Competition is good. Just ask Roy Hodgson. Football and property finance are very different but does that mean that competition is not equally as important? I do not think so. I like lenders reacting to what their competition does. New products, better pricing, higher LTV’s are welcome indeed. But, do more and more lenders coming into the market mean more competition and more quality? I don’t think so.
I am worried by the number of LinkedIn messages I have received in the last six months from property professionals, mostly lenders, who are setting up their own lending businesses and want to know what is missing in the market. I would imagine that as they are involved in the market already that they know what is missing and are simply opening up a dialogue and trying to make me feel important by asking. I do like giving my opinion and it is interesting to see which bits of information I give they choose to use. However, how are these new players funded and what is their motivation?
The funding line is a simpler answer to tackle so I shall start there. Some of the lenders I have spoken to have a simple banking line where they are charged a percentage for money they borrow and put it out at a higher percentage.
Not overly elegant or clever, but at least it’s transparent. My concern here is how they are charged by the bank. If they are charged on money they drawdown, on a deal by deal basis, then I am not so concerned with their model and the deals they are likely to fund. My concern comes when they have a line of say £50m with a bank and are being charged interest on the money all in one go.
They are paying for the funding to sit in their bank account, meaning they will have to charge a higher rate when they do finally lend and are under pressure to lend which could see some take views/risks on deals that they may not be overly confident on or fully understand. Now I am sure that most of the loans are sensible and managed correctly. But there is a niggling fear that such lenders could push some of their limits.
If the funding comes via a crowdfunding platform then the pressure to put money out of the door as quickly is reduced. However, if the fund managing ‘the publics’ money is new and potentially inexperienced is there an even greater risk of losing everyday people’s money? Yes, but then that is a risk with all investments. So far, from what I have seen I like the crowdfunding model. Then again I have only worked with LendInvest, Wellesley and Funding Circle and all three of them have an experienced team and track record. I would be hesitant to work with any new, smaller players in the crowdfunding market.
The final and more simplistic way these new guys I have spoken o are funded is with their own and their ‘friends’ cash. As the money is their own I would assume that this makes them extremely responsible and cautious when they do lend. Which I can fully understand as they would not want to lose their nest egg on a bad loan. My concern here is that this may cause them to be a little too expensive and as a result become a last chance saloon for brokers and clients. If there is a lender out there that can price cheaper, move quicker and gear higher then why would you use one of these new, privately funded lenders?
The second question, what is their motivation, is harder to tackle. I do not know for sure. I can imagine that they have seen the phenomenal growth in the short-term/bridging industry and just want to be involved. The industry has been growing at a truly impressive rate for the last five or so years and I can full understand given the returns why so many new lenders are trying to get involved. The established lenders must surely be flattered by the amount of new lenders and competition coming into the market.
Could some new lenders coming in have an alternate motive and view the market as an opportunity for loan to own deals to be done? Possibly, but then that is where the broker and the regulators come in. we have to remain vigilant in who we are dealing with and fully understand the strengths and weaknesses of who we are putting the deals to.
Of course, with a new lender this is tough as they are new and we would not have done a deal with them. I mentioned in a previous article for Bridging Introducer regarding lenders expanding into development was the need for the right recruitment. This is equally true for new lenders. If you want to be credible, in my eyes, you must bring in someone well known in the property market. Not specifically the short term/bridging market, but perhaps from the wider lending market. This will help add a level of comfort that will allow brokers to understand what you are trying to achieve. Generally I believe that reputation and perception are key when launching a lender and serious investment is a must when hiring.
Is competition good? Yes, but that does not mean that every new lender that comes into our market can compete. Those that secure credible and large investment, coupled with the right recruitment will compete. These new lenders will surely only make the market stronger.