The Alternative Lending Market - Post Lockdown

Three weeks into lockdown and with many in the commercial finance industry unable to trade as a result, focus is starting to turn to the lockdown exit, how do we begin to function again. 

This will vary in different industries but below I’ve shared some views on the alternative lending market for commercial property, after discussing the topic with: UK Finance; the trade association for the UK financial and banking sector, CMS a law firm working in the alternative lending market for both borrowers and lenders and Pluto Finance, a principle lender in the sector. 

Starting by looking at the importance of the secondary market on a broader level I spoke with the Chairman of UK Finance, Robert Wigley on the matter: 

“One of Britain’s great strengths as a play to do business is the ability to access credit from incredibly diverse finance sources. This diversity has grown considerably in recent years and it is critical this continues through and beyond Covid-19. Banks and non-banks should all be able to play their role in supporting businesses of all types and it is important government and regulators create an environment for this to be possible.”

To date the business support structures put in place by the government are mainly operating through larger banks. As a result we are expecting that immediately post lockdown the commercial property sector will find itself far down the priority list for major banks in comparison with large trading businesses with a larger number of employees to protect. Leading to a backlog of work for major banks to cover before they can return some attention to our sector. This will likely include all the high street banks and many multi-sector challenger banks. Leaving a large portion of the initial re-ignition of the commercial property funding market to specialist property finance lenders.

It is extremely difficult to tell how long this market void of larger banks will last and what the post lock down market will look like. Due to the lack of certainty regarding the timeline for the exit we don’t know what the specialist lending market will contain post lockdown; with many predicting if the lock down continues past the end of May we are likely to face a significant and longer term economic downturn. 

Taking all of this into consideration I believe we won’t see a collective movement from the alternative market; but a fragmented exposure of the individual businesses within the market. The property focused alternative lending market includes a range of organisations varying from; institutionally backed bank subsidiaries to peer to peer funders to single family office backed lenders, and all shapes and sizes in between, which creates the great flexibility that the secondary market is appreciated for. 

We can already start to see the fragmentation of the market firstly as many peer to peer funders who focused more on the trading business aspect of secured lending are having to shift their attention from new business to fire fighting their existing loan portfolio. This combined with the fact that peer to peer lenders are often staff heavy businesses, which, like many, have adopted the staff furlough option as a safer route to protect the business, creating a backlog for a hugely depleted staff to manage. As a result I would expect the peer to peer market responsible for over ￡960 million of property market lending in 2018, to be a slow returner to the market post lock down. 

Another divide becoming apparent is in the privately funded lenders on an operational level, like many businesses in many industries a large number of them are sitting waiting without putting a clear message to the market of their true appetite, understandably indecisive on their position. Whatever format the exit comes in I don’t believe it will be a clear cut everything goes back to normal on a Monday morning and these lenders currently stalling won’t have an easy and obvious trigger to go back to their original appetite for lending. I believe this lack of clarity and deceive action will make it difficult for brokers and clients to understand and engage with these lenders and as a result they will struggle to keep up with the market. 

In contrast we expect a number of lenders to stride ahead of the market; in two categories; firstly, those with a defined revised plan, communicated to the marketplace so there is an understanding of their ability to deliver allowing introducers and clients to use them with confidence, based on their revised model. I can’t see it being damaging to their levels of business if these funders lower their loan to value or increase their rates to reflect the risk level, as is so often the case in this market the ability to deliver on your offering is the essential factor and the lending metrics secondary to this. 

A view I shared with James Horton a consultant at the law firm CMS Cameron Mckenna Nabarro Olswang LLP, James focuses on the direct lending market and commented:

“The direct lenders that can communicate a clear message and plan to the market will be the ones that will flourish after the lockdown. Direct lenders can move faster than traditional lenders and the flexibility they offer will be key in the new world. It is inevitable there will be some form of consolidation in the secondary market. One thing that is certain is that when we do emerge from the lockdown the landscape will have changed.”

The second category of lenders we expect to see growth in after lockdown are market lenders who are privately funded with a decisive organisational model and complete confidence in their original proposition. I believe this will be where we see the largest growth in the market, established lenders with a product clients are used to and have adapted their businesses to using over the last 5 to 10 years. Funders who have the ability to maintain what has become the generally expected metrics of the alternative market and rely on the third party involvement of surveyors and advisors to protect them against the change in the wider property market. 

Chris Scott is a Lending Director at Pluto Capital and commented:

"Specialist lending has always been and will continue to be an area of the market well set to take advantage of economic uncertainty. Ultimately, specialist lenders with robust funding lines will prosper and those with banking and P2P funding will struggle given their attitude to risk and sentiment respectively. Lenders will have, and should have, been focused on their active book first and foremost. Ensuring they continue to fund developments, and provide flexibility to resting loans where needed.

Whilst banks are taking a lenient approach to existing loans, this leniency will expire prior to a return to norm for the property market. There will therefore be some forced movement and ability for some investors to pick up well priced stock. Specialist lending will be a key player in these transactions where speed, certainty and flexibility are key. We are already seeing this in some areas where sales have been renegotiated by up to 15% and purchased taking place 25% below the February peak in values. 

The key to managing a downturn or any level of uncertainty is to avoid knee jerk reactions, manage key stakeholders and above all else be transparent and upfront."

To conclude we can expect a void to be created by major banks and multiple sections of the alternative market, the issue then becomes not one of adapting original lending and operating models but figuring out who in the market can, with certainty, maintain their previous proposition or as close to as possible and how these lenders can grow while maintaining service standards and their reliable structure, especially how these smaller but established lenders can obtain enough wholesale funding to satisfy the larger loan sizes currently provided by the high street banks, interesting times ahead!

Edward Page is a Financier and Director of Funding File; a portal for property finance brokers to source and manage lending options for specialist property finance. For more information please visit The Funding File Website.