As CEO at Acre Lane Capital, how do you intend to maintain business once Brexit eventually comes into effect?
Our business is exclusively focused on secured lending on residential property in England and Wales. So, at a headline level, nothing changes. However, the risk may change, property illiquidity is already with us in much of our target lending area and, consequently, house prices are volatile. Most of our redemptions are by way of refinance. Therefore, we are exposed to a systemic breakdown in financial liquidity should the markets seize up post-Brexit.
Back at the time of the referendum, we decided to entirely ignore London as an area we wished to lend in. This has served us well, as London has felt the full force of the illiquidity; and, as a consequence, we haven’t had any losses to date on our loan portfolio. I may be being quite the contrarian, but I believe that once certainty returns, ie Brexit finally occurs, we will see a return of confidence to the housing markets. As a result, we are now lending on London property. London, and particularly prime London, will be in demand, even with a hard Brexit. Any calamities that lead to a fall in the pound would result in lower prices in the local currencies of overseas buyers.
In so far as a systemic breakdown is concerned, we are diversifying our funding lines in order to hopefully dissipate the risk to Acre Lane Capital. Specifically, we are looking for institutions with defined characteristics who, we believe, will maintain their lending appetite through such an event.
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Would you say that Acre Lane Capital currently has a significant regional presence?
We don’t consider ourselves as regional as we lend across England and Wales, except for rural locations. Are we significant to the market? Not really, yet. We were considerably ahead of our business plan last year, we are hiring more staff and I would be surprised if we are not a significant market participant by year-end 2020. I would say we are nevertheless significant to our clients, and brokers; they may not always like what we say — the commercial challenge of honesty — but we do what we say!
What would you consider to be some of the key fundamentals of a development exit loan?
It depends what you mean by development exit loan. In its simplest form, it’s simply a bridge on one or more recently completed residential units. In its more complex form, its stepping into a development and lending mid-build to complete the development. Acre Lane Capital has done both types over the past year and looked at many more lending opportunities for mid-build development loans, not least due to the myriad of lenders collapsing in 2019. The mid-build opportunities roughly break down into two types. In the first type, the developer has had problems and spent more than was budgeted, or been held up with an element of the construction, and these are more tricky as the economics of the loan may no longer work, ie loan-to-cost or LTGDV, or both, may not work. In the second type, the developer has been let down by the lender. This has tended to be due, albeit not exclusively, to the apparent contagion occurring in the P2P market.
In this type of development exit loan, we look at the opportunity as we would any new loan. Our main criteria before we get into the details of any development are skin in the game, liquidity of the finished units, and developer experience. If we are comfortable with those three criteria, we, and a monitoring surveyor, look at whether all the planning approvals are in place, pre-commencement requirements met, the pre-occupation requirements, building control sign off, where required, and whether insurances are in place etc. Then we look at the economics of the loan we will have to undertake in order to complete the build and exit the loan.
Do you feel developers are currently doing enough to aid specialist lenders such as yourself?
Developers don’t owe us a living; Acre Lane Capital has to make itself relevant to them. We try to do this by understanding their needs. As CEO, I try to spend as much time as I can talking to brokers, developers and property investors so I can understand what they want. Their concerns, problems and desires are what motivates us to improve: better coverage, loan product and after loan service. We are honest about what we can achieve in terms of timing, loan amounts and rates and, in turn, expect our clients to be the same. We regularly sit down internally to discuss trends, and specifically how we can adapt processes or products to meet their changing needs. As a relatively small lender, we are nimble and can adapt and innovate quickly. If I had a frustration with our potential and existing client base, I would suggest it would be the glacial pace with which news of high-quality service and innovation spreads.
How did you get into the industry?
I was pondering my next challenge in 2014 and looking to help a friend to back his very significant residential property portfolio into a REIT, as a means to raise third-party funds for further growth. As a result of this, I had lunch with another good friend who was a significant player in the space. He brought along a friend of his who was about to start a raise for a mid-sized bridging lender. I know the institutional market well, and he knew family offices. We decided to team up and do it together. Following a busy few months of meetings and analysis, I became convinced that this was an area with (at the time) supernormal profits. Once the raise was completed, I started working on setting up, at that time, a lending business.
If you didn’t work in development finance, what would you be doing?
Working. I am somewhat of a workaholic. I tried to retire back in 2008 and it didn’t work out too well. I love finance, and all the challenges that go into being successful in the area.