special thanks Alasdair McPherson, Rangewell Rachel Whittingdon, Mortgages for Business Ben Rooth Gill Eaton, Iceni Projects Krishnan Doyle, COREcruitment Nick Baker, Allica Roselle Allsop, Charter Court Nimisha Cross, OSB Rob Simpson, ARTAL Felicie Krikler, Assael Architecture Jason Wyer-Smith, 42 PR Toby Gibbs, Logika Consultants Polly Neal, Logika Consultants Alex Harrington-Griffin, TrustedLand Printing The Magazine Printing Company Design and image editing Russ Thirkettle, Carbide Finger Ltd Bridging & Commercial Magazine is published by Medianett Ltd Managing director Caron Schreuder caron@medianett.co.uk 3rd Floor, 71 Gloucester Place London W1U 8JW 0203 818 0160 Follow us:Twitter @BandCNews | Instagram @BridgingCommercialMagazine
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espite the recent stretch of insufferable heat, the clouds of 2020 are still hanging over us. As I write this letter, the news has just broken that the UK has plunged into a deep recession, with the economy suffering the biggest tumble on record between April and June. While the ONS reports that GDP climbed by 8.7% during June—when lockdown measures started to ease—it is still a staggering 17.2% lower than February 2020 levels. With consumer confidence low and the public anxious about a potential second peak, who knows how quickly we will ‘bounce back’. We will also soon see the end of government support packages, such as the furlough and CBILS, and unemployment is expected to surge as limping businesses weigh up their options. Already, we have seen almost three-quarters of a million jobs lost from company payrolls since March—and this will only get worse come October. The negative impacts of the pandemic will undoubtedly be on everyone’s minds, especially as businesses in our sector aim to best plan for now and later. However, we must also be looking at any opportunities that boost transactions, output and productivity—all of which will help to support the economy. In this issue, ‘Building Better’, we investigate the latest prospects, such as the reimagining of the high street and how residential projects could improve the vitality and footfall of town centres [p64] and why it’s not last orders for the hospitality sector [p56]. It’s clear that the country’s recovery must have the people at its core—and the latest planning reform announcements are an exciting development that will help build better homes where people want to live. This is why we ask Gill Eaton of Iceni to explain how we can work towards a healthier built environment by using the planning system to positively impact wellbeing and prevent projects which don’t serve these objectives [p50]. Elsewhere, we interview Octane Capital [p14] on its first foray into creating an actual product, find out how big data will transform the way valuers and lenders work [p22], and cut a slice of birthday cake with Alan Cleary, group managing director for mortgages at OneSavings Bank, who takes our readers down a decadelong memory lane of Precise Mortgage’s history [p8]. We also take a peek at what hobbies the industry has mastered during lockdown—including who has taken up the Japanese art of forest bathing [p80] and what it’s like to join a new company during a pandemic [p84]. While we illustrate (literally—[p30]) was has happened so far during the Covid-19 outbreak, we have decided to focus this issue on what happens next. That is why our feature, ‘Building for a new world’ [p40], dives into how living priorities have changed, and the importance of putting social wellbeing, health, sustainability and affordability at the heart of housing—something that lenders need to be encouraging when looking at future deal proposals. Some 31% of adults have had mental or physical health problems during lockdown because of the size or condition of their living space, and around 30,000 people have spent the period in a one-room home. We all know that this is not acceptable, and we must, as an industry, ensure that new business does not compromise quality. For starters, why do we say ‘units’ and not ‘homes’? “…It’s difficult to imagine that lenders won’t look to adapt, and it’s likely that those who don’t will struggle moving forward”, says one expert. Businesses which actively promote the need for better living standards will be in tune with the trends of what and where people will want to rent and buy and, during a time of great uncertainty, this should be a no-brainer.
Beth Fisher Editor-in-chief
3 Jul/Aug 2020
8 16 30 40 50 64 72 76 80 Being forced by the PRA and FCA to have sufficient capital to weather an extreme downturn is vital for longevity p8 4 Bridging & Commercial
Exclusive Interview Cover story View Zeitgeist Feature Explained Limelight Backstory
Welcome to the lockdown birthday club
Octane Capital / Method
It’s been both a whirlwind and an eternity
The grass can be greener…
Planning for change /Why it’s not last orders for the hospitality sector
Resi set to save the high street
Possession proceedings - what you need to know now
The industry takes up some hobbies
Shrena Patel
Happy Birthday, Precise Mortgages
Words by
BETH FISHER
On 20th May 2020, at the height of the Covid-19 crisis, Precise Mortgages joined the lockdown birthday club, turning 10 years old. While the company couldn’t properly celebrate the milestone, it has been able to mark the occasion by commemorating its achievements so far. Alan Cleary, group managing director for mortgages at OneSavings Bank (Precise’s parent), takes our readers down a decade-long memory lane to find out how a business that started off with four co-founders and a tiny funding line became one of the biggest specialist lenders in the market
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advantage was so significant that most of the lenders that were about at that time couldn’t really compete and they had to go off into other markets or, as you know, some of them went bust over time because they were doing bad lending and charging customers too much money.” As a result, Alan believes Precise could be credited with bringing in an “age of transparency and fairness” to what he (and many others) called the Wild West, back then. At this stage, Precise had started building up and diversifying its funding lines with other providers in the wholesale market—mainly from big, American banks and various other firms—but 2014 was when things really changed. “In the last financial crisis, non-bank lenders, one of which I was part of, ended up as casualties … because they didn’t have diversified funding streams and, when those wholesale markets closed, those lenders ceased to exist,” he states. Therefore, the lender was determined to build a longstanding platform for when the next, inevitable, crisis hit. “…That’s why we became a bank,” he confirms, “because a bank gives you access to retail deposits which are much more stable than wholesale markets— especially in times of stress.” Being forced by the PRA and FCA to have sufficient capital to weather an extreme downturn is vital for longevity. That year, when Charter Court was granted its banking licence to launch Charter Savings Bank, its funding USP amplified, cementing Precise’s place as a price leader in the market. In those days, new banks were not as common as they are today, prompting Alan to describe such a move as “radical”, “revolutionising the business and turbocharging its growth.” When I ask what Precise’s aims were at the very beginning and how they have changed over the years, Alan said that, at first, it was to offer solutions in an area of the market which was underserved by high street banks and mainstream lenders.. “When you start a new business, you don’t have a 10-year plan—that’s too long … you have much shorter timeframes. ” While this may have been the case then, it was required to look at longer-term plans for the business once it became profitable. Its strategy was again drastically altered when the merger with OneSavings Bank came along. It completed in October 2019—just months before Covid-19 changed the world.“One of the key things with the merger was that we became bigger and stronger,” he describes. “Of course, we didn’t know the downturn was going to come five months later but, what we did know, certainly in Charter Court, was that the housing market works in cycles and, broadly speaking, every 10 years or so there will be some kind of downturn...” The preparation for this was to have as much capital available and solid funding lines in order to continue to operate through whatever decline was presented and out the other side. “I for one am very happy that that merger took place—we are in a better position because of it.” When the pandemic stopped life as we knew it on 23rd March, Precise (and the wider OSB
ith over 100 industry awards under its belt and having placed four times in the top 20 of the Sunday Times 100 Best Companies to Work For as part of Charter Court Financial Services, Precise is an undeniably formidable player in the sector, boasting a loan book of £7.4bn for the year ending 2019. But how did it all start? In the second quarter of 2010, Precise— which had just won its first servicing contract with a large investment bank—made its initial steps with a BTL proposition. It specifically placed itself in the opening just where the high street stopped lending, but still at the more prime end of the market. The company had recruited a total of 27 staff, including just one call centre manager, Nicky Parke (now intermediary team manager), who runs it to this day—based on one half of a floor at an industrial park on the edge of Wolverhampton. The brand now takes over the entire two-storey building and has further sprawled across two other properties to fit in its 688-strong team. The call centre now has close to 60 people manning the phones and takes 1,500 calls per day—how things have changed. Alan vividly remembers waiting eagerly for the first mortgage application to come in. “I’d say in the morning, ‘Have we had one yet? … Where’s the mortgage? What’s happening? What’s going on?’” Seemingly unfathomable now, the business waited weeks before it received a deal. Obviously, things picked up and brokers liked what they had to offer and, just six months later, Precise was granted permission from the regulator to enter the residential mortgage space. Alan describes this as a “substantial milestone” for the business, considering it was to become one of the first new regulated lenders since the devastating blow of the financial crisis in 2008. Precise’s breakthrough into the bridging sector happened in 2011. After spotting a gap in the market, it decided it was time to shake up this burgeoning, yet complacent, sector. Starting out with just Richard Lawton (still there, now as head of short-term lending) and a couple of people to process the loans, it has since grown its team approximately ten-fold. I ask Alan what triggered the company’s decision to move into short-term lending and what it had thought was missing from the marketplace. When Precise was doing its research, he felt that the prices were “sky-high”, and noticed that the market wasn’t performing effectively as there wasn’t enough competition. He explains that the rates (typically around 1.5% at that time) were simply disconnected to the cost of funding and made worse by expensive penalty clauses—“some of those lenders were absolutely having it away,” Alan maintains. Leveraging its deep relationships with intermediaries, clubs and networks, Precise was able to launch products that brokers wanted to sell. “They were good value for money and they weren’t ripping borrowers off, and that’s pretty much how we got traction … our cost of funds 10
Bridging & Commercial
“In this downturn, the banks are part of the solution�
Exclusive
Roger Morris, group distribution director, OneSavings Bank
“I’ve been with Precise Mortgages for about a decade and my most memorable moment was when I was asked to be the host of a quiz at the start of the B&C Awards one year. Although I was briefed not to mention Precise during the quiz, I just couldn’t stop mentioning it! It just kept coming out by accident! I can’t remember having as much fun as I did that night. What makes it even funnier is that they wanted to hire a professional to host it. The main sponsors just couldn’t believe what was happening. Needless to say, my quiz mastering skills weren’t required the following year...”
Jamie Pritchard, head of sales, Precise Mortgages
“I’ve been at Precise Mortgages for just over six years and, during that time, there have been so many amazing memories. The one that really stands out, however, is winning the Specialist Product of the Year for our refurbishment BTL offering. It was the culmination of so much hard work—gathering feedback, developing, marketing and presenting it to the brokers. It was a great team effort and fantastic to have it recognised.”
Roselle Allsop, associate director of marketing, Precise Mortgages
“I’ve worked for Charter Court Financial Services since day one, so surviving the credit crunch and then launching the Precise Mortgages’ brand in the midst of the financial crisis was a pretty big highlight. To then go on and grow the brand during pretty turbulent times, become listed on the Stock Exchange, combine with OneSavings Bank—it’s been a bit of a rollercoaster to say the least! Being one of the original 27 employees means a lot to me. There have been so many highlights but, before I get too sentimental, I have to mention the London Routemaster bus roadshow we did. The tour started in Edinburgh and ended in London in the middle of winter; I can still smell the diesel and oil now. How that bus didn’t break down, I will never know. There were some scary times on the bus, too, like when it nearly drove into Peter Brodnicki’s car! I’m sure that [he] still has nightmares about that now.”
Rob Williams, director of processing, Precise Mortgages
“I’ve been with Charter Court Financial Services from the start, so my favourite memory is of those early days, going back to the exciting work of successfully building the first new lender to emerge from the ashes of the last mortgage crisis. The part I’ve played in creating a proposition from the ground up that has the customers’ needs at its core, and a quick decision in principle that gives brokers surety that if the case is validated they have working proposition to take a customer through the exciting process of buying a home, is something I’m very proud of. This led to our first case, then the first £100m of completions, then the first £1bn, then the IPO and, ultimately, our combination with OneSavings Bank.”
Nicky Parke, intermediary team manager, Precise Mortgages
“I’ve been with Precise Mortgages for nearly 10 years now, but my favourite memory is still the welcome I got when I started with the organisation—it was with open arms at all levels of the business, from colleagues through to the executives. The feeling of being part of a working family has been a constant throughout my time with the business, and the support I’ve received has helped evolve the intermediary contact centre to where we are today.”
Colin Barrett, group mortgage proposition director, OneSavings Bank “As one of the original 27 who have been with Precise Mortgages since day one, there are almost too many memories and career highlights to mention. However, the day we went to the Stock Exchange when Charter Court Financial Services went public really stands out for me. It was such a proud day for us all and the culmination of everything we’ve put into the business over the years.”
Richard Lawton, head of short-term lending at Precise Mortgages
“I’ve been at Precise since May 2011 and was employed to set up and manage the operations side of the bridging function. My most memorable moment has been seeing the bridging [side] grow from just myself back [then], to a team now of 37, [and] the way [we] overcame and broke down the initial perception of Precise being just a mortgage lender trying to do bridging, to actually being the introducers’ first choice when looking to place a bridging case for their clients. I firmly believe that if you offer customers outstanding products and exceptional service, both resulting in good customer outcomes, they will place repeat business with you.” 12 Bridging & Commercial
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the data that we can begin to expand, then we will obviously be looking at that,” Alan tells me. “As to how long that’s going to take, nobody knows.” When we last sat down with Alan, he was working on improving processes and the broker journey, capitalising on what works well with each brand under OSB. Even during the pandemic, this was ongoing. “In fact, Covid-19 probably sped that up because we’ve got less people available in the office ... so you’ve got to try and be as efficient as you possibly can,” he divulges. Alan says that leading the culture alignment in the group during lockdown has actually accelerated the cohesion. “I’ve seen loads of examples of people working together in a way that I thought would take longer to achieve,” he admits, owing it to each brand leveraging their respective resources to get the best possible outcomes. Is there anything Alan knows now that he wishes he knew 10 years ago, at the start of Precise’s journey? “I wish I knew Covid-19 was coming,” he answers, predictably. “Apart from that!” I say, rolling my eyes. There’s silence as he thinks for a moment. “…This isn’t something that I would do differently, but there are a number of people, those who were around back in the last crisis, who have done exactly the same stuff they did before, and crashed into the same brick wall this time around … I do find that rather perplexing. I don’t really look back and say, ‘I wish I’d done that differently’, because that’s not in my gift; you can’t go back in time, you can’t change stuff, so you’ve just got to say, ‘What have I got now, and how do I plough forward with it?’” He adds that learning from your experiences so that you can change what you do going forward is simply more important than having a crystal ball. So, what is planned for the next decade? Fortunately for brokers who are loyal fans of the business, Alan now thinks bigger than Precise. “I’m in the executive team of a combined group that has multiple mortgage and savings brands … it is not just about Precise Mortgages anymore.” This could mean more success for the brands that were previously competing— and better outcomes for intermediaries. He explains that they now treat it as if OSB is the parent and they have three children and, like typical parents, they want all of them to do equally well, but also to be better than other people’s kids. “We’re quite competitive, but in a good way … I want all the brands to do well, not just Precise. I’m equally as focused on Kent Reliance for Intermediaries and InterBay Commercial.” As a result, he thinks there is a lot more opportunity due to the different markets they have access to and the potentially reduced competitive dynamic going forward. Considering the group had attracted a staggering £16.3bn of retail deposits by the end of 2019, it is an indicator of a powerhouse equipped to really challenge the incumbents in the years to come—making its next milestone a party nobody will want to miss.
group, along with its brands Kent Reliance for Intermediaries and InterBay Commercial) decided to temporarily suspend new loan applications from the 30th, due to unprecedented demand for payment holidays from their borrowers, and valuers no longer being able to visit properties. Instead, they diverted their resources to support their existing customers. “…As a bank, you build up capital reserves for a downturn, you stress test your business for lots of different scenarios and lots of those are prescribed by the Bank of England but, of course, it doesn’t happen exactly in the way your stress tests were modelled.” Alan clarifies that, when a crisis hits, you stress test based on what you currently know and what you think may occur, and avoid digging a hole by writing new lending. “You basically slow down so that you can assess what you think the risks are now going to be.” He reiterates that, in 2008, the banks were part of the problem. “In this downturn, the banks are part of the solution … all banks are lending to customers and some of them are lending through government schemes to keep the economy ticking over.” After a hiatus of 12 business days, Precise emerged with new products in order to accept desktop valuations on BTL and residential firstcharge mortgages. By early May, it had resumed activity in the bridging market, supported by AVMs. However, Alan warns that bridging is presently subdued—and he believes it should be. “If you’re an investor or a developer, you really shouldn’t be taking bridging loans on right now, because you don’t know what house prices are going to do,” he urges. “You don’t know whether you’re going to be able to exit the loan onto a long-term deal, so you need to be super cautious.” Therefore, the lender is currently keeping its bridging LTVs capped at 50%. “High LTV loans would be risky right now,” he declares. “However, the frost will thaw, and we will be able to see what damage has been done to house prices, and we will be able to see how the banks react from a financing point of view—but that’s going to take a few months.” He expects that most bridging lenders that have been run properly should be able to survive, but the trick is not to issue a lot of loans right now, because they might bite you later down the line. “I do anticipate quite a lot of re-bridges occurring in six- to 12-months’ time, where loans that can’t exit are still floating around.” Considering that house prices and the rate of unemployment once the furlough scheme ends are all up in the air, it makes sense. For example, there were substantially lower property transactions in April and May, producing a significant hole in the records. With house price statistics a lagging indicator (the figures normally reflect activity a couple of months in arrears), you may have to wait that long from when the industry reopened in May before you can start analysing any of it. Therefore, it might be nearer the end of the year by the time lenders can consider what their response is to the crisis and its impact. “… When the market starts to show us some signs in 13
Jul/Aug 2020
Octane takes the stress out of BTL— literally
WORDS BY CARON SCHREUDER
When Mark Posniak shared with me Octane’s plan to enter the buy-to-let market, it struck me as an interesting move for a number of reasons: are we really witnessing the self-professed ‘product-less’ pioneer developing a product? Will BTL be a gateway into a wider, more mainstream offering? How does a lender with such a flexible approach tackle an area that is relatively prescriptive?
Interview
he founders of Octane Capital—Jonathan Samuels, Matt Smith and Mark—have a respected lineage in the specialist finance industry. Among other notable credits, all three were responsible for the exponential growth of Dragonfly Property Finance (later acquired by Octopus Investments to be rebranded as Octopus Real Estate), which is widely considered to have put bridging firmly on the map as a viable option not of last resort. The trio set up Octane in early 2017 and went about assembling an enviable team of professionals, amassing an enormous amount of expertise in order to execute their ambition. Third-generation bridging (#3rdgen) was coined and summed up an evolved way of lending that had a product-less proposition at its core— employing creativity, flexibility and leveraging the capability of the team to face complex scenarios with confidence. This latest development marks the lender’s first significant addition to its primary proposition since launch. It was planned before Covid-19 and, after a slight, understandable delay (and minor adjustment to the original LTVs), Octane piloted its BTL product suite through a limited number of brokers in late April.
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At the end of June, I spoke to Jonathan, Mark and Donna-Louise House (head of credit for BTL) about the ins and outs of the offering, what landlords really need right now, and why Octane decided to dive head first into this part of the industry. “Landlords have been under pressure for ages—but increasing pressure,” says Jonathan, leading into the logic behind the lender’s motivation for devising the range. The biggest thing affecting landlords when they are taking out finance is the interest cover ratio (ICR), so Octane did a very Octane thing: it removed the need for an ICR altogether. That’s right, no stress testing. According to Jonathan, using this one measure of affordability is flawed as it fails to assess the borrower as a whole. “It takes no account of their position, experience, the amount of money they have, their ability and track record in servicing their debt through other means when there are voids—it just seems to be myopic.” The ICR, a mandatory requirement levied by the PRA, is in place to give comfort and surety to the lender and the borrower that, if there are interruptions
Interview
in rental income or the borrower has unexpected outgoings, their ability to service the debt is unmarred. However, I am told it is only bank and bankfunded lenders who are required to apply this stress test. Octane’s dedicated, “completely exclusive” BTL funding line allows it the flexibility to base its lending on more holistic parameters. “When we underwrite any deal, we look at the bigger picture, which can include the strength and liquidity of the asset, the borrower’s assets and liabilities, credit profile and worthiness, as well as how the loan will be serviced and repaid,” Mark expands. “All these factors together dictate our appetite to lend and our likelihood of being able to be serviced monthly.” Essentially, removing the ICR creates more leverage, something that is sought after by increasingly cash-strapped landlords. “You’re going to have clients out there that want the lowest possible rate and leverage is not important but, for 90% of them, leverage is everything. We’ve got a separate solution, which is slightly more expensive, but far more flexible and will give them more money.
You’re going to have clients out there that want the lowest possible rate and leverage is not important but, for 90% of them, leverage is everything
That’s why we’re having success.” When Mark talks me through a few case studies, I am stunned by the difference it makes. On one deal involving who would be considered a prime borrower, Octane was able to offer £300,000 more than a competing bank—and at the lowest pay rate—due to its deferred interest option. Depending on the ‘wave’—Octane’s way of naming the various sub-products—up to 2% pa (max 1% on the longer-term, five-year options) of the interest rate may be deferred until the end of the term, again maximising cashflow for the client. “That deferred interest just gets added to the loan amount on redemption; it’s not compounded,” Mark explains. “If the loan stays on the books for the five years and they repay us at the end, that 5% gets added to the loan amount and is repaid on redemption.” Octane’s pay rates (interest minus any deferred %) start at 3.99% pa. During this unprecedented time of strain on income, brought about by the pandemic, it is particularly timely for landlords to have the option to enhance cashflow and the amount of capital at their disposal. A handy matrix enables brokers to decide which option, capped at 70% LTV,
17 Jul/Aug 2020
Interview
is most suitable, typically starting with the client’s profile. There are solutions for first-time buyers and/or landlords, foreign nationals, offshore companies and more—some of whom are classified as “difficult borrowers” and often restricted by other lenders, claims Mark. Moving on to security, a wide range of property types are considered, including HMOs, semicommercial, ex-local authority flats and multi-unit freehold blocks. Assessing the borrower’s credit profile comes next and Octane will lend to those with defaults and CCJs, moving towards ‘Wave 5C’ the more adverse it is. The mobility between products is also facilitated by another USP. “There’s a little thing called a low LTV product shift, a very 3rd-gen-esque set of criteria,” Mark details, “which allows people, if the risk is low enough, ie it goes sub50%, to take one product better.” I ask Donna, whose prior experience includes heading up LendInvest’s BTL underwriting department, about how brokers have reacted and helped shape Octane’s proposition during the beta phase. She shares that the underwriting
We are trying to build a beast—but build a beast for the right reasons
18 Bridging & Commercial
and credit teams have direct access to their introducing partners which has resulted in useful, constructive feedback. Consequently, the product that is eventually rolled out to the wider market (something which I am told won’t be rushed) will be “much stronger than what we initially started with”. During the process, Donna describes how Octane has already lowered its rates for loans over £500,000 in response to borrowers at this level being more rate sensitive—as reported by the select group of brokers it is working closely with. “One of the reasons we have kept it quite tight with our distribution is that, frankly, we did not want to bowl over our credit team,” says Jonathan, acutely aware of the importance of maintaining service standards—regardless of what one comes to them for. It also wanted to give back to those who had contributed to the lender’s success, hence the very controlled release of the product. Addressing the challenges posed as it transitioned into ‘productising’, Mark describes it as having felt quite “radical” going back to a defined set of criteria. Jonathan points out that, in this instance, having a presence on sourcing
Interview
systems—routinely used by brokers for BTL—is key to positioning itself as a contender, and you can’t do that without specifically outlining what’s on offer. What was important to Octane was to imbue its anti-tick-box attitude into this new foray and allow the underwriters to use their vast understanding of property transactions. Considering the team is not bound by guidelines, Donna feels they are encouraged to practice what they naturally do best. An avid adopter of technology for seamless processing, Octane’s BTL proposition is bolstered by a mobile app and various electronic means (for ID verification and signing, for example) to submit documentation— which was reduced to just two pages, saving the broker valuable time. What does this spell for the lender near-term, as it approaches the billion-pound milestone? Denying all coyness, I am told that “this is it” and focussing on core product areas has been a huge part of its ongoing success. Considering what areas of lending other providers might be planning for, or have already entered, Jonathan says: “I’m sure we will get there and will
compete with them at some point.” “We want to build a really big book here,” Mark says of the BTL offering. “We are trying to build a beast—but build a beast for the right reasons, not just the number of people.” Discussing the hybridity of bridging and BTL, Donna and Mark report a spike in interest for a bridge-to-let product that has been tailored to provide a solution for many of those whose exits have evaporated or been delayed. “We have seen such a positive response because it’s given people that alternative without having to potentially pay higher penalties in the event of those failed exits…” says Donna. On the topic of changing attitudes to property and the impact this could have on the BTL sector, Jonathan does not anticipate a big, overnight cultural shift. In fact, we agree on the possibility that those moving out of the city in search of space and greenery, and those needing to move into HMOs or similar out of necessity, will likely create a net-neutral effect on the market. In true Octane style, Mark latches on to another opportunity that this could present. “A number of investors may want
to move away from the HMO space and, if they do, a lender like ourselves can help them manufacture value by converting that HMO back into a family home.” Having managed to continue to lend throughout the pandemic, the team is suitably gratified with how Octane has navigated this difficult period. “I’m so proud of how we have come through this, how we’ve looked after our staff, brokers and clients … and I’m pretty certain that the reason why the volumes are so high now is because of those things,” beams Mark. Jonathan believes that the prospect of ‘restarting’, for those who have pulled back during lockdown— practically, and from a personnel point of view—will not be easy for some. In a sector that has been subjected to an onslaught of measures in the past few years, resulting in “shrinking attractiveness” for landlords, a lender with Octane’s engrained ingenuity and ability to adapt to borrowers’ needs will likely be a breath of fresh air. Its bold decision to disrupt the market and readdress stress testing could be just the ticket that boosts leverage-starved landlords and stimulates transactions.
19 Jul/Aug 2020
Interview
The idea that companies in the second decade of the 21st century will not want to be able to alter just about every feature on a system to make it a truly bespoke process is just ridiculous to us
Niall Deas, operations director at Method Valuation Management
22 Bridging & Commercial
Interview
Attitudes to valuations are changing Words by
BETH FISHER
uring the Covid-19 crisis, many bridging lenders have changed the way they view and instruct valuations in a bid to streamline processes while teams are at lowerthan-normal capacities. Despite physical internal inspections by a Red Book valuer still the most favourable option in the specialist lending market, the rise in the utilisation of desktop valuations, AVMs and alternative methods—such as the emergence of geo-tagged, timerestricted photos—could result in a more open attitude to valuing property in the future. With many lenders having taken this time to assess their positions and re-examine their third parties, could we see an evolution of bridging valuation panels and, finally, a more fluid approach to digital techniques? For growing bridging lenders, finding, instructing and managing valuation partners can start to become a chore— especially during unprecedented events when criteria are easily moved and
certainty is sparse. In a crisis, time spent sourcing and embedding new valuers to adhere to changing policies and requirements could be spent more wisely by staff that are already stretched. I was not shocked, therefore, to discover that, since lockdown began, Method Valuation Management has attracted numerous new bridging lenders to its system, which automatically links finance providers to appropriate valuers. Automation like this is set to increase efficiency and speed up the process of completing deals due to valuations being instructed at a click of a button—which will be music to the ears of brokers. Niall Deas, operations director at Method, has been an RICS-registered valuer since the inception of the Valuer Registration Scheme in 2013 and a
23 Jul/Aug 2020
Interview
chartered surveyor for over 20 years, working at national and smaller, private practices in the North East. He joined the Robertson Simpson Group (out of which panel manager Method was born) in 2009—the week during the GFC in which the main lenders turned off the tap. “I’d been brought in to grow a valuation business, so that was quite interesting,” he jokes. Despite the situation, he was told to find a way to generate business—and managed to do so. As the secured lending side grew, it had come across established panel management companies, but didn’t like the way they operated. “We didn’t think it was particularly slick, quick or efficient,” he tells me. He claims that they didn’t facilitate good communication between the valuer and lender and began to realise that it could be done better. As a result, Method—which started trading in early 2014—started developing its online panel and process management system, presenting the first version of this to the market in November 2017. Since then, it has launched various portals for lenders, valuers, packagers, solicitors, and QCs, in addition to a management one for its own staff. The idea was to grow a multi-user, cloud-based system enabling efficient transactions between everybody in the process. Niall reiterates that it isn’t just a digital front end to a manual-based process. The fully integrated system can facilitate total panel management, but can also be used as an IT software solution which allows
I think it’s normal business practice if another company does something better than you do yourself, you’ll potentially consider outsourcing lenders to do it themselves. “The idea that companies in the second decade of the 21st century will not want to be able to alter just about every feature on a system to make it a truly bespoke process is just ridiculous to us,” he argues. “We don’t believe that’s where the market is now.” The system—which manages the process from actual valuation through to quality control reports—can obtain quotations from its pool of around 160 valuers or offer fixed-fee instructions, submit reports to the lender, and deal with post-valuation queries and project monitoring for development work. It is designed to cover both residential and commercial work, in addition to agricultural development, and allows lenders to set the parameters to determine who acts for them. “It gives lenders the control, so, as and when they change their lending or credit policies, they can change the criteria settings on the system and only allow valuers who meet those to quote and undertake the valuation or monitoring.” Its packager portal allows brokers to get valuations on the lender’s behalf 24
Bridging & Commercial
to save time, while ensuring that the valuer instructed meets the necessary criteria. Lawyers accessing the part of the system specific to them—which is GDPR-compliant and secure—can send documents and reports to the lender seamlessly. The portals promote direct, transparent, and time-stamped communication between the lender and all other parties, while being recorded all in one place. “…As and when a lender wants to be able to see how a case has progressed, they can press a button and they’ve got all the case history with all the communications listed,” Niall explains, which is particularly useful if a complaint has been made, as they can pinpoint how and why something has happened. At the end of 2019, Method completed the first iteration of its system including all of its portals and, since then, has been growing its customer base—which is mainly in the bridging space. Some of its clients include prominent names such as Roma Finance, Alternative Bridging Corporation, MT Finance, Glenhawk, Seneca Bridging, KSEYE Bridging Finance, Together, Catalyst Property Finance and LendInvest. Method acts for 28 lenders, three of which are banks and two are peerto-peer lenders, with the rest being bridgers—and six of those have gone ‘live’ with the business since lockdown. It has also picked up a considerably higher amount of business from mainly London-based lenders who are
Interview
expanding further outside of the capital. The number of instructions through Method were 5% higher in May 2020 than the same time last year—despite approximately 25% of its client base not currently active in the market. He believes that lenders which have furloughed staff that normally instruct and obtain valuations have also been looking for easier ways to do this— especially if some of their go-to firms have not been as accessible during this time. “I think it’s normal business practice if another company does something better than you do yourself, you’ll potentially consider outsourcing,” he says. Indeed, when many lenders were struggling to source valuations during lockdown, 87% of reports procured through Method were returned within the lenders’ SLAs. Many finance providers are joining the onward march in fintech and actively looking to use more digitised solutions, confirming to the team behind Method that the decisions it made back in 2015 were correct. “2020 very much is the year that we will take ourselves to the next step of our business plan.” This will include the launch of a property metrics feature and the development of a commercial property AVM, which will allow Method’s clients to make more effective lending decisions. In essence, the system allows lenders to adjust their valuation panels instantly. In a time when criteria are changing from one day to the next, this gives finance providers instantaneous control, which can only be positive. “Manually maintaining panel settings for individual lenders is very time consuming and quite difficult,” Niall explains. “‘Who can we add to this panel? Who must we take away? What is the change? What will that do?’ This way of working can present more risk if a change that needs to be made isn’t fully implemented; however, a system does not need to rely on anyone else and can instil more confidence.” During the outbreak, Niall has noticed some lenders wanting slightly larger, national, and more “financially substantial” firms on their panels, and fewer smaller, local practices. I ask
Just because somebody was good at valuing some type of asset class in 2005, doesn’t mean that they are in 2020. The staff, outlook and size of the company may have changed whether this is related to professional indemnity insurance—a market which has hardened for valuers in recent years. “Mainly, yes.” He claims that there has been an adjustment from some lenders on the maximum level of PII excess that they will accept, especially from smaller firms. With the material uncertainty clause still being used in some reports, this may further impact lenders’ risk appetites in terms of who they want to do business with. If more business from bridging lenders is channelled through national valuers, they might become swamped and further slow the process, which is why Niall believes it’s the perfect time to look at ways to cut inefficiencies and save time. “…If your bigger valuer takes a couple days longer, well, it doesn’t matter because you’ve not lost days at the start or during the process funnelling the instruction to and fro,” he explains. There are a considerable number of reasons why lenders should rethink their panels. For example, firms come and go, and people jump ship. “Valuation practices aren’t static,” Niall tells me. “Just because somebody was good at valuing some type of asset class in 2005, doesn’t mean that they are in 2020. The staff, outlook and size of the company may have changed.” Therefore, lenders should constantly review who is appropriate to work with. Pursuing automation is cheaper, as it eliminates the need to maintain in-house administration teams to find and instruct valuers. By sending the request to the system once, and reaching the entire panel, it cuts out a layer of replication. “Also, one of the major benefits of going
down this route is the transparency of everything,” Niall adds. It is clear what everyone is charging, which is important as wider FCA regulation becomes even more of a possibility. “TCF is a big, big issue,” he says. “Ok, a lot of this market is non-regulated and doesn’t quite have to think about the nuances, but where will the FCA be in the future? Well, a smart business looking at their practices and deciding that treating customers like other companies [which] are regulated have to, is the right way forward.” Basically, it’s easy to spot how each party has fulfilled their specific role. However, there are some obstacles. “…The challenge is breaking down old manual processes and bringing an acceptance that there are technological ways of doing things, but technology relies on the information that’s inputted. A system is only as good as the input data. So, if your staff don’t follow the process, it won’t be as effective as if they do.” Another issue to look out for is the ‘bedding in’ period, as valuers get used to lenders’ requirements and how they want things reported. To help, Method promotes extensive (I’m told around 50 pages worth) of guidance notes—which need to be produced by each of its lender clients—so that valuers can instantly understand the requirements, especially if these change. He believes that valuers are service providers and therefore must deliver what lenders are asking for—providing it doesn’t breach RICS guidance. As well as seeing a surge of bridging lender clients, Method is also expanding its pool of valuers via a substantial recruitment drive. It presently has 20 applications in progress and, during these challenging times, has experienced more demand from them, rather than the other way round. “We’ve seen quite an upturn in valuers approaching us, because they are now aware of Method and who we are acting for, and want to be part of the process.” I question why this is the case. “Valuers are hungry to get back to normality,” he responds. With the volume of business still not at the level it was pre Covid-19, they are actively looking for opportunities
25 Jul/Aug 2020
Interview
The challenge is breaking down old manual processes and bringing an acceptance that there are technological ways of doing things, but technology relies on the information that’s inputted ... So, if your staff don’t follow the process, it won’t be as effective as if they do” 26 Bridging & Commercial
and want to bring their staff back from furlough. From their perspective, having just one application process through a panel manager increases efficiency, business prospects, and gives valuers access to more potential clients. While the pandemic resulted in property accessibility challenges, it has also “focused minds on change”—as Niall puts it—and accelerated the shift in how technology is being taken up by the valuer community in order for them to do their jobs. But this isn’t particularly new. As far back as November 2017, RICS had produced a paper called ‘The Future of Valuations’ which examined how relevant real estate valuations for institutional investors and banks were at the time. While big data, blockchain and AVMs were all highlighted as likely to have a role going forward, the openness among valuers to new ways of harnessing information was pinpointed as just as crucial as any single technology. It had recommended that valuers embrace tech and be receptive to changes, such as how data is gathered and the increased use of AVMs; how to reduce timescales through digitsation; experimenting with new ways of reporting to enhance the client experience; and urged the profession to place more emphasis on skills development—particularly in the areas of data analytics and client interaction. These suggestions have never been more pivotal—and there’s a great deal still to be done. Niall believes that there are fundamental issues over what will end up being the longterm definition of valuation which is supported by the industry. “…There’s going to be information from all sorts of sources,” he predicts, “…as well as seismic changes in terms of what we actually record and how it is presented, and the environment in which that is made available to everybody.” Big data could represent massive changes to how we currently view our industry. “Some people are taking account of it and are looking at it now, some are a bit head-in-the-sand and will worry about it as and when the changes come but, in the same way that Covid-19 has forced people to look at how they work, it’s likely that something else will come along to change how valuers actually operate.” Method’s plans to develop a commercial property AVM and a property metrics feature is also dependent on it. “It’s an interesting world, certainly—it’s going to keep us all busy for a long time going forward.”
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Cover story
Words by
BETH FISHER JOE LYONS Illustrations by
Ling TANG
A TIMELINE OF HOW THE SPECIALIST LENDING MARKET TURNED
UPSIDE 30 Bridging & Commercial
12th
6th
MAR
Cover story
Budget 2020 declares coronavirus measures
Bridging lender announces risk adjustment in light of coronavirus pandemic
A £46m package announced by prime minister Boris Johnson includes funding for urgent work to find a coronavirus vaccine and develop a rapid test for the disease.
The Monetary Policy Committee votes unanimously to reduce the interest rate by 50 basis points to 0.25% in response to the economic shock caused by Covid-19.
Chancellor of the exchequer Rishi Sunak presents Boris Johnson’s first budget, which includes £12bn to provide security and stability for people and businesses facing inevitable financial distress because of the virus.
TAB reports that all its new bridging loans will have interest deducted for the full term from the outset of the loan, in anticipation that borrowers’ ability to service their loans could be compromised.
11th
Global race to find a vaccine
Bank of England drops interest rate to 0.25%
DOWN 31 Jul/Aug 2020
Cover story
32 Bridging & Commercial
“The six-month interest rate break offered on these emergency loans is helpful but, after this time, SMEs will find themselves swimming in debt” — Luke Davis, CEO at IW Capital
BoE cuts interest rates to 0.1%
UK employees start getting furloughed
The government implements measures to protect renters and landlords affected by coronavirus, including emergency legislation to suspend new evictions, and no new possession proceedings to start during the crisis.
In addition to the interest rate cut, the MPC also voted to increase the BoE’s holdings of UK government and corporate bonds by £200bn to a total of £645bn.
The government introduces the Coronavirus Job Retention Scheme to pay up to 80% of people’s wages up to a total of £2,500 per worker each month, initially open until June. This comes as entertainment and hospitality premises, like bars and restaurants, are instructed to close from tonight to limit spread of coronavirus.
“Through countless monetary and fiscal measures, the Bank of England and the government are throwing the kitchen sink at the economy in an effort to bridge it across the peak phase of the pandemic” — Sam Harhat, head of financial services at Andrews Property Group Tomer Aboody, director at MT Finance, predicts it is more hopeful of a possible stamp duty cut within the next few months “in order to stimulate the property market and encourage new borrowers”
20th
Mortgage lenders agree to support customers that are experiencing issues with their finances as a result of Covid-19, including through payment holidays of up to three months. Chancellor Rishi Sunak makes available an initial £330bn of guarantees—equivalent to 15% of UK GDP.
Possession proceedings halted and evictions banned
18th
Mortgage payment holidays and £330bn funding package introduced
19th
17th
MAR
Cover story
33 Jul/Aug 2020
23rd
MAR
UK goes into lockdown The property industry freezes, lenders pull down their shutters, valuers rendered inert, and thousands of companies transition their staff to work from home. On this momentous day, CBILS opens for applications.
Lenders leave the market and construction sites close
Together makes the public announcement that it has temporarily halted new loan applications across its product range, followed by many others amid the evolving Covid-19 crisis.
Surveyors react to being on lockdown and the Covid-19 material uncertainty clause appears
Boris Johnson tests positive for Covid-19
“…There will be very limited transactions in the market for valuers to fully understand the effect of Covid-19 for some time” — Stephen Todd, cofounder of VAS Group
The prime minister self isolates at 10 Downing Street
“Where this clause is used, lenders will find it difficult to rely on [the valuation], which is why many are scaling back their LTVs” — Mark Posniak, managing director at Octane Capital
26th
Construction sites start to close throughout the country to ensure the health and safety of onsite staff. Sales teams start using video technology to market homes remotely.
27th
24th
APR
MAR
Cover story
Bridging lenders start depending on AVMs and desktop valuations
Reports of rapid falls in construction output and new work in March, as emergency public health measures to help halt the spread of Covid-19 led to sites closing across the UK, in addition to construction companies recording severe supply chain pressures due to reduced capacity and shortages of stock among vendors. “With no upturn in sight . . . the sector is stuck in quicksand and sinking further” — Duncan Brock, group director at the Chartered Institute of Procurement & Supply Remote auctions gain popularity
Virtual property auctions witness an upturn in business as buyers go online. “Investors are still keen to add to their property portfolio and sellers don’t have time to wait, so we are seeing that supply and demand is there” — James Ashworth, director at Landwood
6th
1st
Lenders introduce alternative valuation models in order to continue lending during the pandemic.
Construction work declines at steepest rate for almost 11 years
36 Bridging & Commercial
Brokers urge lenders to “print reality” after communication on scaledback LTVs fails
Lenders still in the market tighten criteria by capping LTVs and reducing loan sizes as a result of having to rely on AVMs, desktop or drive-by valuations. Scrambling brokers call for clear messaging from lenders about what is still available so they can manage their expectations and those of their clients. “It’s like the door is open, but people are switching the lights off and running out the fire escape” — Liam Keighley, director at Laybourne
20th
9th
Cover story
Almost 500 criteria changes made from 14 different lenders in 48 hours
Knowledge Bank reports huge rise in criteria changes and Covid-19 concerns from broker searches. “At this time of change, it is important to reflect the issues and the searches that brokers are carrying out as it [represents] the market as a whole” — Nicola Firth, founder and CEO at Knowledge Bank
Call for suspension of house price indices
The Coronavirus Large Business Interruption Loan Scheme targets businesses with a turnover of more than £45m, with facilities available of up to £50m.
The Brightstar Group demands the immediate and indefinite suspension of all house price indices, until a meaningful number of property transactions are able to be processed, to guard against unnecessary panic and knee-jerk policy decisions.
The chancellor reveals a Future Fund set to open in May in order to support innovative businesses unable to access other government support programmes because they are either pre-revenue or pre-profit and typically rely on equity investment.
“Too many lenders are professing for it to be ‘business as usual’ but then having a long list of changes in the small print” — Sam O’Neill, senior finance broker at Clifton Private Finance
Rightmove has suspended its house price report due to the crisis. Lockdown has led to statistics on the number of properties coming to market, new seller asking prices and new sales agreed being insufficient. “We find ourselves in a completely unprecedented situation where the government has, with good reason and quite rightly, deliberately paused nearly all economic activity, and this has imposed an artificial halt on the housing market” — Rob Jupp, CEO at The Brightstar Group
23rd
14th
In such a volatile situation, we are seeing new lending criteria come and go “literally every hour” — Jo Breeden, CEO at Crystal Specialist Finance
CLBILS opens and Future Fund announced
37 Jul/Aug 2020
MAY
Some construction sites announce plans to reopen with workers eligible for testing
Housebuilders use government advice to implement social distancing protocols and physical measures to ensure the safety of staff while they plan to reopen a number of sites and launch a phased return to construction.
Bounce Back Loan Scheme opens for applications and HM Land Registry starts accepting deeds signed using the Mercury rules
Bridging lenders start returning to the market
Numerous bridging lenders start announcing their comeback, albeit cautious, to the market after adopting new technology and ways of working, and some furloughed staff return to work. “The current climate will create new buying opportunities for our customers, and we are pleased to have found a revolutionary way to support them [by utilising new AVM and desktop valuation products which enables us to lend using photos taken by the customer], so they can continue to create wealth for themselves and their families” — Scott Marshall, managing director at Roma Finance
Lenders accredited by the scheme can provide loans of up to £50,000 over six years, with the first 12 months of interest paid by the government. Providing lenders with a 100% governmentbacked guarantee and standardising the application form is expected to lead to a faster process with many loans becoming available within days. The Land Registry makes an epic change to signing deeds during Covid-19 to make it easier to verify a person’s indentity and sign deeds. “The changes are stated to be temporary but, given the likelihood of a long period of restrictive movement and semilockdown, it is likely that they will become the new normal, like everything else” — Nicky Richmond, managing partner and head of real estate finance and banking at Brecher LLP
Property market reopens
Housing secretary Robert Jenrick announces plan to enable people to move home safely and to restart the housing market. All buyers and renters will now be able to complete purchases and view properties in person, while estate agents, conveyancers and removals firms can return to work while following social distancing guidelines. New guidance revealed to allow extended working hours on construction sites and to make the planning system operate remotely again. “The great unknown is how cautious surveyors will be with their valuations and lenders their criteria, but that will become apparent in the days and weeks ahead” — Andrew Montlake, managing director at Coreco
13th
1st
“Having spent the last month developing and testing new site protocols that incorporate the necessary social distancing and protective measures, we believe that we are now able to return to site safely and support the UK’s economic recovery from the pandemic” — David Jenkinson, CEO at Persimmon
4th
28-29th
APR
Cover story
38 Bridging & Commercial
The prime minister sets out further changes to lockdown measures in England to enable people to see more of their friends and family, help businesses get back on their feet and get people back in their jobs. Plans for pubs, restaurants and hairdressers to open are revealed.
HM Land Registry starts accepting electronic signatures
Boris Johnson underlines his commitment to upgrading Britain’s infrastructure and skills to fuel economic recovery, and sets out the first step in government plans to “build back better” in the wake of coronavirus, for the benefit of every corner of the country.
HM Land Registry will now accept witnessed electronic signatures in a bid to simplify and speed up the process of moving home. It is also holding further discussions with the sector to explore the potential introduction of qualified electronic signatures, as soon as is practicable.
27th
‘Build, build, build’ deal for Britain revealed
6th
23rd
The FCA confirms that the current ban on lender repossessions of homes will be continued until 31st October 2020. The regulator also announces that customers who have not yet had a payment holiday and experience financial difficulty have until 31st October 2020 to request one.
Boris Johnson announces easing of lockdown measures in England
AUG
Repossessions ban extended
30th
2nd
JUL
JUN
Cover story
IT’S BEEN BOTH A WHIRLWIND AND AN ETERNITY
Property industry reacts to landmark planning reforms
Robert Jenrick sets out plans to overhaul the country’s outdated planning system and transform the way the country builds by publishing the white paper, Planning for the future. The “most significant reforms to housing policy in decades” aims to deliver the high-quality, sustainable homes communities need. The changes are expected to be a major boost to SME builders currently cut off by the planning process. “Planning law reforms will prove to be another shot in the arm for the housing market. However, all this early show of confidence could hit a major roadblock if housing developers fail to get access to development finance in a timely fashion … A potential second wave could further exacerbate this situation and funding may dry up even more” — Paul Oberschneider, CEO and founder of Hilltop Credit Partners 39 Jul/Aug 2020
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Google Earth image of Denmark’s Brøndby Garden City
BUILDING FOR A NEW WORLD How we can meet post Covid-19 housing requirements Words by
BETH FISHER
“I am not worried at all for anyone who has the ‘choice’ to decide where they want to live—the market will adapt. What is really crucial, though, is that all new homes built for those who don’t have that luxury of choice are good homes, delivering social value through design”
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ake no mistake—the pandemic has awakened the need for good quality living. Many are now asking themselves whether the way they currently live is fulfilling, and are actively looking to change this if the answer is ‘no’. With social wellbeing and sustainability finally being recognised and treated as necessities rather than aspirations, will this really change how homes are created or repurposed, and how can the property market encourage and empower the building of better homes for all? “While the threat of Covid-19 will no doubt subside, this event will inevitably be the catalyst for a widespread shake up of future urban design,” states Rob Simpson, director at head of fund monitoring at ARTAL. He’s not wrong. In a poll conducted by B&C, 68% of property professionals anticipate that buyers will place more emphasis on the quality of homes and associated amenities as a result of Covid-19. Looking at trends already emerging, I consider what people really want when it comes to housing, if it’s feasible, and how these demands can be met by property investors and encouraged by funders.
What key trends are we seeing? Since lockdown restrictions were imposed in March—effectively closing estate agents, valuers and removal firms— more than 450,000 people were unable to progress their plans to move home. After enduring almost two months of strict isolation measures, the property market reopened on 13th May. While the period of downtime impacted many anxious buyers in limbo, it also prompted everyone to reevaluate their living situations, whether on or off the property ladder. The ‘home-mover momentum’—as Rightmove puts it— led to its busiest-ever day on 27th May, surpassing a colossal six million visits. Over a quarter of people who were not planning a move before lockdown, now are. Research conducted for this article by Sam Raife, senior SEO lead at Blueclaw Media, found that searches for a ‘house with garden’ were up 176% in May 2020, compared with the same month last year. Data from Rightmove agreed, finding that both buyers (63%) and renters (59%) now want a bigger garden, or indeed access to one, while over 40% of buyers and renters want a bigger home, and over a quarter want to live closer to parks and green spaces. “What we are starting to see in terms
of a greater importance from buyers is a move towards flats with [gardens], flexible living spaces and more of it,” says Marc von Grundherr, director at Benham and Reeves. In addition, he expects more people to want to maximise existing capacity, by extending homes through loft, garage and basement conversions. However, Lucy Pendleton, property expert at James Pendleton, says that it’s “very difficult” to alter existing homes in a fundamental way, unless they can be significantly extended. “That’s why we are expecting to see a surge in homeowners looking to move to bigger properties.” The recent (and ongoing) workingfrom-home experience has pushed more potential buyers to consider trading smaller city flats and apartments for semirural living and occasional commuting. In July, a survey by the Home Builders Federation found that 55% of people polled now value their home space more than ever, with two in five prioritising room for an office if they are searching for a new place to live. Moving outside of the city can make this more affordable and achievable. Research conducted by JLL on its own staff (more than 1,300 respondents) revealed that many had shifted their “most important housing priorities”. Private outside space and a home working area, in addition to faster broadband, have all significantly risen in importance. Interestingly, proximity to public transit—which has been a selling point for years—has dropped in rank and some 42% of those wanting to move are looking away from urban areas, with only 1% wanting to move towards it. Before Covid-19, 22% of its respondents were looking to move—this number has now increased to 45%, showing there has been a monumental rise in people wanting to relocate, and are likely to be taking these points on board. “Home working may not necessarily become the norm, but it will certainly become more prevalent and many people could find that they balance their working life between home and the office—and this could have a number of unintended consequences,” says Joe Arnold, managing director at Arnold & Baldwin Chartered Surveyors. “For example, being close to a transport hub may become less important, while having easy access to amenities, say, to go for a walk at lunchtime to buy a sandwich, could become much more important to people. This could be quite an interesting dynamic if we see the redistribution of wealth away from city centres and back to the high street as people support local businesses and reconnect with their local community.”
In a blog post by Sebastien Miller, lead landscape architect and urban designer at GHD, he explained that, while economics will dictate how easily design interventions are implemented, many new approaches to urban transformation could potentially result in improved quality of living and more vibrant neighbourhoods. As a result, he expects pop-up cycle lanes and pedestrian pavements, and a move towards localism—allowing the design to become more about the community and connectivity, and to take advantage of what each city has to offer socially, culturally and physically. “Unlike anything before, this crisis has allowed us all to challenge the expectations of urban living and consider new approaches to landscape design,” Sebastian says. “Social distancing and work-from-home initiatives have resulted in new thinking towards public spaces that need to allow us to safely pursue business, social and recreational activities. While government policy and economic realities will steer the above initiatives, the design profession stands ready to be active and agile in ensuring the outcome changes the way we live for the better.” Félicie Krikler, director at Assael Architecture, hopes that engendering a “positive community spirit” will become a key design driver going forward. “Community feel can often be either enhanced or annihilated by good or bad urban design principles,” she explains. An emphasis on green spaces, connectivity, inclusive access, and a “healthy mix of uses” to support not everyone commuting to work, are elements she is hopeful for. “These principles can also be replicated, and should be encouraged, at the much smaller scale of development, in single buildings, or apartments.” It’s obvious that buyers have always wanted a big house with lots of space, additional bedrooms, a garden and proximity to schools and amenities—but most people can barely afford to get on the ladder, let alone check off this wish list. “What Covid-19 will do is change the way these compromises are prioritised,” notes Lucy. “Internal space will also be a top priority and the layout of homes is becoming increasingly important.” However, more floor space is only useful if it’s well designed. “Families who have been living [together] seven days a week during lockdown have had to confront a rather different reality to the one they knew before coronavirus, when they only really shared their house for sustained periods of time at the weekends. Lockdown has been extremely stressful, and we expect a lot of homeowners to move for fear of ending
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up living on top of each other if similar measures are required in the future.” One change we are likely to see in newbuild developments (often boasting open atmospheres) is the inclusion of more rooms. “As [we] have got used to working from home, often open-plan living spaces have not been suitable for multiple people under one roof to do this easily,” Mark Bailey, director at Landwood Group, points out. “We have all loved open-plan spaces for many years, but Covid-19 could spell the end.” Developers and property investors may start incorporating separate studies and dining rooms, for example, into their plans. At the more luxury end of the property market, there is increased demand for selfcontained houses and townhouses, with buyers wanting their own front doors and private access to their property. “The ultraprime lateral apartments that dominated the market last year are now less favourable with buyers who are concerned about shared communal spaces, such as foyers and lifts,” says Peter Wetherell, chief executive at Wetherell. “In addition, for any newbuild property, buyers want homes that comply with strict health and safety rules, such as video cameras or lights to indicate when the lift is occupied for lowering the risk of any infection transmission.” Elsewhere, we may see a reduction in dense developments. For those projects that have been granted planning permission but not yet started, developers will be asking themselves if what they had envisaged will now be fit for purpose. “The new demand is going to be for lower density development, lower rise, and with more space built in for
residents—both private and communal,” says Mark. “Do we really need more huge numbers of high-rise, small flats—and will people want to live in them? That was great when [it] meant that city dwellers were constantly out at restaurants, theatres and cinemas and they were buying a lifestyle as much as bricks and mortar. However, that’s all changed now and isn’t likely to fully go back to how it was for quite some time.” This sentiment is the exact reason why I have decided to move out of London—a place I have called home for seven years. I was constantly compromising on things (a garden and more space) for the ease of travelling to and from work (which still took an hour each way) and the excitement that city life brings. I understand that I am part of the ‘knee-jerk reaction’ group, but as companies become much more flexible with where their staff can work and people start standing up to to overpriced yet substandard living and commuting, this will undoubtedly become more common.
Social wellbeing and our health It is integral that the place where somebody lives is designed and built with consideration to the inhabitant’s health and wellbeing. “Social wellbeing will become an area of great focus for future new-build developments and we’ve seen this to an extent already where the availability of on-site gyms, shared social areas and other amenities are concerned,” notes Marc. This trend could also evolve to 44
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Sense of community
Modern appliances
Thermal comfort
Energy efficiency
Noise
Post-Covid
Proximity to quality primary and/or secondary schools
Pre-Covid
Proximity to public transit
Spare room
Air quality
Private workspace
Proximity to local public green space/park
Natural light
0%
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10% Personal outdoor space
% ranked Extremely Important
Living priorities have changed in light of Covid-19: Graph by JLL
where social wellbeing is at the heart of property development, rather than represented as additional features— although it may come at a cost. Nevertheless, with the fear of future health pandemics likely to remain elevated, residential developers would be remiss to ignore this, just to save money. Félicie says that it has been really hard to witness what those living in poor conditions have had to endure over the last few months. “I am not worried at all for anyone who has the ‘choice’ to decide where they want to live—the market will adapt. What is really crucial, though, is that all new homes built for those who don’t have that luxury of choice are good homes, delivering social value through design. By that, I mean that they should allow residents to be in control of how they live in their own homes, whether to open windows, control the heating etc. They should be well-built and long lasting and generate utility bills as low as possible; they should provide enough storage space to enable tidiness; they should have access to external space; they should be connected to their neighbourhoods, and so on.” The contrast of how one British household compared to the next has coped during these times has been vast—so much so that it sparked the nationwide Homes at the Heart campaign and coalition, which is calling for a once-ina-generation investment in social housing to ensure that everyone deserves a safe, secure and comfortable place to call home. This initiative reported that 31% of adults have had mental or physical
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health problems during lockdown because of the size or condition of their living space and some 30,000 people spent the period in a one-room home. Therefore, it is not surprising that one in 10 adults felt depressed during lockdown due to lack of space. “For many, this has created the opportunity to spend more time with their children, grow their own produce, and wear flipflops at work,” says Rob. “For others, it has led to isolation, increased fuel bills and a loss of social interaction.” Anyone who has been keeping up with the news would have seen, or experienced themselves, how impactful living arrangements have been on social and mental wellbeing. “Recent news footage has made it clear that poorly considered infrastructure is currently perpetuating marginalisation within many communities throughout the UK,” highlights Rob. “This is currently being assessed on a national level, including both buildings and public realm areas, with a view to creating more accessible and inclusive spaces that are representative of modern Britain.” For example, a lot of old houses don’t have disability and agefriendly features, such as step-free access, and therefore addressing this would help see more homes catering to all needs. “It might also be an idea to stop thinking of homes for the elderly in terms of places to be kept to themselves and instead build them deliberately in the middle of new residential developments, possibly adjacent to nurseries or primary schools, as the mixing of the two extremes of the age groups has been shown to be beneficial for both,” states David Hannah, principal consultant at Cornerstone Tax. By enabling older relatives to live across the road more easily from children or grandchildren, neighbours can assist with shopping and more physical tasks, like gardening and cleaning. “It’s become very clear these last three months that [the] lack of these types of arrangements leaves the elderly and most vulnerable high and dry in a crisis,” he adds. Housing that is unable to adapt is likely to suffer a shortage of demand, which could further negatively impact the surrounding area. Rob believes that the government will need to pay special attention to this and look to add value, as there will be an increased likelihood that these areas may suffer from social issues as a consequence. If remote working does become the new normal (although it is assumed this will mainly be for service-based, higher-earning jobs and professions) then developers may change their focus as they look to build slightly bigger, more upmarket properties in rural areas. Steve Woomble, sales director at Vistry Yorkshire (formerly Linden Homes
Yorkshire) thinks that it may be possible that regional housebuilders will look even more favourably at land opportunities where commuting is an option, given this change. In turn, this could mean more attention on affordable housing in urban areas, a positive step for our key workers, many of whom have had to continue to commute during all of this, in addition to potential first-time buyers. Toby Wilde, founder of real estate and computer technology private equity firm Oparo, says that building more stock that meets buyer demand in a geographical area, is key to social and work/life cohesion. “For far too long we’ve built homes that aren’t affordable for the majority of the market, in areas young professionals often don’t want to live,” he proclaims. Densely-populated urban areas—where the only option in recent years has been to build upwards—will also need to take on board the demands that semi-rural areas are more likely able to cater to. Mark believes this can be done through biophilic design, an approach which aims to “bring the outside in”, and something he expects to see becoming more popular. “In these cases, providing residents with green walls and other ‘living’ elements will be fundamental to social wellbeing.” Rob tells me that while recent evidence points towards a new way of living, it is not clear how much of this is a quick response to the restrictions imposed by the Covid-19 lockdown and what is a symptom of a built environment that has been “overlooking hard-wired human comfort factors for too long.”
A sustainable and green future This year, global emissions are expected to fall by a record 5-10%, with a potentially larger descent in the UK. However, this is only temporary. At the end of June, the Committee on Climate Change released a 2020 progress report to parliament, setting out steps for building a ‘resilient recovery’. The report’s investment priorities include low-carbon retrofits and buildings fit for the future; tree planting and green infrastructure; a setup to make it easy for people to walk, cycle and work remotely; and moving towards a circular economy. While sustainable placemaking has teetered on the UK’s housebuilding agenda in previous decades, lockdown has made many people realise how important it is, not just for the environment, but also our own wellbeing. The report explains that achieving the UK’s climate goals will deliver better public health, improvements to biodiversity, vastly improved air quality
and more comfortable homes—all things which have been identified as key requirements during this time. In April, research by Ipsos found that 66% of Britons believe that, in the long term, climate change is as serious a crisis as Covid-19. To add to this, more than half (58%) felt it was important that climate change was prioritised in the economic recovery after coronavirus—and developers are taking note. Our sister publication, Development Finance Today, asked developers whether they were looking to increase their focus on eco-friendly and sustainable housing schemes in the near future. Some 70% said ‘yes’, while 30% said either ‘no’ or that their focus would ‘remain the same’. According to Zoopla, demand for new-build homes soared by 66% in the six weeks since the property market reopened, surpassing levels seen before lockdown and outpacing the revival in the market for older homes. This implies a stronger desire for high-quality, modern, and environmentally friendly housing. “As far as new builds are concerned, the changes you would expect to see from developers are actually already in the pipeline,” says Lucy. “Over the past 10 years, housebuilders have shifted their focus to lifestyle in a big way, and they are now taking their customers’ whole being and modern priorities into consideration.” She gives me an example of this—a development in Balham called The Tramyard by Joseph Homes—which she says is “exceptionally well-designed”, right down to the eco-friendly paint on its walls. Marc believes that ‘clean living’ is also likely to resonate with future buyers, so a focus on greener transport routes, such as cycle highways within placemaking, could become more prominent. “Developments built around this aspect whereby cars are excluded or restricted could well be the future, and this would open up a lot more land that is currently unfavourable due to the lack of public transport links.” It may also see more specialist lenders widen their criteria as a larger spread of projects become more viable. Paresh Raja, CEO at Market Financial Solutions, tells me that it supports property projects that will have a positive impact on the surrounding environment. “This can range from green building designs which minimise their carbon footprint, or facilities that promote better lifestyles, such as homes with gyms and recreational facilities,” he says. “To encourage these sorts of opportunities, lenders need to ensure their loan facilities are tailored to meet the needs of these developments.” Environmentally responsible lenders should be playing their part in supporting
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developers in being more sustainable and using modern building materials and methods of construction, which are often easier to work with and can fare better from a promotional standpoint—for example, lower energy bills. “…Ultimately, they all serve as excellent marketing soundbites when it comes to selling a property, to set it apart from the crowd,” says Nick Oakley, head of lending at CapitalRise. “Buyers, investors and tenants alike want to be green, especially when it can mean cost savings in the longer term. As such, they are often prepared to pay a premium at the outset to wear this badge and [retain] the bragging rights. Specialist lenders are therefore uniquely positioned to promote these wider benefits and, in turn, give the developers an advantage, too.” United Trust Bank is one such lender that is happy to consider proposals to fund schemes employing the latest in contemporary home design and modern construction techniques. “If the fundamentals of the scheme are sound and the exit is realistic, we will consider funding most schemes to create homes suited to post-Covid living, if that’s what the developer believes and can demonstrate to be their market,” states Adam Bovingdon, the bank’s senior director of property development. The obvious argument when it comes to building more homes that we need is whether we are removing green spaces that contribute to biodiversity and a better environment. In rural areas, an assessment of priorities will need to be
Noise attenuation features and soundscape design
Attractive recreational spaces and routes to encourage healthy lifestyles
made when it comes to greenbelt land. “We currently use less than 10% of the UK for actual buildings, which is a staggeringly low figure—unconscionable really, when one considers the number of homeless people and the number of families currently housing several generations under one fairly small roof,” says David. “Environmental concerns are an issue, but if more property is built in greener ways with solar energy etc used … then there should be a way to balance things out. Carbon negative homes are a reality and the use of these will actually contribute to the environment, rather than damage it.” To find out more about this, I speak to Toby Gibbs, managing director at Logika Consultants—a company founded earlier this year and which aims to provide environmental advice and design solutions—about how placemaking will transform in line with a growing awareness for ‘greening’. He believes there will be a drive for more communal green space, in the way that some parts of Europe already offer. For example, Fælledby i Vejlands Kvarter, a fully timber neighbourhood in Copenhagen, has been designed to weave itself into the natural landscape, incorporating and preserving natural habitats that encourage richer growth for plants and animals. Wild-planted natural swathes run between its three mini-villages, ensuring free movement for local species, and integrates nature into the core layout of the new community. Elsewhere, a central public garden—an urban reimagination of the
‘garden city’ concept—has formed the social heart of a 155,000 m² masterplan named Humlestaden, outside Gothenburg in Sweden, by architect Henning Larsen. Its aim is to establish outdoor greenspace as the primary setting of public life. Toby explains that where you get higher density developments, the additional green areas will help mitigate pollution, provide space for flood water, and improve biodiversity. He also feels that people are embracing and enjoying their local areas more as a result of the pandemic—which can only be a good thing for the environment. He describes groups of people now sitting in local parks two or three nights a week, when they may have only done this once or twice a year, pre Covid-19. He also predicts that local high streets will become more popular and people will enjoy nights out closer to home, rather than travelling into city centres. “… People are already meeting up nearer to home and [as] the pubs and bars open up nearby, I think there’s going to be much more focus on using pubs, bars, shops etc in our local areas, rather than getting on a tube or a bus, or even in a car...” While this is great for building a sense of community—something which is critical right now—it is also extremely positive when it comes to tackling climate change. “I think there’s going to be much more of a focus on having really high-quality open space that offers a level of tranquillity [and] protection from air pollution, and somewhere people can go and meet in a way
Noise mitigation and carbon sequestration strategies Ecological habitat protection and enhancement
Input to road and bridge impact to minimise impact on people and wildlife
River restoration and flood mitigation
Solutions to support the development of proposals that have environmental design measures fully embedded within them—by Logika Consultants
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that there hasn’t been previously,” he says. For example, a column from July in the New York Times explained how Vishaan Chakrabarti, the founder of Practice for Architecture and Urbanism (PAU), a Manhattan-based architecture firm, believes that the pandemic has created an opportunity for New York and other cities to reduce their reliance on cars. PAU’s proposal was to ban private cars from Manhattan in an bid to improve life. Toby hopes that what will come out of focuses like this is more pedestrianisation— furthering the clean energy agenda.
Will recent planning changes help or hinder the future of housing? On 30th June, prime minister Boris Johnson announced the most radical reforms to the planning system since the Second World War in a bid to make it simpler to build better homes where people want to live, and to speed up rebuilding. Under the new rules—which are planned to come into effect by September—there will be greater freedom for buildings and land within town centres to change use without planning permission, in addition to a wider range of commercial buildings being allowed to change to residential use. Builders will also no longer need a normal planning application to demolish vacant and redundant residential and commercial buildings if they are rebuilt as homes. “The changes now mean it is possible for homeowners to add up to two additional
Urban green space design as city ‘lungs’ and stepping stone habitats
floors on their residential home without the need of full planning permission,” states Jason Berry, group sales director at Crystal Specialist Finance. “Undoubtedly driven by the terrible care home statistics during Covid, the government clearly expects that family environments will better cater for their elderly loved ones by … extending floors to create further space.” However, Paran Singh, adviser at specialist lender TIC Finance, claims that when permitted development use was previously introduced for office-to-resi properties, the quality was generally poor. Could the planning changes set us up for more problems? “…This could even mean that future properties are less supportive of people’s health and wellbeing than traditional housing estates,” he tells me. Jason agrees that previous building flexibilities offered by the government have “certainly not created the better lifestyles which were aimed for”. As a result, he thinks it is sensible that specialist lenders apply criteria which encourages positive outcomes. “… Offering criteria and pricing which best incentivises those projects which are well constructed and delivered responsibly seems absolutely imperative,” he says. D’mitri Zaprzala, head of residential at Octopus Real Estate, tells me that by looking at each deal through an ESG (environmental, social and corporate governance) lens, specialist finance providers can encourage property investors and developers to create housing that promotes better lifestyles for its Green roofs and walls for health and wellbeing, ecological and air quality benefits Public realm design to minimise public exposure to particulates
Community green spaces, play areas and food growing
residents, such as increasing lending on homes that have access to quality outdoor space. “Lenders can also consider restricting lending on micro-units, unless they have substantial communal facilities similar to those in the coliving revolution, and quality PBSA.” However, it remains to be seen whether developers will sacrifice units in favour of more outside area, as this will impact the profitability of the scheme. Instead, they may look into better ways of utilising the square footage they have available. The specialist lending market should also support even the smallest of changes which can improve the lifestyles of residents. “This could be in the form of creating little pockets for an office in a flat, such as under the stairs, small office rooms in houses next to bedrooms, or innovative ways to bring the outside in—we have even seen developments in London where there are townhouses with gardens on the roof,” says Chris Oatway, managing director at LDNfinance. Historically, the trend for the development of new homes has been for them to get smaller. “I think the age of people settling for a small concrete box in which to live, even as a starter home, is now well and truly over,” confirms David. So, what will happen to these ‘microhomes’ or ‘slums of the future’ (as they were sometimes called in the national press)? Nicky Richmond, managing partner at Brecher LLP, expects to see more sharing. “Micro flats aren’t the best place to be [in lockdown] on your own, and we may see the rise of shared accommodation as a result, where clubbing together might mean larger space overall. As to whether this is possible, in many cases it only needs small tweaks to existing planning to facilitate some of the changes purchasers will want.” This type of housing could also be re-used to increase the wellbeing of workers. Joe’s business has seen demand for smaller ‘citycentre crash pads’, or serviced apartments, with companies looking at buying them for their employees as a “potentially safer option than staying in a hotel”.
Catering to the demands While homes will need to accommodate the new normal, a balance must be achieved between the changing requirements of purchasers and renters, the cost of development, and local price elasticity. “Space and technology come at cost and this will need to be reflected in sales income,” says Rob. However, he believes that there is a real opportunity for earlyadopting SMEs looking to “sell the dream”. Considering the UK has just fallen 47 Jul/Aug 2020
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into recession, will people be able to afford these properties? “That’s going to be a tricky tightrope for developers and investors to tread, as they weigh up what people are likely to want with whether they’re likely to want/be able to pay the additional cost to get it,” says David. He points out that it may be difficult to modify a lot of existing properties in the ways that are required without significant investment. “However, for new properties, it ought to be fairly straightforward, and the diversification of requirements for an area might actually attract more investment in projects, private and public.” Brokers looking to build their pipelines should be looking at partnering with smaller housebuilders and developers— which are likely to be better placed to react to changes in demand in the short term—as well as modular manufacturers, which have a burgeoning opening to increase their market share, and at pace. We could also see a move to more datadriven decision making, using flags such as local buyer demands, age and mobility profiling, to ensure the correct properties are built to match buyer appetite. Toby believes that this could also help to speed up transaction times and improve conversion levels. “Using data such as this, Oparo is acquiring a 30-unit social development in a desirable town where the waiting list is currently 22 years for social housing, and the difference in pound [per] sq ft between social and private housing is nominal. I feel that providing upfront data and transparency to lenders can only help in speeding up and obtaining the best rates for development finance.”
How the specialist finance industry can help Many specialist lenders have really shown their worth by supporting brokers and their clients with funding options throughout the pandemic. As we enter this new era, our lending community will continue to make up a strong part of the funding solution. Chris explains that bridging and, more specifically, refurbishment finance, presents a great opportunity for investors and developers who want to stay one step ahead of the curve. “With future requirements in mind, refurbishment finance provides a quick funding solution to help investors and developers easily cater to changing needs and make design enhancements from day one when purchasing property, whether [it’s] an added alcove or additional room on the floorplan.” However, he warns that due to the outbreak, the bridging market is evolving “rapidly” and lenders are altering their terms
on a regular basis. Therefore, it is critical that property professionals use a specialist finance broker to secure the best product. Hope Capital is already seeing an increase in demand. In June, enquiries were up 189% on the same month the previous year, and nearly 90% of those were for residential properties. “Investors looking to sell on or rent out residential properties need to reflect on what prospective buyers and tenants are looking for,” says Hope’s managing director, Jonathan Sealey. “Bridging finance can enable them to make modifications to existing properties that will boost the value in the long run and increase their potential rental income. We have a new range of products within the Hope Capital custom collection, specifically geared towards the residential market, and we’re confident that we’re going to see continued high interest in these over the coming months, especially with the stamp duty holiday giving investors an extra incentive to bring projects forward.” More brokers have also been approaching Octopus with regulated bridging deals. “Increasingly, these tend to be for borrowers to reconfigure their own home in order to create an improved working-from-home space.” Masthaven Bank has reported a rise in demand for specialist finance, which could be down to borrowers being turned away by high street lenders and now learning about these options from brokers. “This has brought to light alternative forms of finance, such as bridging loans, which many borrowers would not have explored before the Covid-19 outbreak,” says Jon Hall, chief commercial officer and deputy CEO at Masthaven. There are a number of ways in which property professionals can utilise bridging to tailor housing to new trends, such as loft conversions under permitted development to create usable workspaces, to extensions and garage conversions that create larger living areas. These improvements also often add thousands to the value of homes. “Obtaining short-term bridging finance can be a great way to make those home improvements, before approaching a longer-term mortgage provider,” says Nick, “but with the knowledge that that added value could mean a lower LTV and, in turn, lower rates of borrowing.” The demand for good quality rental accommodation is also set to be higher as a result of people who were aiming to get on the housing ladder being furloughed or made redundant. “Specialist lenders have an important part to play here, by making finance available to landlords who can increase the supply of good quality rentals. In some cases, the standard of properties 48
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may have to be improved and the loan size will need to reflect this,” states Paul Brett, managing director for intermediaries at Landbay. For example, HMOs may need additional bathrooms or kitchen facilities. “In the same way that landlords now need to get an environmental certificate for a property when they buy it and HMOs need to have fire doors, it could well be that there will at some point need to be a certain number of bathrooms or kitchen facilities depending on the number of inhabitants in a rental property.” Paul explains that lenders already look at how likely a property is to be rented out when they commission surveys before they provide finance. “The condition of a property and how habitable it is has always played a part in this, but it could well be that, going forward, further elements will be factored in as demand for properties where people can selfisolate if need be is bound to increase.” Criteria expansion may also encompass wider areas that lenders may have historically not considered. Roxana Mohammadian-Molina, CSO at Blend Network, reiterates that alternative lenders are typically happier to lend in smaller cities and towns, which can often fall outside of the comfort zones of traditional lenders, and are likely to become more popular areas to live in the near future. Tiger Craft, partner and CFO at Hilltop Credit Partners, echoes this, stating that it is “critical” that development lenders reevaluate their previous hesitance on lending to developments in the regions “if they are to keep pace with changing buyer demand”. This may mean working with more SME developers and housebuilders that know their areas and markets implicitly, like UTB does. “[These developers and housebuilders] are in tune with new trends and create homes with features buyers and renters are looking for,” says Gavin Diamond, commercial director of bridging at UTB. He points out how Hawkfield Homes, a regional housebuilder in the South West, had started to develop homes ready for occupiers to WFH long before Covid-19 appeared, because they had recognised the emerging trend. “In their view, the pandemic boosted the demand for this type of housing, rather than created it.” It’s clear that this will be a whole new era for property refurbishment and development, which David believes will require “some creative thinking” on the part of banks and bridging loan providers in order to keep up. “Again, having come through this period and with a real appetite already showing itself in the property market, it’s difficult to imagine that lenders won’t look to adapt, and it’s likely that those who don’t will struggle moving forward.”
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Working towards a healthier built environment
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n associate at Iceni Projects, Gill has over two decades’ planning experience under her belt, mostly as a consultant and adviser to developers, resident groups and individuals. Her recent work includes providing planning advice on the extension and upgrade of the Old Ship Hotel in Brighton; as case officer on the St Albans Museum and Gallery Project, which involved major refurbishment to the Grade IIlisted building to extend its use; and consulting on Countryside Properties’ mixed-use development in Maidenhead. “I have worked extensively on projects with a heritage angle, often alongside heritage specialists, advising on projects in conservation areas or affecting listed buildings,” says Gill, in addition to being involved in cultural, education, residential, commercial and energy markets. Having fulfilled a couple of roles within planning departments, Gill is afforded great perspective of both the public and private sectors— something she says is invaluable. Her focus is on development management, the aspect of planning that handles the preparation and submission of applications for new schemes and negotiating with local planning authorities (LPAs). “A key area which has changed over my career is better and more high-quality engagement with local communities prior to the lodging of planning applications,”
I met Gill Eaton when we both participated in a webinar in June and was drawn to her points made around health and wellbeing in connection with the built environment. As we move into an era of urgent progress and the necessity for quality living spaces, I was eager to ask her how planning and development management slot into these objectives
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she highlights. “Many developers are realising the benefit of engaging with local communities and key stakeholders early on and are designing their schemes with broader collaboration. This can greatly improve the process and outcomes and, in my opinion, leads to better developments coming through the system.” Gill believes that this sort of cooperation may have previously been seen as unnecessarily costly and negatively affecting project timelines; in fact, neglecting to collaborate can ultimately result in far more delays overall, uncertain results, and a higher risk of challenge. As a novice when it comes to the primary purposes of the planning system, Gill helpfully summarises the process for me. “The National Planning Policy Framework (NPPF) sets out the central government’s planning policies for England. Its key driver is achieving sustainable development through three main overarching themes: economic, social and environmental objectives,” she explains. Each local authority (there are 343) is responsible for producing a development plan which conforms with the NPPF—it is this plan that dictates how decisions are determined by the LPA. Before applying, there is “strong encouragement” for discourse with the LPAs, locals or interested parties. Once submitted, a consultation phase begins, during which anyone can comment, assessment is made against the development
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plan and other relevant factors, and various professionals—such as environmental health officials—are looped in. After the LPA has determined the application, the decision may be appealed—a process which is dealt with by the Planning Inspectorate. “Another main function of the system is local plan making, where the development plan for the local authority area is drafted and consulted upon, following a strict adoption process,” states Gill. “This document sets the parameters for matters such as good design, housing need, affordable housing “We need to get thresholds, greenbelt back to using the boundaries, and all manner of other considerations planning system relevant to the area and to to create positive guide development for the forthcoming plan period health outcomes (normally 15-20 years).” and prevent Permitted development is a subsection that carries development which exemptions to the typical doesn’t serve planning process and is used to “fast track” parts these objectives” of the system by restricting the matters which councils usually have regard to. The conversion of office space to residential accommodation is a popular function of PDRs and limits planning matters to a much shorter list. Gill divulges that this sort of ‘loophole’ worries some, particularly in relation to the resulting quality of housing. “There is some concern in the industry that certain homes created under permitted development rights have not met the minimum standards which would have been required under a full planning application. A recently published piece of research has concluded that just 22% of the permitted development schemes reviewed met the nationally described space standards.” While the aim was to reduce red tape and enable more homes to be built, Gill is keen to stress the importance of maintaining adequate sizing and light for housing created in this manner. This leads us on to a growing movement that puts ‘healthy’ planning and cities further up the agenda, a cause close to Gill’s heart. In her role at Iceni and as chief engagement officer at PropFit—a not-for-profit organisation which seeks to promote health and wellbeing in the property industry— she represents these views at conferences and events, and has contributed to the work being done by the All-Party Parliamentary Group for Healthy Homes and Buildings. According to Gill, academic research and progress on this topic is increasing, but
slow to reach planners at the coalface. “I agree with other voices in the industry which are calling for a more joined-up approach on this, especially given that the NHS and planning system were founded at the same time, with the latter having a central theme to address the poor public health from overcrowded, unsanitary urban areas characterised by poor housing and living conditions. We need to get back to using the planning system to create positive health outcomes and prevent development which doesn’t serve these objectives.” I press Gill about her opinions on the apparent bureaucracy represented in the system and what can be done to alleviate this. Acknowledging that planning often receives the brunt of stakeholders’ frustrations, she considers that the importance of what is at hand—and the multitude of interests that need to be protected—to be at the root of the issues that arise. “A tremendous amount rides on the outcomes of a planning decision for many parties, be it the developer, investor, person living next door, or the wider local community. Planning and planners tend to be criticised from all sides, but I think this is more because all these conflicting drivers, opinions and desires come into the melting pot when determining a planning application.” Rather than create further technicalities that risk driving standards down, Gill instead thinks that the “chronic underfunding” of planning departments is the fundamental problem and maintains that more resources are needed to keep the system moving—and more swiftly. “It’s interesting that headlines around boosting the economy are very closely followed by the need to change the planning system, no more so than recently,” she points out. “It appears clear that the links between the two are well recognised, yet the calls for adequate funding have largely remained unanswered.” Another area in which Gill would like to see advancement is the flexibility of uses in town centres, which are often subject to very prescriptive, “out-of-date” retail policies. In the wake of the pandemic, the shift away from bricks-and-mortar shopping to online is even more pronounced, and city centres need to have the ability to respond quicker to these changing patterns. At the time of writing, changes to the class use system have just been announced and a planning policy paper has just been released. The creation of Class E, announced in late July and which replaces Classes A, B1 and D, dictates that a building classified as such may be utilised for any purpose within 52
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the new class (referred to as commercial, business and service uses), without the need to secure planning permission (subject to any conditions and legal agreements which may apply to the premises in question). This could materially impact how businesses navigate and adapt to fluctuating markets and greatly boost the resilience of these establishments. This alteration to the is a real game changer and creates a flexibility between town centre uses which we have not seen before. Throughout her career, Gill has noticed a persistent struggle, particularly in the home counties, where housing numbers, needs and green belt allocations are bitterly contested, leading to extensive delays in trying to get local policies adopted. This “hugely adversarial approach” is negatively affecting young people’s options when it comes to homeownership and leaving behind those on lower incomes or people without the means to exercise choice. This can’t be right in a civilised society, so we need to start having more open and honest discussions about how and where new development is going to go, as it’s all our children, healthcare workers, local service providers and key workers who are often being held back. “Our collective, historic approach to objecting to all new development is difficult to sustain in this climate.” Gill accepts that local communities have had to put up with schemes which have fallen short in terms of quality, and that developers need to play their part in delivering change which is positive and benefits these areas. “We need to house our population—and to house them in accommodation which is adequate and achievable, relative to normal salaries. We need to collectively get our heads together to prevent this process taking decades and work out where past changes “Our collective, have caused more problems than they solved, refining historic approach the system so that it is to objecting to all functioning and operational development plans can new development is and be adopted in a timely way.” difficult to sustain Looking at how Covid-19 has specifically impacted in this climate” planning, much like everything else, it has adapted to virtual methods and Gill expects that, in the long term, these means will be merged with public meetings to result in a hybrid system. A positive outcome of this could be that more young people get involved. The emphasis that is being placed on the difference in how people with spacious homes, gardens and balconies have managed
throughout lockdown in contrast to those who do not have such things shines a light on the need for housing that supports good health and quality living environments. Gill warns against unintended consequences when applying changes to the system in an attempt to stimulate progress and notes that this can sometimes be avoided by ensuring that alterations are consulted on. Utilising existing mechanisms that are in place to kickstart projects—such as local development orders and enterprise zones— can often be preferable to widespread changes to the structure of the planning system, which can take time to bed in and experience inadvertent impacts. “Personally, I would like to see strong, clear, government-led policy on healthy homes and buildings incorporated into the NPPF so that health and wellbeing is a much more central pillar. As a society, we should be restricting development which gives rise to unacceptable levels of harm to people.” As to how developers can be urged to follow this, incorporating the principles of health and wellbeing into the NPPF will act as a “powerful incentive”, given hat schemes which uphold these ideals will be favoured. Gill expects support from Public Health England and other organisations demonstrating a focus on building for a healthier life, but encouragement through the NPPF would go a long way to ensuring these good practices are adopted as early as possible. “If, as a result of the pandemic, we were collectively able to bring forward a health-led growth plan to see regeneration of decaying or under-invested urban areas, it could be a real catalyst for positive change,” she says. “Town and city centres already, in the best examples, are an amazing melting pot of culture, heritage, education, entertainment, leisure, community and living uses. But, equally, there are areas where they represent underinvestment, vacant businesses, and left-behind communities. Our town and city centres need to continue being the focus for new development, but perhaps with a more pragmatic approach to land uses and, particularly, car parking. Doing this through the lens of healthy cities, utilising the wealth of expertise in our local communities and stakeholder organisations will create more local ownership. Adopting some radical thinking which is embedded in healthy and community-driven ideas could bring about positive improvements to urban areas, upskilling residents in the process. This sustainable approach to growth could greatly assist in kickstarting the economy and the real estate sector.” 53 Jul/Aug 2020
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Hospitality sector hit hard—but business owners champion resilience It’s 4th July and I am several glasses of Champagne deep at Home House, my chosen venue to break the going-out ‘fast’, and already thinking about which pubs to hit on the way home. For someone who thoroughly enjoys experiencing food and beverage establishments, I have missed this. Without doubt, the leisure and hospitality sectors have been impacted profoundly by lockdown—and they have a long, hard journey ahead, with the stabilisation of our muchloved pubs, bars, restaurants and hotels still relatively unknown. A month earlier, I had set about talking to numerous experts in the commercial finance market about the lending landscape and road to recovery for some of the integral businesses that make up the fabric of our society—and some of our best memories
Words by
caron schreuder
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A one-size-fits-all approach is not the right position to take for any asset type. We hear of other lenders adopting a ‘traffic light’ approach to sectors which can seemingly go from green to red overnight—that is far too binary
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side from the fact that they have been unable to trade since late March, many leisure and hospitality businesses still face the daunting challenge of how and when to reopen, and the substantial cost of doing so. PPE and the requisite Covid-friendly adaptations can set venues back thousands, not to mention the investment that is going into many in order to put their best foot forward when they do open their doors. With less people going out, management teams are pulling out all the stops to attract and retain whatever clientele they possibly can. I believe that if we are going out these days, we want it to count. With meetings and events unlikely to be popular for a while yet, those spaces are being repurposed and any loss of revenue needs to be recouped elsewhere. Corporate travel has also left a sizeable gap in trade, especially for hotels and central London venues. One only has to take a trip into Covent Garden now to realise just how much tourism fuels this kind of hotspot—and how much slower that will take to recover than suburban communities. Support for local amenities—owing to travel restrictions and public sentiment—during the pandemic has been a positive outcome and one which will hopefully see those businesses blossom in the coming months. It has been said that hospitality has been historically slow to adapt to change and that Covid-19 could be considered a wake-up call. We have seen that those which have been able to pivot their offerings have facilitated takeaway or delivery services (sometimes faring more profitably than when operating as a dinein), or, in the case of hotels, have housed key workers and vulnerable people.
“As a global phenomenon, the effects of Covid-19 on businesses when they do reopen will, by definition, involve considerable amounts of guesswork,” says John Mitchell, managing director at Christie Finance. “Operators who were in business at the time may look to previous downturns and the effect on business levels and profitability for some guidance—but this is different.” When furlough ends in October— an initiative that has been nothing short of life-saving for the hospitality sector—unemployment will inevitably rise, leading to less disposable income, overall. Just as the sector starts up again, could this stop it in its tracks? Against the backdrop of the governmentbacked CBILS and BBLS—loans which have consumed banks’ attention for months and which may compound cashflow woes for many businesses in the long term—the future of financing in this market seems precarious. Andy Elley, head of commercial at Mortgages for Business, describes the scene in a year’s time, when this debt is due to be repaid, as potential “carnage”. On the plus side, investment prospects are said to be plentiful (owing to unusually high levels of distressed assets and vacancies), with those who show savvy encountering “a once-in-a-generation opportunity to invest in locations that have not been available for many years,” according to Alasdair McPherson, head of partnerships at Rangewell. There is evidence that acquisitions of pubs and B&Bs are rising because, as echoed elsewhere in this issue, people are looking towards a possible change in values and lifestyle—as well as a safe investment.
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PUBS A mainstay of British life, you might be pleased to read that the pub is not in as much dire straits as some of the other asset classes within this market. But, still, thousands could disappear because of the crisis, with those in town centres and reliant on vertical drinking most at risk.
I am told that, before Covid, there was no shortage of conventional funding for freehold pubs, given that that market was generally in a better place than its restaurant counterpart. Nevertheless, Ed Sandall, division director at valuation firm Fleurets, reveals that the ‘middle tranche’— between £500,000 and £1m—was still “tricky” to fund, despite the emergence of a few alternative lenders in that space. It is this SME space which has suffered particularly, having eaten into working capital during lockdown. “Those [are the ones that] tend to acquire and grow; if that stops, then there are no transactions, there’s no evidence, valuations become hard and there’s no lending.”
Far more pubs are freehold than, say, restaurants, which means that, during lockdown, they had effectively gone into a hibernation of sorts with very few material outgoings (thanks to the furlough scheme). A couple of industry insiders I speak to are not aware of any government intervention or moratoriams in place for commercial mortgages, suggesting that, although overheads are manageable during this period, there is still the matter of debt to deal with. Leasehold operators, on the other hand, have faced difficult conversations with landlords—a theme central to the general Covid-19 fallout—after trade was cut off, making the rent, which is in the region of 12% of turnover, all but impossible to fork out. During a webinar by specialist hospitality recruiter COREcruitment, Neil Morgan, senior director of corporate pubs and restaurants at Christie & Co, shared that he is experiencing a notable increase in demand for its lease advisory services, including restructuring, negotiating on rent concessions, regearing, renewals and dispute resolution. Trevor Watson, executive director of valuation services at Davis Coffer Lyons, believes that landlords are witnessing first-hand what ‘no revenue’ looks like. “…You’ve now got landlords who are sitting on six months’ rent arrears, which is going to create massive tension and problems for them.” He explains that while they can live with a three-month rent gap, they may still have their own landlords and bondholders to deal with. Andy predicts a “mass sell-off of freehold stock” as pub companies without rental income, or which have had to adjust it downwards or extend holidays to keep tenants, struggle. “As part of this sell-off, [they will] most likely [be] sold to developers, as these pubs can often sit on large sites with car parking, which are prime for redevelopment.” Tenants may be offered the chance to purchase their freeholds at reduced prices (certainly not the much-modelled pricing structure of 10 times the rent plus income) and, for those who are opportunistic, there is funding to be had. It is expected that some going concern values will be no higher than the freehold value price or 180-day market value.
I ask Ed to break down how one goes about valuing a pub. The basis is FMT (fair maintainable trade or turnover), defined in the RICS Red Book as ‘the level of trade that a reasonably efficient operator would expect to achieve on the assumption that the property is in good repair and suitably equipped, repaired, maintained and decorated.’ This is coupled with its EBITDA and then adjusted to ensure “that we’re dealing with a competent operator, so it’s not over or under pitched … and then we attach a multiple to it [that proves] trading information,” he explains. Because calculating FMT requires having access to a large database of detailed trading information gleaned from similar businesses, any hiatus in transaction levels—represented in the extreme during lockdown—makes this difficult to assess. Speculation when it comes to serviceability makes lenders understandably nervous. Despite the government having given pubs the green light to open [Ed: for now...], trying to value these businesses based on yet unknown trading levels is extremely difficult. Fleurets ran a survey of 100 SME operators and asked what they anticipate turnover for the next 12 months to look like against the previous year; 68% expected a 25% drop, while 26% thought it more likely to be down by half. “We’ve modelled it out [that] at 75%, you probably break even. At 50% . . . you lose a lot of money,” Ed details. The lack of trading is having a direct impact on the EBITDA element. “So, therein lies the valuation conundrum: do you allow for a period of time where there’s no profit or negative profits, which would deduct from the purchase price..?” Nick Baker, head of intermediaries at Allica Bank—a lender that came up time and again as being particularly active and supportive of the sector during this time—advises that, aside from asset values, valuer commentary around future sustainability of trade is vital, as are fair maintainable operating profit assumptions, given the vastly altered trading environment. “The
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valuation helps us understand what has been achieved historically and how that may change and develop moving forward. Demand and sales periods are also an important consideration where valuer advice remains key,” he states. “It is often the words, not just the numbers, that give us what we need to make sound lending decisions.”
are still unable to go ahead on a sizeable scale, the reopening of these venues is set to be a tough and costly decision. Investor demand for hotel opportunities is still “very strong”, according to John, who divulges that he has seen a pick-up in people looking to enter the small hospitality business market, with these ‘lifestyle units’ just profitable enough to support their living needs.
Almas Uddin, director at Revolution Brokers, is seeing enquiries for pub purchases, however, it is largely with a view to turn them into restaurants or hotels—the ability to convert a large upstairs area into accommodation, for example, will maximise revenue.
His perception of corporate market activity is that it is limited to disposed non-core assets, and distressed deals. “To date, we have only seen a very small number of those in the hotel space, but we expect to see [more] towards the back end of the year or in early 2021.”
Cynergy Bank has been lending, albeit cautiously, and is looking forward to valuation reports that can be fully relied upon. Covid material uncertainty clauses give little reassurance, and valuations coming in at up to 25% below where they were before the pandemic mean that deals done at 6065% could be soon “under water,” says relationship director of hospitality, Steven Crosswell. In his view, the only way we can ease back to those levels is through activity that gives valuers something to work with in the way of comparables.
Almas confirms that appetite from cash buyers is there—and is noticing an uplift in sale and leaseback transactions, where the freehold is bought for cash and then leased back to allow the operator to stay afloat. Many businesses, including hotels, have taken this time to really analyse their strategy, potentially, as Steven considers, emerging much “leaner and stronger”.
Jon Salisbury, managing director at Ortus Secured Finance, believes that assumptions and business plans in this type of lending have always needed to include a degree of “fat”, given the inherent nature of trade and the myriad things that can affect it. This time, it happened to be a pandemic. “We’ve always lent against the vacant value of pubs [because] we’ve always known that everything can go wrong . . . Will we factor [Covid-19] into our decisions going forward? Yes, but maybe not in the way people think,” he continues. “…For every pub that [doesn’t make it], that presents an opportunity for someone else to come in and start it in a different way. Quality is going to really matter.”
RESTAURANTS Something that I was unaware of (because I’m in them all the time), is that the restaurant sector (and casual dining in particular) was struggling even before Covid-19, due to a decline in dining out, oversupply, and general disproportionate rent-to-revenue ratio. In September last year, research showed that restaurant insolvencies were up 25% on 2017/18. The blow that Brexit dealt to consumer spending, coupled with the swathe of businesses that were severely over-extended, culminated in what was already deemed a “crisis”. Further research, also conducted by accountants UHY Hacker Young, indicated that the UK’s top 100 restaurants had made an £82m loss as at Q1 2019, compared to pre-tax profits of £345m two years before.
HOTELS The lockdown on travel—and ongoing public concerns—has hit the hotel business hard. Although it is anticipated that staycations and domestic holidays will see an uplift this summer, most hotels rely on tourism to meet capacity quotas.
Taking this into consideration, the pandemic only sped up the demise of some of the early casualties by a matter of “weeks”.
From January to May this year, regional and London hotels reported revenue per available room as down by over 40%.
High-priced, poor food offerings by outlets that lacked investment to remain relevant is a product of several factors, according to Andy, including the cost of renting premises, increased staffing costs (due to the uplift of the minimum wage), and over-leveraging themselves with the banks.
“Not only has the tourism side of their business been affected, but business meetings and businessrelated hotel stays are likely to remain significantly reduced,” Andy predicts. “People are using newlyadapted methods of conducting meetings by zoom or telephone and this trend is expected to continue, even as things return to ‘normal’.”
Steven recalls that the smoking ban and GFC played its part in thousands of pubs closing— primarily because there were too many of
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them, they were badly run, and uninspired. He suggests that casual dining is experiencing its first, somewhat similar, evolution. It would not be unexpected to see price increases in restaurants as a result of social distancing further hammering the bottom line—something that may come as less than welcome considering the the fact that we are now officially in a recession. The effect of this crisis on restaurants is pronounced due to them being primarily leasehold establishments. However, gastro pubs, especially those by operators who have secured free-of-tie status, may attract more custom, owing to general better value for money and being owner-run. Trevor understands that private equity investment in this part of the market could in fact be “accelerating” but appetite from senior debt lenders is very scarce. A flat trading environment before Covid-19 meant that, aside from some crowdfunders and “choosy” challenger banks, the sector was largely an unattractive funding option. OPPORTUNITIES In June, Allica Bank reported a 400% increase in applications across the business, including from several quality hospitality companies. Nick feels that operators who are not currently supported by their incumbent bankers will naturally turn to alternative options during this time. Expanding on what constitutes a ‘quality’ outfit, a track record of success, demonstrable affordability, and good people, location and product are paramount. Jon speaks about how crucial business planning has become. “…Suppose, for example, Covid never gets cured. Suppose there is never a vaccine, it [is] incurable for the next 10 years—what are you going to do then? Then you’re looking at factors like alternative use, can they sell other assets…?” Given the amount of distressed assets that will undoubtedly come to market, the investment landscape as we emerge from the crisis can be described as predatory, fuelling demand for borrowing in this space. “Opportunities may first present themselves on over-leveraged or creatively-financed businesses; buyers with significant capital to deploy and who are prepared to ‘fix’ [these] may pick up attractively priced opportunities,” claims John. “One particular investor [that I work with] wants a minimum discount of 35% on hotels,” says Almas “…whether he gets finance or not, he can afford to make the purchase . . . and it’s unfortunate the seller’s in that position, but that’s how the capitalist market works and that’s how people make money.”
It’s clear that the commercial broker’s job has become more challenging, taking the additional affordability aspects and everchanging lending environment into account. “You have to put in more effort, 100%,” Almas confirms.“It’s basically not giving up until the last breath, really.” On a slightly different front, Andy sees the holiday let sector as somewhat of an outlier, with plenty of appetite for investment in these properties—even more so now that the SDLT threshold has been increased. “I predict that this sector will boom and, in fairness, [it] has for some 24 months before Covid,” he states. “…With the increase in UK staycations, I expect to see operators or savvy investors piling in.” He also predicts that vacant commercial properties in seafront locations will be converted into holiday lets. “Yield in this sector, including Airbnb, can be upwards of 7-12% and more for the largest of holiday lets.” ON LENDERS “Probably more so now than at any time in 30 years, [lenders] actually want your opinion,” laughs Trevor, explaining that what is happening now can actually be seen as the “nub” of what valuers do. “Sometimes you’re valuing an existing business, sometimes you’re valuing potential.” Because traditional lenders are still reluctant to accept ‘new-to-bank’ business, specialists who will take a bricks-and-mortar view are providing a lifeline for commercial facilities. “We have a number of specialist lenders who’ll consider on an asset basis, rather than on a going concern basis,” Chris says. “These lenders offer short-term debt to a maximum [of] 24 months; after [that, it] would be refinanced with a term lender.” ‘If a business was successful pre Covid, then it will be successful post Covid’ is a lending strategy that Chris believes will form the foundation for robust valuations. He likens the caution being exercised now to what occurred post-EU referendum and remembers how businesses were able to adapt and reposition themselves. Josh Mendez, head of leisure and retail at Rangewell, has in fact been “impressed” with the appetite of lenders looking to support this market, but is witnessing AIPs that are subject to more definitive guidance from the government and trading updates. 62
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“Smart lenders are not approaching hospitality as a homogeneous group; rather, they are taking the time to work out the new trading models for each of the sub-sectors. Lenders are looking for operators who have the experience and ability to modify their business models to take advantage of the new normal, as well as those who will exit from lockdown quickest and strongest.” Nick agrees; lenders should be more nuanced in their attitude to this asset class. “The challenge here is that all hospitality businesses are suddenly deemed to be ultra-high-risk, given the operational and financial challenges brought on by the pandemic,” he comments. “To us, a one-size-fits-all approach is not the right position to take for any asset type. We hear of other lenders adopting a ‘traffic light’ approach to sectors [which] can seemingly go from green to red overnight—that [is] far too binary.” As has always been the case, lenders will look more favourably at loans where there is a significant cash stake that commits the borrower to the deal. John has managed to secure funding throughout lockdown, but admits that lenders want far more detail surrounding the business—profit, loss and cashflow forecasts, plans in the event of another closure, and information around cash reserves to cover loss-making periods, for example. New capital is coming through, and active equity investors may sit alongside debt providers as another way of bridging the LTV gap. Rangewell is working with a growing number of private lenders which have returned to the market now that their minimum yields can be achieved again. Alasdair sees this as a positive development because many of these providers have sector experience and a willingness to be flexible on LTV and covenant requirements. It will be several months before adequate profitability can been measured, leaving a potentially fatal gap for businesses looking to get commercial valuations. Nick considers commercial bridging to perhaps “play a part where a proven operator needs to build trade to the point of terming out the debt with a longer-term lender”. Andy also anticipates that bridging will flourish, as it tides businesses over until the high street banks are comfortable again. “The brave may start to look for commercial bridging loans circa 18 months; I expect to see a lot of this,” claims Andy. “Bridgers who specialise in the leisure sectors will do well—commercial bridging rates from 1.25% per month could be the norm.”
loans that will need to be repaid—could present an affordability issue later down the line. Almas tells me that commercial deals for which he could “always find a home”, now, in some cases, are being sent down the bridging route. “I do always advise clients … ‘you may have to have some cash ready to put money in and we may have to rebridge’”. Ed also believes that, until cashflows stabilise and the high street lenders step back in, operators will need to explore “more expensive debt”. “It wouldn’t surprise me if we saw greater demand for commercial bridging,” confirms Jon. “In fact, if we are heading into difficult times, we are likely to see more demand, generally, in our sector. “The challenge, as always, [is] differentiating between businesses which stand to benefit from short-term finance and those which are delaying the inevitable … lender experience and expertise will be so important.” Trevor points out that some challenger banks willing to lend to new clients are picking up market share during this time, familiarising themselves with the sector and gaining experience. There is a possibility that we may finally see some traction away from the incumbent mainstream lenders as their counterparts build confidence. However, it is considered that a market without mainstream debt or exit options is in peril. How long will it be before viable exit strategies can more easily include a high street commercial lender? Jon reiterates the importance of support from lenders in this space and the difference it can make. “Yes, it is a setback. We’re going to get setbacks; it’s not terminal. It’s not going to destroy you. Lenders have a massive role to play in that ... when we’ve had those conversations with them ... they start getting motivated again. “Now, if you get a business that has gone from perfectly viable to being completely and utterly unviable, you were mistaken in the first place—it wasn’t viable.” “Hospitality business owners are some of the most resilient and creative SMEs I have ever come across,” said Nick. “They will fight hard to rebuild and create new customer experiences that drive footfall and, in turn, their business performance.”
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An historic picture of Guildford high street, Surrey
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Reimagining the high street Words by
BETH FISHER
F
or those who haven’t yet attended an online conference or exhibition, it’s very similar to the in-person experience. You can expect to ‘sit down’ next to old and new faces at a variety of topic-designated tables; instantly strike up conversation through video with those who are already there; see sponsors, panellists and keynote speakers catching up and testing their at-home microphones in their branded VIP areas; and even ‘go upstairs’ to the second floor, sit on your own to make notes and scan through the day’s agenda and delegate list—which the introvert in me did. And just when you start to get into a deep conversation with someone about the latest industry gossip, you are hurried to the main stage—the resemblance to the real deal is uncanny. I attended two information-rich, expert-packed days on the platform Remo, hosted by Alex Harrington-Griffin, CEO at TrustedLand, to discover the current opportunities in the retail-to-residential market, and the effect that ambiguous values in property are having on land prices—two perennial subjects in the property development finance industry. IS RETAIL TO RESIDENTIAL A REALITY? According to Policy Exchange’s programme ‘Liveable London’, it is estimated that there are 1,220 sites, with a total area of 6,122 hectares, on which there are single-storey ‘big-box sheds’ accommodating a range of commercial uses. In May, the think tank published the report, ‘Better brownfield: How we can banish Boxland and create popular, mixed-use neighbourhoods and streets without losing jobs’, which states that these could be redeveloped, retaining all existing commercial functions (and perhaps adding more) while accommodating between 250,000 to 300,000 new homes, forming an “urban pattern of largely medium-rise ‘London-like neighbourhoods’”. In January this year, RICS published an article about changing shopping habits posing an existential threat to bigbox retail parks, and whether their existing set-up made them ideal for redevelopment into housing. With some town
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centres and retail estates often sitting empty and looking ugly, contributors believed that if these areas already had transport infrastructure, it made sense to transform some of them into residences. While there is a push for communityled masterplans—involving housing built in tandem with shops, which could in turn increase footfall for hard-hit businesses—there are concerns that the quick fix to building residential in these areas could result in poor or unsafe homes. So, is it wise to build on the high street? On 3rd June, I tune in to TrustedLand’s fourth virtual conference ‘Is Retail to Resi a Reality?’ in association with OakNorth Bank and Developers Boardroom. Looking at the existing high streets and current retail offering, I, and many SME developers present, am looking forward to finding out where the residential opportunities are, and the complications and challenges that can arise. While lockdown restrictions have eased, it is still unlikely that consumers will be rushing back to shops, pubs and restaurants in the way that they did pre Covid-19—and we’re yet to see the final results of the government’s half-price Eat Out to Help Out Scheme this month. In essence, there has been a major shock to demand, and this could be set to continue. The retail-to-residential discussion point is extremely timely, considering Boris Johnson’s radical reforms to the planning system were announced just weeks after the conference was held. These new regulations will give greater freedom for buildings and land in our town centres to change use without planning permission. Under the new rules, existing commercial properties, including newly vacant shops, can be converted into residential housing more easily, in a bid to kick start the construction industry and speed up rebuilding. I first listen to Chris Price, director of property at development company Open Vu, who starts the event by interviewing Alex Price, CEO at real estate investment management company Fiera Real Estate, on what he thinks has changed in our towns and how they will be approached in the future. Alex claims that retail to residential only made up a fraction of the new units which came through the permitted development [PD] system in 2019. He believes that this was partly due to the resistance from councils to lose some of the high street in their local areas.
Positively, this thought process might be starting to change. Alex thinks that councils could be happy to see some regeneration in particular areas, highlighting the Debenhams store in Guildford as an example, which sits on the edge of town and will therefore cause little disruption. “…It’s next to the river, the railway station, the high street … it makes sense therefore to turn this to residential and still be left with a decent profit,” he says. He also points out the benefit of vacant possession (VP). “It’s a single tenant and when they go, you’re free to do what you want. So, as a developer, if you can get access to VP, you can get access to your business plan.” The main takeaway is that we need to rethink our high streets and how we want our city centres to look. “Whether you do it through PD [or] the normal planning system ... we need to stand back and say, ‘What do we want our city centres to [achieve]?’” He explains that there will be six or seven million more people in the UK in the next 20 years. “They’ve got to go somewhere.” In an article written by Anna Ward, associate senior research analyst at Knight Frank, she believes that development proposals will ultimately go beyond the model of re-providing retail spaces— which have historically been supermarkets on the groundfloor of a residential scheme—and will instead adopt more innovative designs to create homes in place of or alongside existing uses. “Key to the design process is establishing a phased approach to allow continued income and avoid having to pay existing tenants to break their lease,” she noted. James Keegan, partner at Knight Frank, claims that the majority of retail centres are underutilised and, by creating residential through innovative design, both the asset value and risk profile are improved. “Often, build to rent is the preferred residential tenure as it can be retained and generates an income stream much like a traditional commercial asset. We are also beginning to see more industrial companies looking at ‘beds over sheds’ which has huge potential. Given the market is relatively quiet now, it is the perfect time to undertake the necessary feasibility studies.”
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HOW RESIDENTIAL COULD IMPROVE THE VITALITY OF TOWN CENTRES It’s been widely reported that the high street has been suffering for some time, with both major and independent retailers struggling—mainly due to changing shopping habits and travel patterns, in addition to shifting leisure activities—and lockdown is inevitably exaggerating this trend. On the other hand, residential developments are said to be flourishing in these areas. However, The Social Market Foundation (SMF) notes, importantly, that potential changes to urban spaces, in terms of introducing more residential, could risk exacerbating income inequality. “Reduced commuting costs will benefit white collar professionals, while those working in retail face widespread job losses,” highlights Scott Corfe, research director at SMF. Its report, ‘A new life for the high street’, recommended that the introduction of a nationwide program of repurposing city and town centres that would see vacant retail space converted into residential property, could, under conservative assumptions, create 800,000 additional homes. It does suggest, though, that tax incentives are offered for firms moving into these parts, contingent on the hiring of local employees—particularly those that have lost work as a result of economic change accelerated by the coronavirus crisis. While reimagining some of the outdated and unworkable retail space into residential is clearly a no-brainer, we have to remember that town centres are integral to provide services for local communities and offer a place for people to meet and spend their free time. Quality homes need to fit into the high street environment and avoid being detrimental to the businesses and people that already exist there. Rebekah Jubb, partner at Bell Cornwell, believes that planning plays a key part in how the high street can adapt. Policies have traditionally sought to protect primary shopping frontages, with A1 retail use being top priority. “…Other uses outside the A-class, such as offices, leisure, and residential, have often been frowned upon, particularly at groundfloor level in town centres,” she says. “But I do think that approach is changing in response to the demands of the planning system, it’s got to seek to find ways to ensure that policies don’t result in the long-term vacancy in the shopping area, and that is something that we are seeing increasingly at the moment, with
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very well-known brands failing, small shops unable to keep going, and we’ve got to look at a way to change that.” Since the conference, the government has announced a complete overhaul of the Use Classes Order—which was introduced back in 1987—and is planned to come into effect by September. It amends and simplifies the system of use classes in England, and creates a new, broad ‘commercial, business and service’ ‘Class E’. This incorporates the previous shops (A1), financial and professional services (A2), restaurants and cafes (A3) and offices (B1) use classes. Gyms, nurseries and health centres (previously under D1 and D2) and other uses which are suitable for a town centre are also included in Class E. Therefore, a building used for retail could be permanently used as a café or office without requiring a planning application and local authority approval. However, pubs, libraries, village shops and other types of uses will not be covered by these flexibilities. The National Planning Policy Framework has changed over recent years, and Rebekah points out that its wording is positive and welcoming of these adaptations. “It talks about encouraging local authorities to define a network of hierarchy of town centres, promote the long-term vitality and viability by allowing them to grow and diversify in a way that responds to rapid changes in retail and leisure industries, and allows a suitable mix of uses, including housing.” Increasing footfall and flexibility in these areas must be the priority going forward—not just to thrive, but to survive. One way the government has encouraged change is by the extension of PD rights, which removes the need for planning applications, often making it a much quicker and cheaper process. However, there are still criteria that need to be satisfied, such as transport, contamination of flooding and the desirability and impact of such changes, and even the design and appearance of the final building. In the past, restrictions were sometimes placed on properties by councils under Article 4 directions to prevent changes of use taking place. However, with the reform of the Use Classes Order, and the impact of lockdown being felt both financially and socially in the retail sector, this may be curtailed. She claims that a positive aspect is that the ‘prior approval’ process when using PD doesn’t seek to control the internal and amenity space of
residential units that would otherwise happen during normal, full planning applications. It also allows for more flexibility around cycle and car parking requirements. Therefore, she feels that there are lots of opportunities on the high street for creating mixed uses, which will result in those living in town centres “supporting the economy and enabling sustainable travel”. WHAT MIGHT A HIGH STREET FOR THE FUTURE LOOK LIKE? The design and reinvestment in high street buildings could also pose an opportunity to improve the appearance of a lot of ageing town centres. Later in the conference, a panel discussion is chaired by Alex Fox at Cushman & Wakefield, along with Paul Farr at C7 Architects; Lita Khazaka at Studio LK; and Tina Patel at Formed Architects, to help us visualise the potential of these areas. Just getting your hands on a string of retail assets and thinking you can add tens of flats on top is clearly not always the case. Fox urges the importance of “architectural schematics” in order to explore whether an opportunity actually exists. As an agent, Fox says that when advising a landowner what to do with their asset, the key element is to demonstrate flexibility. However, valuations are unlikely to be rebalanced until there is reasonable evidence in the market to suggest they should— such as legitimate rent changes. “That will impact on the investment value, which will impact on the decision to develop, or to hold,” he adds. Cushman & Wakefield is developing a change-of-use model, based on over 100 data points, which can predict when, what and how assets will be redeveloped. A sliding scale will show the number of residential units, how much mixed-use space there will be, and when the alternative use value stretches above the existing use value. The architects start talking about shared and private amenity space being explored in the retail-to-residential schemes they are working on and Alex Harrington-Griffin—who once rented in a large development—explains to the panel that he used to get frustrated with the “goldfish environment” where no one used the communal space, as there were no private areas. He questions whether, in a post Covid-19 environment where people are more carefully considering their personal space, we will see more privacy
incorporated into these going forward. Fox is adamant that there needs to be a fundamental shift in the way that housebuilders deliver apartments and densities, and how land uses work. “I’m not convinced that apartment living is going to be the way it was yesterday,” he says, adding that some amenity space in these schemes is not necessarily appropriate, and believes a lot of developers will be going back into planning to change some of their projects which they are now nervous about. Lita feels that we need to start looking back at clues, in order to go forward. She claims that a lot of these problems started in the post-war era when modernism came into play, and not much thought went into the human body and condition, or what we really need. While the theory for these was well intended for that time, many of these estates have since been knocked down. “I think it’s really [about] going back to the great London squares that we have, the areas for food growing, the allotments… Even the way we design streets, that you can actually sit comfortably on a bench, or bump into someone and have a chat … those sort of niches have to be thought about a lot more carefully going forward,” she says. Fox mentions the Kings Hill scheme in Kent as a prime example of great placemaking and reimagining how town centres and homes can coexist. Having taken a landscape-first approach when it was crafted, it has embraced its cultural heritage and continues to review and refine its social and physical infrastructure, so that it will work for generations to come. It has been built so that it’s easy to get to local shops by foot, thanks to greenways and footpaths leading to the heart of the village, with supermarket chains, shops, pubs, restaurants and healthcare facilities all nearby. While I don’t think the high streets will be replaced by residential buildings, it is clear from this particular conference, and many changing attitudes, that evolution is inevitable—and hopefully this will mean residents will have more reason to visit the shops on their doorsteps, all while fuelling the economy and having better places to live.
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How land prices have been impacted by Covid-19 The next TrustedLand virtual conference, entitled ‘SME Land Prices & Funding Opportunities in 2020’ is on 8th July. This topic piqued my interest as I had often wondered how developers, brokers and lenders manage to navigate existing and future purchases during a time of uncertainty—especially around valuations. James Gerrard, co-founder of Restoration London Group— currently with £112m in GDV under construction—talks to Ben Barbanel, head of debt finance at OakNorth Bank, which, at the time of writing, has lent £282m since lockdown, about the changing lending market. James starts by asking Ben whether he is optimistic about the sector, if the bank’s appetite has altered, and what he has witnessed in terms of valuations. Ben explains that the dynamics and fundamentals of the residential market remain, as the imbalance of supply and demand is still there. “…Therefore, everything I am seeing, everything I am hearing, is not about price reductions,” he confirms. “I haven’t heard any horror stories; I’m not even seeing the cheeky bidders, to be honest,” he adds. He also believes developers buying land aren’t experiencing any real softening of attitudes when it comes to price. Is Ben’s opinion reflected in the valuations that the bank is seeing with regard to loan applications? He concedes that valuers have a role to play, and insurance and reputations to look after. “…Who’s incentivised to put their neck on the line and [stick their head above the] parapet? No one.” To assist, OakNorth does a lot of its valuation work in-house. It looks at comparable data sets, some of which are its own, in addition to extensive research and a Red Book valuation, as this can reveal comparables that OakNorth hasn’t picked up on itself. When talking about the contractions in LTGDVs in recent months, Ben highlights that OakNorth—which has an average LTGDV of around 60%—looks at every deal in isolation and is not a fan of a headline offering. “To me, that shows a bit of naivety towards the property market,” he says. He believes that having expertise in local areas and dynamics in terms of supply and demand, construction costs, labour and supply chain Cont p72
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TrustedLand, in association with OakNorth Bank, asked its conference attendees three key questions about their priorities, expectations and restrictions going forward
What is your key priority for funding in the post-Covid market?
Open credit
11.1% process
Speed
16.7% Development
16.7% understanding
Flexible terms
55%
Bridging & Commercial Magazine spoke with Ben Barbanel, head of debt finance at OakNorth Bank, about the data, and how specialist lenders can support developers in this unusual market. As a develoopment lender, what are you doing to be more flexible during and after Covid-19, and what are you offering specifically? BB: During these unprecedented times, it’s important as a lender to continue to support viable British businesses and provide flexible debt finance packages. That means doing video site inspections to ensure drawdowns continue to be made on time by the bank, and that no delays are experienced on site. We have continued with our speedy approach to new business lending; from first contact with the borrower, we’ve been able to approve and complete deals within a few weeks. One way in which we demonstrate our flexibility is by structuring facilities that provide some equity release to the borrower from sales, as opposed to making the developer wait until the last unit is sold and the bank is repaid in full. This, in turn, helps the borrower reinvest the money into a potential new property transaction. What are your thoughts on the expected increased monitoring and scrutiny from development lenders? And how could this impact developers and their schemes, as well as lenders’ current and future resources? BB: At OakNorth Bank, our credit analysis and monitoring technology has always allowed us to take a granular and forward-looking approach to credit underwriting. Our analysis has only slightly changed to include sector-specific Covid-19 scenarios, which enables us to proactively monitor and assess the borrower’s needs. This level of insight means the developer gets a second set of eyes and ensures the contractors or builders are adding value. It helps strengthen our partnership with the borrower, as opposed to a traditional bank and developer relationship— lots of our clients [meet] with us before agreeing to move forward with the deal. Uncertainty in the market will always create new opportunities. Due to our proven ability to transact, execute and the speed at which we complete deals, we’re really well positioned to assist our borrowers with these opportunities.
What do you expect to change most from lenders post-Covid?
Increased
20% monitoring
Lower LTV’s
48% available
Increased
32% security
What restricts you most in buying stressed or distressed land and assets? Market
4.3% uncertainty
Access to quality deals
Confidence
21.7% in funding
69.6% Lack of
4.3% time
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Cheaper costs need to be considered with caution; if the projects end up not being feasible as a result, is there breathing space for both the developer and lender attached to that scheme? 72 Bridging & Commercial
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availability, for example, enables lenders to look at deals on an individual basis. After a networking break, attendees are ushered back to listen to the main panel discussion—chaired by Jeremy Leaf, the former RICS residential chairman— which includes Lucy Greenwood, director in residential research and consultancy at Savills; Rupert Driver, senior director of residential valuations at CBRE; and Jon Neale, head of UK research at JLL. Last month, Savills published a report on residential development land in Q2 2020, which found that Covid-19 has slowed transactions of development land “significantly”. However, it made the point that while land values remain relatively stable at a national level, there is a greater focus on renegotiating and extending payment terms and structures. Moreover, the demand for strategic land and longer-term opportunities requiring less upfront expenditure has continued without interruption during lockdown. Lucy added to this, saying that values had fallen at headline level by 1.1% for greenfield land across the UK in Q2, but it had seen drops of around 5% on deals in areas where more transactions are happening. She reports that Savills has typically seen payments being extended across the board. “So, instead of just deferring [for] a couple of years, they might be deferred over another year on from that.” She says that distressed sales are not happening yet, but she claims there is appetite for them. “Some [land deals] have fallen through, but, generally, no one has seen anything of that scale at the moment.” WHAT WE CAN MAKE OUT OF PROPERTY TRANSACTION DATA—SO FAR The June 2020 RICS UK Residential Market Survey found that the housing market is showing initial signs of recovery but respondents remain cautious about the year ahead. Government boosts will eventually come to an end, and the SDLT holiday will only be around until 31st March 2021—which could distort market transactions and keep lenders less than comfortable for longer. Looking at the commercial market, Jon says there has been a “definite fallback” in terms of deal velocity, with Q2 showing the lowest in volume that JLL has got on record—which dates back to the late 80s. “We’re definitely seeing investors pivoting towards what we call longincome products,” he adds, such as a property let on a 25-year lease to a
supermarket or major corporate. In addition, logistics and alternatives, such as data centres, are in demand. Jon explains that there is a lot of American private equity money currently looking for distressed assets, particularly in the retail space. “…They’ve been looking at the retail market for some time now, but the values haven’t got [to] quite where they want them to be,” he says, predicting that in 2021 we will start to see that crystallising. Valuers have been including Covid-19 material uncertainty clauses in their reports, due to the unprecedented scenario, and Jeremy wonders whether lenders and buyers can rely on these valuations—something which has caused limited criteria until finance providers have more clarity. Rupert states that the clause is there to “point out the obvious”—we are in an uncertain environment and, simply, less weight can be attached to valuers’ opinions than previously. “It’s not there to say that values are being suspended pre-Covid … we are doing our very best to look at other data points in the absence of land sales to form an opinion,” he adds, stating that they are advising—particularly among the lending community—that valuations could potentially be reviewed more regularly. Since the conference, the RICS Material Valuation Uncertainty Leaders Forum (UK) has recommended that using this clause may no longer be appropriate for some types of residential property and land in England, such as C3 dwelling houses and C4 HMOs (small, shared houses occupied by between three and six unrelated individuals). This should hopefully provide some reassurance to the lending market. There is also ambiguity when it comes to the cost of materials to build out development plans—seeing as many of these come from overseas and supply chains have been halted, backlogged and slowed down. Before Covid-19, RICS forecast that building costs would rise by almost 20% over the next five years. The price of construction materials was expected to increase by 3-4% per annum over the same period. Rupert claims that, over the last five or six years, we have already seen “considerable” cost inflation. “Clearly, the initial impact that the pandemic has had has been less on costs, but [more as a result of] development sites having to be closed because of social distancing measures,” he explains, while strategic land with civil engineering works
(with workers typically at distanced proximity) would have been less affected than urban apartment sites, which were closed for quite some time. “…[Due to the] construction industry [slowing], we might see contractors becoming more competitive again with their tenders to keep their businesses going,” he adds. This could in fact balance the outlay that developers are faced with going forward—but cheaper costs need to be considered with caution; if the projects end up not being feasible as a result, is there breathing space for both the developer and lender attached to that scheme? Nikhil Patel, managing director at Flamingo Investment Group—an attendee at the conference—speaks with me after the event about this particular problem. “The idea of businesses lowering their prices/margins to drive more revenue over the coming months/ years is going to be across the board, not just for contractors,” he says. However, he believes contractors will need to be careful. “Many of them already work on single-digit margins,” he says. If they cut them too fine in order to generate business, it could lead them to go under.” The impact of overly competitive building and materials pricing could cause some contractors to go bust, creating a domino effect where the developer may end up with a site that can’t be built for the cost they planned for, and a lender left waiting for their money to be returned. And this problem is not limited to the UK. Recent data on the US construction market from Turner’s Building Cost Index showed that, for the first time in 10 years, construction costs have reduced. Many developers and builders source their materials from overseas and will need to ensure that the companies they procure these from are stable and will be able to deliver. In addition, they must also consider supply chain problems and any backlash from Brexit— because, yes, that is still a thing. It seems that while we wait for the emergence of genuine market data involving land and property values and transactions, developers, lenders and brokers need to ensure that when they are assessing future development prospects, they are careful to pre-empt all potential scenarios and avoid projects being geared too highly. If an opportunity sounds too good to be true, it probably is.
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Explained
Why receivers must be ‘agile’ in the coming months This year saw disruption in many parts of the sector, calling for workarounds and entirely new models of operating to tide transactions over in these most unusual of times. Property possessions are captured under a list of proceedings that were stayed by the courts during the pandemic to allow forbearance in those circumstances where lockdown has impacted borrowers’ ability to service or exit their loans. We sat down with Daniel Richardson and Edward Gee, partners at CG&Co—a firm which specialises in property receivership—with a view to understand what is happening in this oft-overlooked bit of the market and its impact on lending as a whole
Explained
L-R: Edward Gee, Daniel Richardson
Explained
Another factor for lenders to consider is the ‘opportunity cost’ of money. By having funds tied up in problematic loans, lenders are unable to lend them on to new borrowers”
In the wake of Covid-19, how will property receivership evolve during the rest of 2020?
How can brokers and lenders be best prepared for the postpandemic era?
DR: We’re working through an uncharted era of change but, as the much anticipated ‘new normal’ gradually takes shape, property receivers can still be engaged, and different appropriate actions remain open [and] have the potential to ensure the best possible outcome for all parties. These are intended to [make certain] that recoveries are as far advanced as possible, even though it has been difficult to arrange face-to-face meetings due to Covid-19 restrictions. This has been accomplished by entering into discussions with borrowers at the earliest opportunity via web-based platforms or telephone calls and, where possible, by issuing pre-action correspondence and possession proceedings online. In short, it’s vital for receivers to be highly proactive and agile in the coming months. Maximum transparency must also underpin every decision that’s taken; the need to be absolutely crystal clear with borrowers about what’s happening during this difficult time is imperative. This will [make sure] that borrowers do not incorrectly assume that no enforcement can take place at present—simply because the courts’ part in proceedings is stayed. The reason for this is simple: this approach will ultimately expedite the swiftest possible resolution at the right point in time. Given the underlying economic conditions, it is inevitable that there are going to be an increased number of defaults—not least because Covid-19 made it initially impossible to get valuations carried out to support refinances or sales. But, at the end of the day, lenders simply have too much to lose by not taking the swiftest recourse, and we are aware that many have been actively talking to their customers about this issue and discussing extensions and refinancing options.
EG: Lenders must remain as customer focused as ever throughout these exceptional times. Otherwise, there’s a risk that they could alienate clients which will, in turn, make brokers’ roles far more difficult when ‘normality’ returns. For borrowers who find themselves in default, there remains a real need for open dialogue from lenders at the earliest opportunity—and to subsequently maintain this level of communication. Another factor for lenders to consider is the ‘opportunity cost’ of money. By having funds tied up in problematic loans, lenders are unable to lend [them] on to new borrowers. To my mind, this means that there’s now an even greater incentive for lenders to recover more difficult loans as the rates on new lending appear to be increasing in line with market uncertainty. The courts will resume hearing repossession cases from 24th August 2020, although it could feasibly be extended by the government if further Covid-19 clusters emerge. It’s worth stating at this point that any lender authorised or regulated by the FCA needs to follow the regulator’s guidance and avoid either commencing or continuing possession proceedings until 30th October. Nonetheless, proactive receivers are currently working tirelessly on behalf of lenders operating in the unregulated market by issuing claims, in full knowledge that they’ll be stayed up to 23rd August. And there’s wisdom in this approach. The court system is likely to become stretched extremely quickly once the [pause] is lifted, and those cases with the appropriate paperwork in place will be the ones that progress [quicker]. Ultimately, this should mean that these loans are the ones that get returned to lenders in the shortest timeframe— and that’s good for everyone.
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Explained
Should lenders and brokers adopt a bullish or cautious approach right now?
When it comes to repossessions, what should lenders’ plans be for the next few months?
What have been your key observations since the pandemic took hold five months ago?
DR: It’s essential to remember that the economic fallout from Covid-19 will ultimately end—and it’s equally important to keep looking for opportunities beyond the current uncertainty. While some lenders understandably adopted a cautious approach to lending at the height of lockdown, it’s been heartening to discover that others have been actively growing their loan books during the crisis, taking advantage of the increased lending opportunities on offer. As ever, what’s right for one will not be right for another.The approach invariably comes down to each individual lender’s attitude towards risk. In my experience, recovering the value of a property in the current market is predominantly dictated by its inherent qualities and location. What’s more, while many valuation reports are now lower than they were pre Covid-19, this can still potentially be factored into the risk associated with a short-term bridging loan. In other words, there’s no reason why lenders still can’t lend to the right borrowers, on the right properties. However, there will always be occasions when things don’t work out. It’s stating the obvious to say that the pandemic is currently impacting receivers’ ability to obtain possession of property, but the sale process has not been barred by statute or court procedures. The taking-of-possession aspect of receivership might not be as quick as it [was] pre Covid-19, and this is unlikely to change over the next quarter.
EG: A starting pistol will ring loud and clear when the stay is lifted. At that point, we estimate that hundreds of possession and enforcement proceedings will be scheduled for hearings in courts across both England and Wales. This [will be] accomplished [as a result of] entering into discussions with borrowers at the earliest opportunity. At CG&Co, we’ve continued to actively collaborate with borrowers throughout lockdown by seeking voluntary agreements while keeping them fully informed about the potential consequences of them suspending any moves towards repossession. Everyone has had to find a different way of working together. . If lenders intend to bring a possession claim as soon as the stay is lifted, they need to make contact with borrowers in advance; write to confirm when the term of the loan will expire; what the debt is; make [sure that] the broker which initially introduced the deal is aware of the situation; and consult lawyers about what actions can be taken. Throughout this process, lenders need to be absolutely clear with borrowers about the ongoing costs that [they] are accruing.
DR: Since lockdown began, there has been an immense amount of speculation about what will happen to property prices. At CG&Co, we’ve continued to achieve pre-Covid-19 valuations on any property we’ve marketed during the pandemic, safely returning funds to lenders. This is true for both properties that we were able to obtain possession of prior to the pandemic commencing, as well as for others—including investment properties— where we were appointed after the stay was implemented. On these occasions, we were able to continue obtaining rental incomes while subsequently selling those properties as an investment. We achieved this by working with all relevant parties and ensuring they were effectively marketed. These results—again, dependant on the location and quality of each property—are also a statement on the level of assessment made by lenders at the underwriting stage of the loan. [It also proves] that it’s possible for receivers to continue getting the right results if they adopt a persistent and proactive approach, despite what’s widely regarded to be a highly unpredictable market. My other key observation concerns the stay on possession and enforcement proceedings; since it was introduced on 27th March, it hasn’t necessarily proved to be as restrictive as might have first been anticipated. We’ve found that the stay has directly resulted in us seeking—and achieving— more consensual arrangements with borrowers, by ensuring we use every means at our disposal. Video conferencing and working with process servers to assist with documentation has allowed us to convey the importance of early engagement. And that’s good news for borrowers which start regaining control of their finances, as well as the lenders which recoup their loans. It remains to be seen whether this will continue post-pandemic but, at CG&Co, we’ll always try and achieve the most appropriate resolution at the earliest opportunity, regardless of the prevailing economic conditions.
When the stay’s finally lifted, it’s essential that lenders can demonstrate to the judge that they’ve done everything possible to work with borrowers while simultaneously ensuring that procedures have been followed to the letter of the law” 79
Jul/Aug 2020
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Limelight
a glimpse into the extra-curricular activities the industry has taken up (or mastered) during lockdown
1 Who: Guy Harrington – CEO at Glenhawk What: Shrin Yoku, aka the Japanese art of forest bathing Level: I’ve been doing it for five months, read a few books—I’d say I’m advanced What you love about it: The peace and tranquillity of being deep in nature 2 Who: Tracey North – head of business development at Hope Capital What: Crocheting Level: I started crochet lessons in late 2019 with a local group and, during lockdown, we continued meeting on Zoom calls where I received a lot of support to progress with the creations; I’d say I’m at the intermediate stage What you love about it: It helps me to relax and I enjoy producing things for others 3 Who: Paul Henson – partner at Irwin Mitchell What: Painting and drawing Level: Beginner; started during lockdown and no formal lessons since school (which was ages ago…) What you love about it: Relaxes my mind as I become immersed in what I am doing and allows me to wind down after the working day 4 Who: Sophie Mitchell-Charman – sales director at LendInvest What: Horse riding (my horse is called Solomon aka Solly) Level: I first sat on a horse when I was three and never looked back. I can do dressage, show jumping, cross country, hunter trials; we would probably have a go at anything, although he’s a little large for gymkhana games. Working from home has meant more time riding as I am not travelling to and from the office What you love about it: The freedom, the exercise and especially the adrenalin. It gives you time out in the fresh air to get away from everything else. Solly is a massive softy and I love how he makes a tough day evaporate away 5 Who: Beth Fisher – editor-in-chief at Bridging & Commercial Magazine What: A serious case of green fingers Level: I have been working on my vegetable, herb and flower garden since the beginning of lockdown, and have successfully grown cucumbers, courgettes, strawberries, aubergines and eight different types of chilli pepper. Learning from my grandparents, I have managed to propagate and grow numerous types of rare pelargonium, and am now interested in taking a course in botany! What you love about it: Watching something turn from a flower into a vegetable the size of my forearm is pretty spectacular. I also highly underestimated how much science goes into gardening; it’s not just about deadheading and weeding—pruning is a PROCESS 6 Who: Natasha Yea – director at Next Route Finance What: Wakeboarding Level: I first tried it in 2012 on cable, however I properly started (seasonally) behind the boat a few years; intermediate What you love about it: It’s exhilarating! I love extreme sports because of the challenges they bring and I have always felt a sense of freedom on the water 7 Who: Bilal Ahmed – CEO at Offa What: Football Level: Enthusiastic amateur What you love about it: It keeps me fit and makes me feel young
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8 Who: Paul Edwards – finance director at Ortus Secured Finance What: Playing the guitar Level: I first started playing at university (inspired as a child by Back to the Future). When I joined the real world, I found I had less and less time to practice. Recently, 15 years after playing my first chord, I have found myself picking it up again and learning some new tricks What you love about it: What is great about the guitar, or indeed any instrument, is that you will never learn everything. There are always new techniques to try to add to your repertoire, irrespective of ability. Personally, I like that it is a hobby which requires my full attention; it is a great way to switch off from the day to day 9 Who: Michelle Dean – senior relationship manager at Peritus Corporate Finance What: Walking and cake Level: Before lockdown, my husband and I could manage 10 miles if feeling energetic. During lockdown, we built it up slowly and now anything less than 20 miles doesn’t cut it (obviously with a cake stop somewhere) What you love about it: Being outdoors in all weathers (summer has been interesting weather wise), finding new walks, getting fit and healthier and feeling ‘normal’ in a time of so many restrictions… 10 Who: Wayne Lee – BDM at Hope Capital What: Canoeing Level: Beginner What you love about it: The peace and quiet on the canal, as well as the exercise 11 Who: Robert Simpson – director and head of fund monitoring at Artal What: Vegetable gardening Level: My four-year-old daughter got the idea while watching Cbeebies in May. Luckily, I had some spare timber in the shed to build a crude frame, we nabbed some soil from the end of the garden and we were off! What you love about it: Watering and weeding has formed a fun part of our daily routine with the kids, even if they do occasionally soak me with the hose! It’s also got them eating their greens which has historically been challenging. Cannot recommend it enough—pass me my flat cap! 12 Who: Roshini Lal – marketing co-ordinator at Avamore What: Sketching Level: I have been drawing since I can remember, but it’s something that I subconsciously neglected as I started travelling and socialising etc. Lockdown has given me the time to refocus and reconnect with art and it was a great way to occupy my idle time when I couldn’t spend it with friends and family. I’d say I am on the border of intermediate/experienced What you love about it: You start off with a blank piece of paper and an image in your head that doesn’t look like much and, as you work on it, you see it grow and evolve into something that you’re eventually proud of—it’s very rewarding 13 Who: Scott Marshall – managing director at Roma Finance What: Table tennis Level: I’ve been playing since the age of seven, and got to county level so supposedly an expert. I still play weekly in local leagues What you love about it: Age is no barrier, so I can still be beaten by people of both 18 and 80 years old
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Backstory
‘Abnormal’ doesn’t faze us The new senior business development manager at Octane Capital—who made her move to the specialist lender in March this year—discusses the surreal experience of joining a company during a global pandemic, the get-up-andgo energy you find at a smaller finance provider, and how technology has enabled her to be more productive Shrena left Kingston University in 2005 with a BSc Hons degree in Information Systems to become a business manager at Barclays. She spent just over three years at the bank, managing a portfolio of high-value clients, before joining Santander. After spending nearly a decade there—where she supported SMEs with growth capital funding in sectors such as retail, wholesale, hospitality and leisure—she moved to challenger Shawbrook as a BDM in mid2018. There, she helped provide property finance for businesses and individuals in London and South East England. With her wealth of experience, Shrena was approached by a recruiter for a senior role at Octane, a lender she thinks has the right environment to thrive—even during a pandemic. Why did you decide to join Octane? I was immediately interested, given Octane’s unrivalled reputation in this space and the general buzz around #3rdgen lending. Jon [Samuels, CEO] Mark [Posniak, MD] and Matt [Smith, director of credit and risk] are genuine disruptors in the short-term lending industry and I was glad to have the chance to work alongside them, see how they operate and help them continue to grow an exciting company that always seems to do things a little bit differently to everyone else— that really appealed to me right from the start. I see Octane as a challenger to the challengers. What are the key differences you have experienced so far? It is a close-knit and hugely agile team that is absolutely phenomenal at solving problems and coming up with solutions. No loan is too complex or beyond its skillset. It’s basically done everything, and it shows in the way it effortlessly negotiates road bumps and overcomes obstacles.The culture is clearly different, too.There is an energy and a get-up-and-go [attitude] that you simply don’t find in bigger lenders. It is a really challenging but very rewarding environment to work in. What I would also say is unique is just how connected the sales and credit teams are, which works really well for brokers when it comes to paying out deals. What’s been the best and worst thing about joining a new company during lockdown? Starting at a new company is always slightly surreal, but doing so during a global pandemic when the entire economy is in lockdown is surreal with a cherry on top.The worst thing, probably, is the fact that I’ve not been able to spend quality time in the same room as the rest of the team at the same time, or go for a drink after work with them. Saying that, the technology we’re all using today means video chatting is not far off the real thing. In some respects, starting a new job during lockdown was helpful as [it] forced us all to think about the new ways in
which we must operate.Thankfully, the entire Octane team has been helpful, and I was made to feel right at home from day one. How will you be helping Octane to continue to grow, albeit in an abnormal market? Hopefully by building and consolidating its introducer base, which, as you will know, is the role of any BDM within short-term lending. I’m not out to reinvent the wheel, but rather use my own contacts (and, hopefully, skills) to bring more brokers into the Octane ecosystem. Effectively, I’ve been tasked with spreading the word and putting more deals in front of our superb risk team. As for the market being abnormal, I think Octane thrives in exactly this kind of environment. Jon, Matt and Mark started their last company at the height of the global financial crisis, so abnormal clearly does not faze them. In fact, I’d go so far as to say it brings the best out of them. Why did you decide to join the specialist finance market after your time at Santander? Specialist finance, or certainly the type offered by Octane, forces you to think in a way that simply never happens within a high street lender, and even some challenger banks, which inevitably have to rely on more formal and regimented systems as they mature and grow. You are required to be agile and entrepreneurial, not process driven.You get to think outside the box rather than simply tick it, and that’s hugely attractive to many people, including myself. What one thing does the industry not know about Octane? I think there’s a perception that Octane, like many other bridging lenders, is quite formal and corporate. The truth couldn’t be more different. I’ve never worked in such a relaxed and informal environment; people wear whatever they feel comfortable in, are trusted to get on with the job, and get to work in a very flat structure. In many specialist lenders, there is a clear and rigorous hierarchy but, at Octane, it feels like everyone is equal, just with slightly different roles. 84
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How did you spend your very first pay cheque? This is testing my memory, but I think my first pay cheque went on my one2one mobile phone bill—I do love to talk Most memorable moment from your time in the industry? The referrals and recommendations I receive due to the service I provide is overwhelming What meeting venue have you missed the most during lockdown? The Ned on Poultry, convenient and central What is your favourite industry event of the year? B&C Awards, obviously What new-found hobby have you picked up during lockdown? Two live workouts a day, every day since lockdown Dream job— if you weren’t doing this, what would you do? Have my own bar on a beach somewhere exotic!
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