PCD Club Podcast Interview with Jimmy Baillie of Arc & Co on Property Finance

David: Good morning everyone and welcome. This morning we're recording a podcast with Jimmy Bailey who is from debt finance specialists Arc and Co who are based in Mayfair in London and we've got a few questions today, talking about current state of Prime Residential lending market, about bridging, a whole range of different things, arranging finance for non resident clients. So we'll hope to have an interesting conversation today, good morning Jimmy.

Jimmy: Morning David.

David: So first to kick off, everyone always wants to know about the state of Prime Residential property in London, and from your perspective on the lending side can you give us an overview on the current state the market in London?

Jimmy: It's no secret that obviously this sort of high end residential market in London is a bit flat at the moment, so obviously that does reflect in how the banks look at these transactions.  In terms of the finance market, there's definitely less on the purchase side, but there's a lot on the refinance side and the equity release side. Rates are still low, bank lending rates are still low so it is business as usual and these banks are very keen to lend.

Jimmy: One of the most important things we're finding with these transactions is to make sure that any sort of down valuations in properties don't really hurt the deal from the start, so I think it's very important you have a good relationship with valuers and some of the top valuers in London.  You can quite often get a comment on the value of the property in the way that they see it going before you actually instruct the valuation or even get the deal going, so that does help clients a lot.

These properties are all bespoke in nature, non standard, so where the banks are currently pulling back on loan to value slightly because of the liquidity issues on that end of the market at around 60 to 65 percent loan to value. Good lending rates are available, as long as you get all your ducks in a row, you make sure you're firm on the value of the property at the start, you know it really does solve a lot of issues moving forward.

David: And how to best approach the financing of new build properties. I mean a lot of Asian investors would look at properties in London, for example in Docklands, how would you approach that from financing side?

Jimmy: Yeah, obviously the trick there is that they've got the old assignable contracts situation there, so quite often with lenders nowadays, especially with these new build properties, it's the trick of balancing the actual current market value with the purchase price.  Especially with these types of deals you get an Asian buyer, and the contracts have been flipped the once, twice, maybe three times and then they've got the offer accepted and they come to you at a late stage to arrange finance. So once again the valuation is very important here. We have relationships with a couple of very good private banks who will actually look at the current market value even though the contracts have been assigned a couple of times.

Jimmy: It's important to look at the profile of the client there too. But navigating that is quite important, or once again working closely with the valuers, the relationships we have in London is very important in trying to sidestep those issues. Most high street banks will require you to hold the property for at least six months, so that's quite a restrictive issue, but as long as you do select the right banks and you do make sure you have the valuers lined up before the time, it usually is a problem that we can solve. And we do quite a lot of those at the moment, as you can imagine.

David: So on the broader point of just dealing with non resident investors, as someone who might live in Dubai or Hong Kong buying property in London, are there broader things that you tend to pick up and work with on these clients?

Jimmy: Yeah, we see quite a lot of that. The majority of our clients are all based offshore. The most important thing there is really aligning the clients expectations with that of the reality and the market at the moment. I mean, things change quite a lot in London, so you need to obviously make sure your client is prepared and they understand that.

Jimmy: When you go into some of the local private banks or even the Middle Eastern private banks, with the London branches is, as opposed to the high street banks where they would be more looking at your income and expenditure, with these types of clients we can move it to specialist private banks. They will look at the client as a whole and they will be less focused on your bog standard income and expenditure analysis and they want to look at the whole story, so it creates a lot more flexibility for clients with complex income streams.  They really help and it's important to make sure you go to the right bank for clients like these.

David: I know I can go have a lot of expertise around bridging, I mean how are you seeing the innovation for clients looking at short term financing for their property investments?

Jimmy: Well, this is obviously quite a hot topic at the moment. I mean, the short term bridging market has really has exploded in the last couple of years. I mean, there's so many new entrants into the market you struggle to keep up sometimes. Every month there seems to be a new lender. But, there's a lot of opportunity, and a lot of flexibility and there seems to be a lot of liquidity and a lot of cash in the market looking for good deals. So whereas previously people thought of bridging as a bad name, it's important to know that there are a group of private banks out there who do look at the bridging and who do offer bridging at very good rates.

Jimmy: We've got a couple of private banks who will actually look at bridging for the right client around three percent, three and a half percent all in, something along those lines. It's, for example, you've got banks like HSBC and Barclays pulling out of Russia, some of the Eastern European countries, so you've got clients who've had facilities with private banks like HSBC and Barclays, they've come in off those facilities, they're looking to refinance and their client, for example it could be a Russian client, he's found out, "Oh no, I can't refinance anymore. What do I need to do?" So quite often these cheaper, short term facilities are very useful and this can give the client enough time to either sell the property or refinance elsewhere. So this is obviously quite a useful tool and I think we're seeing more and more people come into this market, especially as it just seems to be more and more competitive as time goes by. And that naturally drives prices down.

Jimmy: So you're seeing private banks coming into that market and they seem to be changing things quite a bit for on the positive side.

David: Great, well thanks Jimmy. If you have clients who are looking at investing in property in London, either new builds or super prime or they're looking at refinancing options, please do reach out. Jimmy, I'm sure, would be delighted to hear from you. So thanks a lot this morning and I appreciate your time.

Finance for CIS clients

Since the implementation of increased sanctions from the west, clients resident in CIS region countries certainly raise challenges for us when helping them to utilize the full potential of the current credit market.  Weak local CIS currencies, increasingly strict regulation policy and limited appetite from lenders to finance those clients means access to cheaper finance is narrow or non-existent.  Despite this our CIS desk has placed more than £500M in finance.

Arc & Co. is a specialist in assisting CIS clients.  Over the last 10 years we have helped our clients access the best available products in the market tailored to their particular needs in terms of gearing level, pricing and duration whilst taking account of circumstances like nationality, residency, the source of wealth, types of the underlying asset and the client’s income.  During an initial phone call, based on our experience, we can predict what is achievable for the client in the current market conditions. We can assist in cases of short time frame, ongoing loan term expiry, lack of liquidity or the lender particular jurisdiction/asset policy change through to giving advice in cases of debt structuring like refinancing, acquisition financing or equity release.

Starting 2018 with continued growth

The start of 2018 is proving to be as busy as the end of 2017.  In addition to the many smaller deals that have completed this month, the £11.3 m loan for a large redevelopment in Reading is a great way to start the new year.  As we look forward to the year ahead we welcome Jeremy to the Arc & Co. team.  Jeremy is the first of several new hires that will take place as we look to not only grow the team but also to expand the skills and experience within the company.

Jeremy is a highly accomplished property lending professional with direct corporate acquisition and ownership experience over a 28 year career including spells with lenders UCB Bank Plc (a then Paribas subsidiary) and PLT Ltd. Success in residential property development and commercial investments as both owner and lender give him the expertise and understanding to provide the outstanding level of advice and service that clients require in today’s marketplace.

Review of 2017 and the year ahead

2017 is coming to a close and despite a troublesome financial market, Arc & Co. have had another successful year. As a team we have organised and structured over £450m of loans.

Although the headlines suggest a volatile market, there has been an increase in the amount of liquidity available and the majority of funders are still keen to deploy money into both development and investment transactions.

We have arranged 70 loans across the capital stack throughout the year, ranging from a 17.5% LTV investment facility on a central London property, up to 95% LTC/75% LTGDV on large residential developments.

Please find below a list of products we put in place throughout 2017:

·         Development & conversion loans throughout the capital stack

·         Bridge loans to purchase

·         Bridge loans to purchase, rolled into development facilities

·         Development exit bridges

·         Investment loans for purchase or refinance (in many cases releasing capital for re-investment)

·         Bridge to purchase and stabilise, rolled into long-term investment money

In 2018 we hope to do much of the same using our expertise in structuring real estate loans for all areas of the market.  If you have any transactions in the pipeline for 2018 that you would like to discuss, please make contact.

Nick Holding-Parsons

Nick is a professional debt advisor specialising in structured asset finance for UK and international clients. In the time Arc & Co. has been running, it has built strong relationships with a wide range of different funding lines to suit our clients' specific property transactions, whether it be development or investment projects. Unlike your typical advisor/broker, we do a great deal of underwriting in-house which means we can quickly find the best solution for our clients.

Tel: +44 (0) 20 3205 2129
Mobile: +44 (0) 79 7350 632
Email: nick@arcandco.com

Market Update

Up until the last recession, developers would normally structure their debt with traditional Senior banks like Natwest, and if they needed higher leverage they would add mezzanine finance to sit behind the senior loan.

Since 2008, the traditional senior lenders have either retrenched from the market or become a lot more conservative on allowing the developer to structure mezzanine behind them. This has resulted in the emergence of new lenders who have the ability to provide whole loans, or ‘stretched facilities’.

These funders, who typically have mandates from institutional funds or family offices, have now gained a sizable market share and are becoming the market norm. These lenders will lend up to 90% of total cost at a rate of around 10-12%. If you compare that to the traditional method and calculate the blended rate of the senior loan, usually at 6% and the mezzanine loan at 16%, the blended rate is in the single digits.

We can clearly see that the market is now swinging back in favour of the traditional way of structuring and as the market becomes more competitive, rate compression is likely to
happen. On top of this, the market is seeing more willingness from senior lenders to accept mezzanine to sit behind them.

The most important part of the deal is not always the price; it is about completing the deal in a timely and cost-sensitive manner. Traditional structuring does throw in other problems that you should consider. Inter-credit deeds must be negotiated and agreed between the senior and mezzanine lenders, and on top of this your professional fees, such as for lawyers and surveyors, will be a lot higher due to two lenders being involved.

A development project very rarely runs on time. If a time extension is needed, the developer will have to negotiate with two lending parties rather than having one port of call.

To summarise, it is a positive sign that the market is seeing increased growth in development lenders and it is great to see that the traditional method of structuring debt deals is returning and expanding. Stretched lending is a good way to simplify a deal and save on fees, but most of the time will not be as cheap.

For developers, any increase in financing options available is always a positive sign, but as the market expands for both stretched and traditional financing there will be more emphasis on the broker and their quality of advice. If advised correctly, the developer can maximise their financial return by using the traditional method.

Bank of England's Base Rate Increase

Following the Bank of England's Base Rate increase many lenders have followed suit, increasing the cost of borrowing across the market.

This news didn’t come as a surprise as mortgage rates have been at an all-time low for a sustained period. It’s likely that as both swap rates and the cost of commercial borrowing increases we will see lenders edge their rates up again over the coming months.

It’s expected that in addition to the increase in rates a further tightening of criteria and maximum term due to the uncertainties ahead with Brexit.

If your mortgage is due for renewal in the next four to six months now is the time to lock in the competitive rates and more lenient criteria. Most mortgage offers are valid for between three to six months, so even if you are fixed in until the Spring you can arrange your new mortgage now.

Contact a member of the Charnock Hughes team for advice on the best rates available for your circumstances.