Short Term Property Finance Update | Market Trends & Case Studies

Peter, you have 20 years experience plus within the financial services sector. Can you tell us about your experiences prior to joining Glenhawk and what is it about Glenhawk that led to you wanting to join them?

– It’s a few more years than 20 to be honest but I started with Barclays, then a stint at RBS, I then joined a brokerage, after I fancied a bit of a change. That was a couple of months before the crash so that was great timing to become a broker! I stuck that out for about four years and then I joined Shawbrook. I was introducing business to them as a broker, they’d just started looking to expand their sales team and it just seemed a great place to go. So, seven and a half years at Shawbrook as a BDM, covering London and the Southeast, which was great, and then out of the blue I got a phone call from Guy (Guy Harrington at Glenhawk).

They had just set up, they were looking for someone established on the BDM side, so I had a conversation with them, with Guy and Nick, and just really liked what they were saying. Where the company was, what their visions were, how they thought that I could get involved and help with that and it just seemed a great opportunity. I have been here just over two years now. We’ve got more staff in but it’s very much a family. They listen if there are issues, if there are suggestions, it’s all taken on board. Some are actioned, some aren’t, but that’s the nature of the beast but it’s just great to be part of it. Everyone wants to get deals in, get deals done, get them out the door and then get them repaid as well, which is some of the fun. It’s just a great place and it’s a buoyant market. When you have got people that want to do deals, then I think that’s a massive plus.

What has been the biggest change you’ve seen in the bridging and mortgage sector over the past few years?

– I think the biggest thing is it’s become mainstream which is great. Back in the day, it was very much I would say last resort. It was used by people with generally bad credit because they couldn’t get finance elsewhere but now it’s mainstream. It’s something that certainly property professionals, which we see, it’s a way of them making money, adding value to the property. It’s quick, it could be a bit quicker with all the various challenges with the process, but it is still quick money and if you pick the right lender, which I think Glenhawk is one of those, we look after the client and make sure that the journey is as smooth as possible for it. I think that’s the main thing is mainstream, so a lot more awareness about it and it’s competitive. With the number of lenders out there, the pricing is getting cheaper, but as we know that’s not always the ultimate driver, it’s guarantee of money. So, mainstream and competitiveness.

Bridging loan applications for the year to the end of June 2021 were 26.9% higher than applications in the year to the end of June 2020 and there’s also been a reduction in the number of loans in default and number of repossessions, so two aspects to this next question. Firstly, Why do you think the bridging market is achieving those kinds of figures? And secondly, what’s your take on the current state of the bridging market?

– Okay. I think I kind of touched on it before that it’s mainstream. It’s awareness. There’s now a lot more brokers that are aware of what a bridging loan is and how it can be used and how it can be used as a solution for their clients. I think the quality is better, we’d say it’s more property professionals that are using it, and also I think the regulated side has probably seen a bit of a jump on that, which is something Glenhawk entered last October. That’s a big market with chain breaks, especially at the moment with prices being competitive, the chains do break down, unfortunately. But also, people want to add value to their main residences or what they’re buying and sometimes a bridge is the right way to do that rather than going straight into a mortgage. So, I think just awareness, and also the fact- pricing. I think it comes into, probably the same answer for both questions, it is more readily available, it is cheaper, so it’s a bit more attractive for people.

Great place to get stuck into some real-life examples and issues clients face and what solutions may be available out there. So, for instance, we saw a case recently where a client developed residential units and was running out of time to sell them with the existing development finance partner who wouldn’t extend or increase the loan. So, if someone was in that situation, what are their options? What are the sort of underwriting considerations, what exits are considered and acceptable?

– We see a lot of them. People call them developer exits; some people call them marketing loans. As you say, it gives someone the time to sell their properties at market value rather than having to drop prices, discount, reduce the value of them. It gives them the time to sell or to refinance.

So, we had one a couple of weeks ago. A customer had built three new houses and had also converted an existing house into some flats. They sold one of the houses, they’d refinanced the flats onto buy-to-lets and they had two other houses left. They had another project with the same development lender, but the development lender wanted the money back before they would lend them for the next project, so we came in at 75% of the open market value, which is what we lend on residential, which gave them a bit more cash and it also gave them another 12 months to sell the properties. I think one of them will probably be redeemed very quickly because I think they’ve exchanged, but it just worked out perfectly.

I would say from an underwriting point of view, we look at where the development is, obviously we pay great attention to the valuation. What’s the demand like for sale? How long is it going to take? Is the sale price realistic? If they’ve been on the market, then why haven’t they sold? So, are they priced too high? Do we need to get that down?

So those would be discussions we’ll have with them but a lot of it will come down to the client’s net wealth, asset and liability position, and the valuation. Is it realistic?

Whatever term they are after, sometimes people will ask for a three-month term and realistically the sale isn’t going to happen.  With something like that we have the ability to either retain the interest or the client can service it, so there are ways of making the loan size work. But you find that quite a few developer exits are a lower loan to value. People aren’t always looking to take all their profit out, so I’ve seen a few 50 per centres, even less than that. You just redeem what they’ve got already so they can move on to the next one.

Turning to HMOs, many believe HMOs will continue to grow in popularity over the coming years. We’ve seen many cases where clients are looking to purchase property, refurbish it, and then sell it as an HMO and not necessarily keep it to rent out the units for want of a better phrase. Before proceeding, what should the client consider initially? What are the underwriting considerations in a situation like that, where you’re looking to purchase a property, refurbish it, and then sell it as an HMO? And what are the exits considered unacceptable? Is selling it as an HMO acceptable to you?

– I would say there are quite a few things that a customer would need to consider when they’re looking to do a resi-HMO. Is planning required? Can they do it under permitted developments? If so, great.

Is it in an Article 4 location where there’s a restriction by the local council in that you can’t change a residential to an HMO under permitted development? The schedule of works is important on any refurbishment or conversion project. Is it realistic?

There’s lots of talk about, the cost of materials which have gone up over the last 18 months so that’s something, again, we would ask a valuer to review and depending on the level of work, we may want an asset manager or a quantity surveyor to review that and monitor the project.

I think licencing, the rules have changed over the last 12 months. Minimum room size, how much space there needs to be for communal areas. So, there’s a lot for a first-time person to look at and consider and I think for us the broker is important in that journey as well because they will help the client and make sure that they’ve got the right team behind them or involvement in the project.

Underwriting considerations. Have they completed some refurbs or conversions before? If they haven’t, it’s not the end of the world, but we would want to understand who’s going to do the work, who’s going to monitor it, to make sure that it can come within timescales and within budgets as much as you can.

I think the exit is really important. Yes, a sale is acceptable. Refinance we’d probably see more as an exit because most people will convert a house to an HMO for rental yield rather than for capital value.

Now what the underwriters and the client and broker would need to understand is the exit. Is it a lender? They switch it to a buy-to-let, are they’re going to do it on an investment value, so a rental yield? Or is it going to be on bricks and mortar? And that can come down a lot of the time to, Is planning needed? If it is, let’s say to change from a four-bed house to a seven-bed HMO. You’ve got planning, there’s value within that planning and therefore the rental is probably more achievable in investment value.

If you’ve got someone that’s bought a three-bedroom house and converts it into a five bed HMO because they’ve used the reception room or a front room and made it into a bedroom, shared facilities, is someone going to pay an enhanced value for that? Probably not because they could probably buy it as a three-bedroom house down the road and do the work themselves.

So those are the sort of things that I think most brokers would discuss with the client and certainly from discussions I would have on inquiries, those are the sort of things that we would want to bottom out early to see whether it’s something we can assist with.

With second-charge bridging loans, sometimes they can appear quite complex. Often we’ve been reading they can be used against the main residence but for commercial purposes. So as an example, you might be buying a commercial building, converting it into apartments to sell, etc. Is this something that you’re seeing a lot of? And also, can you go through an example in practice of that?

– We see a good amount of second charges. Now for us, we can do a second charge on the client’s main residence or on any residential property. So, we probably see more second charges on main residences and as you say, for commercial or business purposes.

Now the business purpose, it could be to physically invest into a business, it could be that the clients are property investors, therefore that is their business so they’re using that second charge to go towards maybe buying or refurbishing other assets.

The couple of examples we’ve seen recently is where we had a client on new build properties, and it was one that I was being a bit cheeky and asking if we could help with, but Nick and Jamie, said okay we have never been asked that before, but actually why not? It was a client that needed to repay development finance and they were arranging a CBILS loan but there was a limit on the amount of the CBILS loan, so it left them about 600,000 pounds short, so we did a second charge.

It was secured across three assets, three houses, and the original CBILS loan was virtually repaid from the sale of the first. So, we were then left with a very small second charge on two nice assets, so that worked really well. But it was a scenario I wasn’t sure we could do.

The other ones we can look at are more where someone doesn’t want to put cash in towards a project, so they would rather use an asset. And again, these are property professionals.

Cash is king in every walk of life so people will give us a second charge on their main residence or on other buy-to-lets, which means we can fund a hundred percent of the purchase price and potentially the refurbishment costs as well.

So apart from a bit of stamp duty and other associated costs, they’re not actually spending hard cash on it because as I’m sure you’re aware investors are looking for deals and projects all the time. So, if they can keep a bit of cash that they can put down on something to hold it, then they would rather do that than having to arrange the finance. So, second charges is a good market for us, and we can go up to 70% of open market value.

Peter, in respect of commercial premises, say I was looking to purchase a commercial property, I already have the tenants lined up, they’re in place and my plan is I want to refinance with a term lender, say, in a year’s time, 12 months. Is that doable and what happens if I lose those anticipated tenants? Say for whatever reason, they just can’t come in.

– We look at a lot of commercial property and semi-commercial as well, so again, we can go up to 70%.

We’re happy with it being vacant or with it being let or about to be let, so it doesn’t make a difference to us from a lending point of view.

We again would look at the valuation, so what’s the valuer telling us the demand is like to let that property. So, if they say you should let it within three to six months, your tenant pulls out, we’ve got a 12-month term, then we’re pretty confident that you’ll find someone.

And again, we would look at your experience as a client. Do you have other commercial property? What other tenants do you have? What other assets have you got in the background? That sort of thing.

I think what we’ve seen, or I’ve seen the last few weeks is a couple of commercials where we’re actually lending off, again, the investment value. Similar to the HMO we talked about earlier, one of them had a “Boots” as a tenant, big commercial, had eight years left on the lease.

So, we were happy to lend off the investment value rather than the vacant possession value and in that instance, it was about a 300,000-pound difference so the client loved that. They were putting less cash in towards it. There are others where you might have a tenant or a lease that’s expired or is about to expire so the bridge will allow you time to renegotiate that lease or get a new tenant in place.

We’re seeing a few where, with the permitted development changes, people are looking to maybe convert offices or storerooms upstairs into residential so again you need to renegotiate on the lease. The bridge will give them time to do that and if they need to get planning it gives them time to get planning, which they can then come back to us potentially and we could raise the finance against the enhanced value with planning and also lend them the conversion costs up to about 65% of the end value, GDV.

Commercial is becoming more and more prevalent and I think portfolio landlords are looking at other ways of diversifying from standard residential, whether that is HMO, whether that is commercial, and everyone is looking to add value to a property.

There are very few people that want to buy something that’s finished and complete unless you’re going to live in it. But if you want it for an investment, if you could go in and spend some money and add value to it, get your rental, it’s happy days for everyone.

If a property developer or mortgage broker wanted to get in touch or learn more about your products and services, Peter, how would they go about that with you?

– The best thing is to give me a call or drop me an email. So, my email is pt@glenhawk.com. There is a generic lendingteam@glenhawk.com as well, which will hit the sales desk and also all the BDMs. So, there are five of us covering the country and we would then put that person in contact with the local BDM to discuss the inquiry, or someone can give me a call on my mobile, which is 07464 202 157.