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Opinion

sam-howard-magnet-capital

Opinion: The New Normal in the Development Finance World

By Blog, Development Finance, Opinion

It felt like the chains had been unshackled, as I stepped out of my car, in bright sunshine, at one of Magnet Capital’s development sites last Monday morning. For the first time in over eleven weeks, I was able to do what I enjoy most; visit our projects, see how they have progressed and chat with our developers and their team.

 

Except it wasn’t normal, I was sweltering in a mask and gloves, despite being on an open-air site, with the two bungalows at wall plate stage. I took my position a good two metres away from the developer, whilst the rest of his team were mostly at home, except for two labourers distancing in a corner of the site. Despite all this, the client was delighted to be back on site having lost a good six weeks due to lockdown, closed suppliers and scarcity of labourers. Thankfully roof trusses and windows were soon to be delivered, so that the site could continue with no delays. Roof tiles from Spain were causing an issue but he had a work around and frankly he is one of the lucky ones.

 

Across our extensive range of development sites at Magnet Capital, we have heard of difficulties for developers in getting bricks, block and beams and specifically those building materials, which require bespoke factory settings, such as windows and roof trusses. Factories are starting to open up but there is a backlog of orders. To comply with social distancing developers are faced with having only a skeleton crew on sites, which will be magnified when the properties are watertight and are working on internals. Hand sanitiser, cleaning of surfaces, face masks will all be necessary. Delays and rising costs are a reality for all our developers. As a development finance lender we have to be realistic that our clients projects will overrun their loan period and we need to help them either to extend their loans or source developer exit products.

 

The new normal is also opaque as to what will happen to the property market in terms of house prices and the mechanics of selling new build properties. There will undoubtedly be far-reaching economic ramifications but at the moment there is plenty of pent up demand. The Government’s lockdown measures resulted in an estimated £82 billion of house purchases placed on hold. Some early indications suggest that the market is springing back into life, with Rightmove stating 40,000 new sales having been agreed since 13 May and it saw its ten busiest days ever in May and June.

 

We are all going to be spending more time in our homes and spacious properties with gardens and nice views should be in demand, whereas flats in high rise blocks, requiring lifts and in urban areas with little outdoor space, might struggle. This could be accentuated by people increasingly working from home, with less need to be in urban areas, close to their place of work. The commute will become less of a burden on the psyche and the pocket, if people are working from home a couple of days a week, meaning that more living space, further out of the city centre, becomes much more desirable.

 

Agents will need to find ways to cleverly market their properties, offering virtual imaging cameras to create accurate floor plans and 3D simulations of properties, or filming short video tours inside. Potentially the new build market will outperform the second hand market, as the risks are lower visiting a vacant rather than occupied dwelling. The mechanics of buying and selling is further complicated by the difficulty in the current climate of getting valuations, surveys, searches, and dealing with the Land Registry. Sellers need to get all their paperwork ready and buyers need to ensure that they have a decent solicitor that is not stymied by working from home and surveyors that are willing and able to attend the property.

 

Last week felt like the mist was lifting and a sense of normality is returning, However, all we can do is take each day as it comes, as looking too far into the future of the property market is unwise in the best of times and especially in current times.

sam-howard-magnet-capital

Opinion: Stargazing in the development finance market

By Blog, Development Finance, Opinion

As I sit working from home with the news on a constant loop, the picture is forming of a dystopian world where  from a corporate perspective there will be few thrivers, aside for big tech, and the rest will be competing to be survivors.

Undoubtedly, the world is facing a crisis like we have not seen for probably a 100 years, and the impact on people’s lives has and will continue to be unprecedented in the short term. Reports are suggesting there will be a wave of soured UK commercial property loans, owing to the slump in retail property. Indeed, from the development finance perspective, restrictions on movement, the closing of building suppliers, the effective shut down of the residential property market for sales and rental has and will lead to serious delays. With regards to residential property, I believe this is overly bleak and once a vaccine and suitable drugs have been discovered, the UK’s passion for property will return.

However, whilst running a development business from my home office, in between Zoom calls, reviewing drone footage and photos of our sites, I wanted to do a bit of stargazing to see what changes for the better or worse might affect our industry. Clearly, I have no crystal ball but just a deep interest in the development finance industry.

An argument that is raging at the moment is whether Covid-19 will lead to a rise of nationalism over globalism. Given that the UK imports significant amounts of building materials, with one fifth coming from China, should the UK be focusing on ramping up domestic production? Whether it is electrical wiring, softwood timber, clay tiles, there is an argument that the UK should be fully self-sufficient. My guess is that there will be a significant move to on-shoring capabilities where possible, although of course some countries are better endowed with natural resources than others and we will still import where there is little alternative.

We are all starting to use technology more in our day to day roles, whether that is utilising: valuation software, drones for building inspections, or zoom sign up meetings. Therefore, shifting the belief that development finance underwriting can’t be automated and that the borrowers need to be met in person and the sites visited. With regards to the surveying profession, whilst physical valuations will still be necessary for the majority of development schemes,  we will see a degree of change , with more virtual monitoring inspections. However, this is likely owing to the rise of modular housing that will reduce the need for so many physical monitoring inspections, rather than Covid 19.

From a lender’s perspective no matter how much a system can be automated, you still need a human to make decisions and review the due diligence that the computer programmes produce. Face to face sign up meetings with the borrowers are crucial to assessing the risk of a development project. Yes ,you are also looking at the valuation information, the site details, cashflow, business plans etc but ultimately you are backing the individual/individuals. At Magnet Capital, we will be reinstating this, of course adhering to social distancing rules, as soon we can. So, don’t get rid of those meeting rooms just yet.

Which leads me on to the question of working from home. It is one that the industry has struggled with for many years. The mantra of management has always been, that you need to have your employees in the same physical space, to create the optimal working environment. The reality is that with modern technology it is possible to work efficiently and productively, without being in physical proximity.

Whether using slack, zoom, dropbox, xero, alongside a business’s existing databases, the ability to work remotely is, if not seamless then close to it. Avoiding the daily commute, not being crammed into a hot desk environment with little natural light, and having the ability to work flexibly is attractive. Now, I am not suggesting that office space is no longer needed but I think there will be a realisation that big expensive offices might need another look. It is of course about having the right systems in place and yes it is easier with a small team such as Magnet Capital’s who have all worked together for many years rather than a giant multinational.

The modern office will be reshaped, with perhaps meeting rooms and desks for those who need to be in rather than paying for a space for hundreds of people. And just a thought – perhaps from a residential development finance perspective, there might be opportunity for developers to turn the unused office space into flats.

To borrow a well worn but largely derided phrase in the financial markets that “this time is different” but I think in some ways it possibly could be.

 

ashley-ilsen

Opinion: Ashley Ilsen Discusses The Latest EY Report

By Blog, Development Finance, Opinion

It says a lot about the rapidly changing face of our market that the data produced by Ernst & Young,
changes significantly year on year. Now in its third year, the annual EY Bridging Market Study is one
of the widest data samples that we have for the short-term lending industry. It is also unfortunate
that the survey was conducted just before the Coronavirus pandemic started to hit the UK and I’d
implore the good people at EY to perform a follow-up study on their short-term findings later this
summer.

We have undoubtedly entered a period of short-term uncertainty and the true impact of
the Coronavirus on our market will not become completely apparent for some time. We can,
however, look at their long-term results with great interest and we can also look back at what
lenders and brokers have reported about 2019. Here are two key areas:

A crowded space

Interestingly, 67% of those surveyed reported that they have found competition increased in the
bridging market in 2019. Similarly, an increase in competition was cited by lenders as the biggest
challenge ahead for 2020. At Magnet Capital we have also seen a proliferation of lenders moving
into development finance, which I suspect is an overflow from what is now a very crowded bridging
sector.

From my own experience I’ve noticed from conversations I’ve had with other lenders that an
overcrowded space has been on everyone’s minds for some years now, and yet every year we seem
to be adding new entrants. A growing market should allow for more capital deployed (not
necessarily more lenders) but considering the effects of Coronavirus, surely we’ve now reached a
point where lenders will either need to exit or merge?

I did also spot a brave new face entering the bridging market just earlier in April 2020 and my hats off to them! Competition has historically pushed lenders to lower rates and higher up the risk curve. Respondents confirmed that average monthly interest rates were lower in 2019 than in the previous year, and LTVs were higher. Having reached the peak it will be interesting to see on what other battlefronts lenders will compete. For me there is one clear area that stands out.

Are we bit old fashioned?

One of the biggest trends seen from last year’s survey is the continued prominence of technology in
our sector. Some 39% of respondents now believe that open banking would significantly improve the
obtention of new business, and this is in addition to the use of AVMs and further automating of the
underwriting process. It’s somewhat apt that in the current crisis use of technology is now a
necessity rather than a luxury and I expect the pandemic to accelerate the need for lenders to invest
in their tech.

At Magnet Capital we focus heavily on our internal technology in order to streamline
the underwriting process and this has been a primary source of focus since our inception.
Conversely, I’ve always been a big champion of old fashioned lending practices and there is
ultimately no replacement for face-to-face to meetings with clients and a first-hand inspection of a
project or a property (no matter how much we’re all enjoying Zoom conference calls at this time).

This is also taking into account that 52% of lenders noted refurbishments as being the primary use
for bridging loans. This inherently raises the challenge of bridging lenders needing to be even more
hands on in a business environment that is still learning how to remain socially distant.

ashley-ilsen

Opinion: Why development finance might not be the same again

By Blog, Development Finance, Opinion

They say the construction industry is the first to enter a recession and the last to exit. I use the ‘R-word’ reticently in that we are nowhere near understanding the true implications of the current Covid-19 Crisis, on values and on the wider property market.  The last few weeks has seen various lenders pull product ranges, with development finance being one of the hardest hit sectors. However, as of today government guidelines do not prohibit construction or activity on construction sites, as long as public health guidance is being followed. In fact, across many of Magnet Capital’s development schemes that we are funding, progress is still excellent.

 

We are seeing a hard-nosed resilience that was perhaps born out of the destitution of what many builders and construction firms went through after the 2008 crash. In fact, just today I conducted a wonderful virtual inspection of a large site we are funding in Kent which was full of activity, with an appropriate number of tradesmen on site that are respecting the social distancing guidelines. Naturally, we do have a handful of clients that have closed their sites and in many cases this has predominantly been down to our clients need to protect vulnerable relatives at home. We have also seen many complaints about supply chain which the government is yet to sufficiently address and could cause further disruption beyond the Coronavirus crisis.

 

Beyond all the usual struggles for SME builders and developers, access to appropriate development finance will now become a serious issue. I say appropriate because for every quality development finance lender, there seems to be a handful trying to cut corners in our market. The landscape for development finance has changed dramatically in recent weeks but the one thing the development finance sector needs now more than ever is consistency. Having what I call a ‘Hokey Cokey’ approach to financing, where lenders decide to be in one minute and out the next, can be hugely detrimental to our sector and damaging to reputations. Consistency is key because it breeds confidence, which in turn trickles down from our brokers to the consumer.

 

The development finance sector has come a long way since the 2008 crash and indeed since I joined the market in 2012. It’s a small world and I really enjoy sharing thoughts with competing lenders and being able to speak candidly with our broker partners. One thing I think we can agree on is that this is very much a pull-up-your-socks moment for the development finance industry.

 

At Magnet Capital we have always been known as being a cautious lender and years of being conservative in our lending means that we are currently in a very strong position to serve our brokers and our clients. Having a sudden nose-dive in liquidity in the sector will undoubtedly cause serious problems for the wider property market far beyond the Coronavirus Crisis. Let’s keep doing what we’ve doing for years and continue to back the construction sector; they’re going to need it.

sam-howard

The end of the 2010s

By Opinion

As one decade ends and a new one begins, I want to reflect on the 2010s and what has been a bizarre decade from the perspective of the housing market.

The decade started with the property market pulling itself off the floor after the slump, caused by the credit crunch. There had been a dramatic slump in housebuilding, as credit lines were pulled with banks and lenders desperately trying to rebuild their balance sheets. The development finance lender where I worked at the time, was getting calls from prospective borrowers, asking not what our rates were but whether we were lending. We were one of the few funders who still were!

The then Labour government were struggling under the precarious public finances, to be replaced by the Conservative and Liberal Democrats coalition. The next few years were characterised by a housing market that was stymied by a lack of credit both for mortgage market and development. House prices did fall initially but the lack of new homes being built, combined with low interest rates maintained a lack of affordable housing. The political world turned upside down in 2016 with BREXIT, the rise of the hard left and the hard right.

Economically, we had the Bank of England continuing to respond to the ongoing crisis, caused by the financial crash, by keeping interest rates low and injecting trillions of pounds of new money into financial systems to ward of depression. This financial wizardry of quantitative easing, counter intuitively seemed to push up asset prices (including house prices) but failed to create inflation. 10 years on we still have historically low interest rates at 0.75%, and little indication that the economy is in a state for them to be raised significantly.

From a housing market perspective throughout this period, various housing ministers have tried  to fix the housing crisis. It has been a crisis largely characterised by the chronic lack of supply of housing, leading to rising house prices and rents preventing first timers getting onto the housing ladder and private renters facing crippling rent bills. We saw the introduction of “Help to Buy” in various guises, increases in stamp duty both in terms of rates and also an additional levy on second homes, and numerous white papers designed to solve the problem. None of them have got to the root of the problem; which is the need for more new affordable homes. The new Conservative government has promised at least a million new homes this parliament, called for a shaking up of the planning system, and proclaimed that there would be a 30 per cent discount on new homes to local people and key workers. The proof will be in the pudding and I hazard a guess that Boris Johnson might get BREXIT done but will struggle to fix the housing market.

Finally, I thought I would list a few things that I have learnt over the last decade in the short-term finance industry, they are simple but worth remembering:-

Always assess the level of risk and whether you can live with the downside.

To minimise risk aim for numerous smaller deals rather than a few large ones.

Work with experienced and trustworthy people

Know your own strengths and weaknesses and surround yourself by colleagues who have complimentary skills.

Avoid what you don’t understand.

Lend near where you are based so that you know your location or at least if there are problems you can easily visit the site.

 

I wish everybody a very happy and productive new year.

sam-howard

Housing and the Climate Crisis

By Development Finance, Opinion

Walking past the Extinction Rebellion protest in Bishopsgate, a few weeks back, whether you agree with their tactics or not, brought the reality into focus, that our planet is in serious trouble. The onus is on every single one of us to do more and it will require a concerted effort.

Given that Magnet Capital’s focus is to support our SME Developer clients in building the right new build houses in the right places, it is pertinent to shine the spotlight on what new homes can do to help the country meet its target of reducing greenhouse emissions to net zero by 2050. The new and existing housing stock currently accounts for circa 20% of emissions.

Somewhat under the radar, the Government in its 2019 Spring Statement has turned its attention to residential housing emissions by including a commitment that, by 2025, they would introduce a Future Homes Standard for new build homes. This would include low carbon heating and world-leading levels of energy efficiency. The Government has now published a new consultation, setting out these plans, which is open to responses until 10 January 2020. This consultation marks the first step towards implementation of the 2025 Future Homes Standard, proposing to tighten the standards on energy efficiency and ventilation in new homes as of late 2020.

It includes two options:- the first is a 20% improvement on carbon dioxide emissions by ensuring new build houses have triple glazing and a waste water heat recovery system.

The second would result in a 31% improvement which require only double glazing but crucially low-carbon heating and/or renewables such as photovoltaic (solar) panels.

The government’s aim is for the housing industry to develop the necessary supply chains, skills and construction practices to deliver low-carbon heat, and highly energy efficient new homes by 2025. Crucially, it has been rumoured to include the banning the installation of fossil fuelled heating systems in homes built from 2025. Whether this means gas boilers will be banned for new builds is a matter for debate, given there are genuine concerns over whether alternatives such as air source heat pumps are viable because of their high initial cost and current ability to heat a home.

However, what is not in doubt is that new build house builders cannot bury their head in the sand, as the first raft of changes of increased efficiency standards will apply by the end of next year. These will have cost implications for house builders and SME developers need to be aware.

Changes are coming and some will be painful but ultimately we all have to up our game to protect our planet.

 

ashley-ilsen

The Government Need To Be Doing More For SME Builders and Developers

By Opinion

Ultimately the government need to be doing more for SME builders and developers who are facing what is already an uphill struggle. We regularly hear complaints from our clients about the rising costs of building new houses; anything from labour to supplies have been on a steady increase of late. When this is twinned with a flat property market all that leads to is a squeeze on margins, making opportunities for developers scarcer.

There needs to be a bigger push from the government to incentivise people to build homes again. We all know we’re a long way away from the targets that we are supposed to meet and this is not going to improve without drastic changes to both the demand and the supply side.

I was a big fan of help-to-buy when it was first introduced however this was only supposed to be a temporary short-term fix, and not long term dependency as it appears to have morphed into. There is a distinct lack of dynamism and forward thinking from our government when it comes to housebuilding and sadly I don’t see this changing anytime soon.

Paul Israel

Beware of the mast gift horse – be wary of what lies beneath…

By Opinion

Lucky landowners with properties in the right spot have been able in the mobile phone revolution of the past 20 years, to rent out land for phone masts, over 40,000 now in the UK. With the telecom provider obtaining planning in place, surplus land has been able to help the owner from helping these big corporations and putting in place a phone mast. Historically, these values have been between £4.5k to £9k annually under 15-year leases, depending on location.

With the coming of 5G and the need for another 40,000 new phone masts, the new Electronic Communications Code contained in the Digital Economy Act 2017 and introduced on 28 December 2017, is as a result likely to sharply reduce landlords’ income from these agreements and leave them with less control over their properties. The government in a bid to help roll out new phone masts for 5G had the bright idea to change the way mast contracts were negotiated under this new code so that instead of mutual negotiation the value was changed to alternative land use. No doubt the big telecom corporates were involved in its drafting.

In the city this value may be higher, but in the country some of these spots have very low alternative use values, as a result existing phone mast locations at the end of their contracts have seen offers from the telecom companies for annual lease values plummet from an average £6k annually to sometimes now offering as low as £32 pounds only a year.

So, in that instance you would then think the landowner could just give the telecom mast company notice, and tell the provider they can take their £200k of equipment elsewhere, but no, in the new code, the mast provider can go to Tribunal and have the value and mast site protected and withheld.

Loss of control is much greater, although, there is no right to “add” equipment, which may give landlords room to negotiate for more negligible rent. However, new rights include, to connect to a power supply; interfere with or obstruct an access route; and to lop trees have been added as well as right to keep the site, so land value could be potentially affected.

So, what’s actually happened since the new code came in? Mutual new mast agreements have now crawled to a standstill and there are cases now going to court to test the legislation, which surely needs significant amendment.

In the code there is scope for compensation in addition to rent for:

Faced with the prospects of a lower consideration, landowners are likely to claim compensation for their loss, as they can be entitled to do. Typical heads of claim will be:

  • Land taken – this will vary between each site (such as between farmland/woodland, farmyard/car park etc);
  • Injurious affection – this allows a landowner to claim for any drop-in value to his retained property (say to a house within sight of the mast);
  • Disturbance – this ought to cover the landowner’s time and trouble in dealing with access requests, which at say five requests a year per operator could equate to well over £2,500 per annum; and
  • Fees

If approached, where until recently a new mast was a potential positive for land, we understand is don’t agree any offer for a mast offer without proper advice first.

Paul Israel

It’s the worst of times, it’s the best of times: Happy First Year Magnet Capital

By Opinion

While British politics remains mired in continual and it seems perpetual uncertainty or lack of resolution; there still remain such absolute certainties; the British weather has kicked in, there is a new season of Strictly Come Dancing, Labour and Conservatives MP’s don’t get on, new political parties don’t seem to last very long, the tube goes wrong,  and every Monday morning in the Magnet Capital office the dynamics begins with critical analysis of whoever’s footie team is (temporarily) in the ascendancy before analysis of the new episode of Peaky Blinders and onto the day’s loans business…

Some things do change though; England finally won a Cricket World Cup this glorious Summer; opening a bank account does take just a bit longer than 5 years ago,  and the government might be looking at reforming the stamp duty system that from 2015 that along with other issues brought to an end the UK’s 20 year property boom

For all the political unknowns, and threats of tax changes and economic slowdown the UK economy remains the 6th biggest in the world and economic growth in Britain in the current year for all the talk, growth is the same as the average in the Euro zone (1), and we are way ahead of Germany and Italy this year, the Government is (so far) in control of the Budget deficit, and with historic low interest rates, and a lot of money waiting to be deployed (liquidity) the ability to re-bound with confidence can be quick – should certainty in the market return

Making predictions in current times on Brexit, the property market, Manchester United’s next score and what happens to Stamp Duty may appear a mugs game at the moment, is an election coming? We seem in a waiting period.

Stamp duty changes proposed have included the seller paying, instead of the buyer, which we think is impractical, sharing the payment (also difficult), raising the minimum charge, cutting the rates at the top (obvious, but looks like it is helping rich people), but something will have to move eventually, as like in all taxes if the take drops then a rethink is needed.

Property business issues may be the same, interest rates, stamp duty, the costs of build changing, but the fundamentals of build haven’t – Most developers just want to get on and build, find the next project and move on…

However, here at Magnet Capital we operate in the engine room of the property world, deals still happen, so we don’t feel the slowdown as some have on higher unit prices, particularly in parts of the South East – and a year in since we started we are very proud the map of England and Wales in our office, is now ablaze with green dots of ongoing projects we have signed up and after 12 months showing our first 6 yellow redemptions where we have lent which have successfully completed.

The team has grown with two new starters this month and a bigger office, roll on Year 2….

sam-howard-magnet-capital

The Bigger Issue

By Opinion

Our new Prime Minister, Boris Johnson, is highly skilled at generating headlines and positive soundbites, which certainly generate interest and coverage. However, trying to figure out what his polices are on any particular topic is never easy.

One minute, we are preparing for a no deal Brexit and then next that the odds are a million to one against there being a no deal Brexit. Perhaps, this ambiguity is both designed to confuse the enemy and simultaneously provide backside covering if things go wrong or perhaps it is a clever way of playing the cards he was dealt or more accurately dealt himself.

Anyway, as you know my interest lies in the housing market, so in these early days of the Johnson premiership, I want to try to figure out whether his new government has what it takes to make meaningful change and also hazard a guess at what their policies will look like.

A new Prime Minister heralds a new Secretary of State for Housing, Communities and Local Government. Robert Jenrick is in and James Brokenshire out. Likewise, a new Chancellor, Philip Hammond is out and Savid Javid is in. Savid Javid was a previous Secretary of State for Housing, Communities and Local Government, oversaw the White Paper for Housing on 2017 and has previously spoken about borrowing £50bn to fund new housebuilding. So there are possible clues in a selection of a team that may be inclined to provide the fiscal fire power to invigorate the housing market, whether that is tax cuts and/or increased spending/borrowing.

Boris Johnson has been a long term believer in home ownership. He realises that as a counterweight to Jeremy Corbyn, homeowners will tend to vote Conservative and to appeal to younger voters, he needs to persuade them that the dream of their own home is attainable. So it is not surprising then that Robert Jenrick has already raised the possibility of the controversial Help to Buy scheme being extended beyond its expiry of 2023. This is not the column for an analysis of Help to Buy but it has contributed to the sale of more than 50,000 new build homes a year and clearly does enable first time buyers to get on the market.

In his first week in Downing Street, Boris has talked about abolishing stamp duty on houses below £500,000 and reducing the top rate of stamp duty from 12% to 7%. George Osbourne’s stamp duty increases have arguably achieved the stated aim of taking the heat out of the housing market but have done a lot to clog up the housing market, especially at the higher end, which invariably has trickled down. Tax on transactions typically reduces housing market activity. However, stamp duty is extremely politically charged and any cuts will be seen as a tax cut for the rich. Given that by the end of the week the Conservative government’s majority in parliament might be whittled down to 1, I doubt whether he will risk trying to reduce stamp duty in the near future.

However, these proposed fiscal measures are really only cosmetic if we are to build the number of houses we need in this country. This will take the Johnson government dealing with amongst other things the real skills and materials shortage in the building industry, the effects of Nimbysim and a broken and under-resourced planning system Further, can Britain adopt modular housing, can it create the infrastructure necessary to support this new housing and can it curb the power of the power of the major housebuilders and enable SME housebuilders and local authorities to build the right houses in the right locations. Only time will tell, but to make a real difference will take more than soundbites.