The UK’s troubled property market could benefit from peer-to-peer exchanges such as the one offered by Relendex. Such systems could provide some much-needed lending capacity
The banking crisis in the UK over the last few years has created a problem for the real estate market. With an inability to get loans, borrowers are struggling to secure and retain properties. Banks have been constrained by the need to clean up their balance sheets, meaning they have been reluctant to sanction the sort of loans so prevalent during the pre-crisis years. However, demand for investment properties is still there and needs to be funded. Step forward Relendex (Real Estate Lending Exchange), a unique business that aims to fill the gap left by the banks by bringing together lenders and borrowers in a secure marketplace.
Describing itself as a peer-to-peer (P2P) exchange, Relendex provides a platform where those seeking financing for property investments will be connected to a number of lenders, who will each bid to provide a part of the whole loan. Relendex claims its system will be “faster and more efficient” than a traditional bank loan, offer lenders better returns and competitive rates to borrowers.
The idea of P2P finance is something that has taken off over recent years. Companies such as Zopa, Funding Circle and Prosper.com have sprung up to fill the funding gap, offering platforms that allow people to lend to each other directly without the need of banks. These services tend to be more geared towards consumers and small businesses. There has not, until now, been a platform specifically tailored towards commercial property loans.
Speaking to CEO and co-founder Michael Lynn, it’s obvious the enthusiasm he has for the business. He believes the opportunities are vast for a new entrant in the property lending business. The state of the market is such that investors are not receiving decent returns where the base rate in the UK is only 0.5 percent a year, while banks are reluctant to offer loans with interest lower than six percent a year and with conservative loans to value (LTVs).
Implications facing the UK lending market, such as ‘slotting’, are likely to be the catalyst for the biggest structural change in property lending over the last 20 years
With a reported £293bn of outstanding banking debt secured against commercial property and approximately £120bn required to be refinanced over the next three years, the pressure on the industry to find new sources of lending is great. A study by De Montfort University discovered that there had been a 13 percent drop in the number of banks willing to increase property lending this year compared to 2011.
Peter Johns, Chairman of Relendex, says that “the situation is further exacerbated by £46bn of CMBS loans (commercial mortgaged back securities) most of which mature over the next three years. Since there are no new CMBS loans being written in Europe now, all of the assets secured against CMBS loans will have to be refinanced from other sources.”
Lynn says a shift is happening in the banking industry, which presents opportunities to alternative lenders. “The disintermediation of the banks is inevitable,” he says. The model of their business is being called into question, and their balance sheets are getting in the way of transactions causing lending rate constraints and logjams.”
The banks are struggling to restructure the now distressed debt they placed before the crisis, as well as trying to come to terms with new capital restrictive regulations like Basel III and the FSA’s proposed “slotting” initiative. Savills’ head of valuation, William Newsom, expects the situation will cause a massive shift in how lending is carried out. “Implications facing the UK lending market, such as ‘slotting’, are likely to be the catalyst for the biggest structural change in property lending over the last 20 years.”
Lynn says: “The EU and UK regulators work in mysterious ways. On the one hand Basel III imposes tighter lending constraints on banks whilst actively encouraging lending by insurance companies and pension funds under Solvency II. The Bank of England and FSA think the banks’ calculation of credit risk on existing loans is inadequate and the level of regulatory capital they allocate using their own internal model is too low. The banks are therefore being told that slotting will apply. This means they will have to slot (categorise) their loans according to the FSA’s criteria rather than their own. Inevitably more conservative than the banks’ internal models, this will result in even more capital being set aside and will result in further reduction in lending capacity.
“Meanwhile, insurance companies are being told that if they own real estate assets they must make a 25 percent reserve against the possibility of a fall in value, whereas if they lend against commercial real estate they need make no reserve against a loan up to 75 percent LTV. Understandably, the banks are unhappy with the inconsistency of this approach.”
There are, however, still a number of lenders in the market. These include large insurance and pension funds looking for a medium to long-term fixed rate secure income. Indeed, major insurance companies like Aviva, AIG and Prudential have all begun to step in to offer property funding. Similarly, Legal & General recently agreed a £121m loan to UK student housing developer Unite.
Platform for success
Aviva’s David Skinner recently spoke of the industry’s enthusiasm for property investments, telling the Financial Times: “Given the prospects for returns in other fixed-income instruments, such as gilts or asset backed securities, real estate lending looks good on a total return and a risk adjusted basis. It stacks up in its own right in a market where margins are exceptionally good because of what the banks are doing.” Relendex believes its platform offers these insurance firms, as well as private investors, the opportunity to obtain healthy returns. Whereas the larger insurance companies and pension funds have the expertise and manpower to execute loans themselves, many of the smaller institutions do not. Relendex provides the platform, evaluation by a leading investment bank property-lending arm with an excellent track record, deal flow and a servicing capability. These are attractive features to a number of institutions.
The system will be similar to the Zopa model, in that it will be run as a Dutch auction. A borrower’s property will be evaluated and then placed on the website with full due diligence completed. Once approved, lenders will be able to make loan offers, and the lowest rates will be selected. The rates will be dependent on the market, but are expected to typically be between five and eight percent. The loans will be non-recourse and secured on the property, and come in the form of senior debt, mezzanine debt, and bridging loans.
The senior debt will be up to 65 percent of the property valuation secured by a first charge, while the mezzanine debt will provide an additional 10 to 20 percent of the valuation, secured by a second charge on the property.
Lynn says the proposition is attractive because it offers competitive rates set by the market. He says the service will also be more transparent, as the bids will be visible online as they are made, and thus the rates will be more democratic: “Like water, the rate will find its own level.” Relendex will also provide a variety of risk opportunities for lenders, allowing them to spread their resources among a number of lending propositions and build a balanced portfolio. He also hopes that Relendex will become an authoritative source of market information, and plans to publish regular statistics on the website.
The use of uniform standardised loan documentation, online execution and a faster, cheaper process than banks can offer, makes Relendex’s offer unique and compelling in a sector starved of debt funding
However, Lynn does not believe that Relendex is in direct competition with the banks. He says there is an opportunity to work with banks that are burdened by their loan books by helping to relieve some of the debt. “The banks are very focused on reducing their loan books right now. In the discussions we have had they have told us they will offer very attractive terms to take over some of their lending positions. If the numbers work for lenders and property owners we will be pleased to provide the marketplace for refinancing to happen.”
For sourcing borrowers, the national firms of investment agents and auctioneers will be an important source of quality borrowers. They expect to have a number of strategic alliances with these firms. On the lender side, they will be working with institutions, wealth managers, family offices, HNWI and the wider public over the internet.
Getting the right people
The team behind Relendex has a wealth of experience across the property and finance sectors. Co-founded by property entrepreneur Sam Rosen who set up property company Burford Holdings before handing over to Nick Leslau, the team incorporates specialists in lending, finance, risk management and software with experience at a number of prestigious institutions. Chairman Peter Johns was previously head of banking at NM Rothschild and was in charge of the banks’ property lending business. Co-founder Michael Lynn is a Chartered Accountant, formerly with Deloitte, who has UK investment bank Corporate Finance and real estate experience. “I had European responsibility for realising a large portfolio for a bank (now part of HSBC) in an earlier banking crisis, so I am inherently conservative in my approach to lending.”
Director Mark Shipman is a founding Partner of London investment agent Michael Elliott LLP, which has had around £20bn of real estate sales since their inception. Shipman will be responsible for introducing potential borrowers to the business through the immense number of contacts he has made during his career in property investment agency. As Shipman points out, “the use of uniform standardised loan documentation, online execution and a faster, cheaper process than banks can offer, makes Relendex’s offer unique and compelling in a sector starved of debt funding. I have a number of clients looking for funding against good quality assets. As soon as the exchange is live, I will be introducing them to Relendex.’
David Benson, Vice Chairman of Risk & Regulatory Affairs at Nomura Europe will bring his expertise in risk management.
At launch, Relendex will have up to 10 full time employees, a number that will soon double once the first transactions start taking place in late autumn of this year. The company plans to outsource loan evaluations to a property investment specialist. That firm, which can’t yet be named, will use its own tried-and-tested system of evaluating loan applications.
While Relendex will never hold cash deposits from the public, merely acting us a platform for the deals to take place, it is eager for as much transparency as possible. Although commercial property lending is not a regulated activity, Lynn says they will be regulated under the umbrella FSA-regulated Real Estate Associates, which will act as trust manager and operator. A major North American bank will act as trustee.
Other P2P lenders in the UK, including Zopa and Funding Circle, have set up the P2P Finance Association, which aims to ensure a set of industry standards and best practice. However, there are no firm regulations in place for these companies, and Relendex believes that by working closely with established financial institutions under the FSA umbrella, it can provide a more transparent and secure model.
Relendex’s plans for the future are ambitious. Rosen says: “Based on the interest we have received from institutions, family offices and wealth managers we see there being no shortage of lenders through the exchange. Most P2P lenders seem to have difficulty finding enough good loan propositions. We do not expect that to be the case with commercial real estate lending. Our modest UK target is £450m of loans in three years but as we increase loan sizes this figure is expected to increase rapidly. Once the platform and process are proven, this model can be replicated in many territories.”
Expanding the model overseas is something the company is interested in pursuing eventually. It has already received interest from Hong Kong, Singapore and Malaysia, but is focusing on the UK market at the moment. Overseas expansion will depend on the regulatory environment, as well as the demand for real estate investment.
It is clear that the property market in the UK is in an uncertain place. New entrants are needed to pick up the lending slack left by banks and to help reinvigorate the market. If Relendex is successful, we may well see a very different real estate market that allows lenders to directly reach borrowers, free from the troubles of the banking industry.