Last year was a busy one for Mutual Finance in the real estate debt market. During 2016, we arranged about £700m of drawdowns on behalf of our clients.
With this level of exposure to the lending market, we quickly become aware of changing trends in lending patterns. One thing that was blatant last year was the increased volumes and sophistication of non-bank lending platforms.
We have seen a significant number of non-bank lenders become established in the commercial property sector, with more than 50% of the business transacted by Mutual Finance in 2016 completed with non-bank lending platforms.
Bank debt has been the traditional source of financing within UK real estate for the majority of transactions requiring a financing component. However, since 2007, bank lending has become more restrictive. As a result, for debt-backed purchasers to optimise their options they have sought relationships with a range of alternative institutional and professional lenders, financiers and private equity houses alongside traditional banks.
While at first borrowers were perhaps nervous of moving away from traditional banking options, this is certainly no longer the case.
They are now embracing the new alternative lending market and using its various components across their capital stack. There are non-banks willing to lend up to 85% loan-to-value with mezzanine, senior and junior tranches.
What has made non-banks attractive? A number of factors seem to be giving them the edge over their banking counterparts.
Since the banking crash, there has been a distinct change in banks’ attitudes towards risk. Despite the sustained ultra-low-interest-rate environment we find ourselves in, banks remain wary of property. This has opened the door to competition from others.
But it is the willingness of non-bank lenders to make deals happen that sets them apart from normal banks. Essentially, non-banks are funded by cash from many sources, all of which aim to achieve a preset IRR or income hurdle. This reflects the safe nature of the UK lending market.
With this weight of expectation on investors’ minds, the non-banks have a greater sense of urgency to deploy the funds. They are very much of the opinion that they must ‘use it or lose it’ when it comes to the fund.
However, this speed is not without regard for risk and credit matters. Non-banks have robust systems that explore in-depth property matters. Typically, decisions are made exceptionally quickly and commitments provided that can be relied upon.
This is refreshing news for borrowers who have become accustomed to the lengthy timescales that banks work to. Bankers are often buried under the bureaucracy of various committees and compliance matters that stifle their ability to act fast.
With legacy issues still prevalent in bankers’ minds, the attitude of bank lending is more based on a cautious ‘don’t lose it’ philosophy that seeks not to create bad debts.
It is not the bankers who are to blame but the processes and restrictions that they work within
Therefore, greater time, process and due diligence is imposed upon lenders, which slows down completion times in scenarios where bank debt is obtained. It is not the bankers who are to blame but the processes and restrictions that they work within.
The frustration of working in a bank has caused many well-respected bankers to jump ship and the non-bank lenders have welcomed their expertise and professionalism.
I guess bankers will see the marketplace become more and more competitive and should be increasingly wary of the new kids on the block.
I wonder what the lay of the land will look like this time next year. Will the non-banks be seen as the cheaper, more efficient alternative?