Embracing alternative finance options
Daniel Austin (pictured) is the chief executive and co-founder of ASK Partners
Over ten years on from the global financial crisis, banks and other mainstream financial institutions are still reticent to provide finance to the property sector, in particular to small and medium-sized developers. However, to compensate a range of alternative options have emerged, whether just for bridging loans or for mezzanine and senior loan funding. Each option has its own particular characteristics and below I review their main features for the benefit of developers seeking to approach them.
Challenger banks embrace property lending
Challenger banks have moved into both residential mortgage and commercial property lending. Their core advantages are being more nimble, flexible and responsive. Some have embraced the property sector more than others and a number of challenger banks finance projects across asset classes, including care homes, student accommodation, and serviced apartments, co-working and co-living spaces. However, it is common for the challenger banks to still be limited on LTVs, meaning developers will likely need to look elsewhere to top-up their funding requirement.
Peer-to-peer has moved into property finance
Peer-to-peer (p2p) can be an easy-to-access funding option, particularly for smaller projects. Some 30% of total p2p loans are now property-related. However, development funding is very different to lump sum loans used by businesses, and is provided in stages as work progresses. Some p2p lenders will not have the experience or expertise to do this effectively. Also, some P2P property platforms are quite targeted, offering little flexibility. For example, some only offer bridging finance, or are strictly for particular types of development or property such as low-cost housing or buy-to-let portfolios. The p2p market is also facing increasing regulatory burdens following several well publicised p2p failures.
Debt funds make their mark
These pools of largely institutional-backed capital have enjoyed strong growth and target a range of mandates, including originating senior and mezzanine real estate loans or collateralised loans for qualified borrowers, with most structured to execute a specific loan strategy or investment goal. These funds typically have shorter time horizons than private equity and infrastructure funds. Typically they focus on medium-to-larger developments and their charges can be higher reflecting their institutional funding base.
Boutique property finance firms attractive option
While larger private debt focused property funds have won strong institutional backing, other private property finance firms, such as ASK Partners, has emerged in the form of boutique finance providers, typically backed by HNWs and family offices. Due to its diverse funding pool, ASK is able to offer flexible debt across a range of sectors, including student accommodation, retail, residential and commercial, with a particular focus on “value add” opportunities with a clear business plan to enhance an asset. Such boutique firms, such as ASK, can also provide multiple levels of finance for the pre-development stages, from short-term bridge finance, short-term loans, joint venture equity, mezzanine finance, and even hybrid, providing borrowers with choice and flexibility.
While the post-financial crisis landscape has presented small to mid-size property firms with challenges, developers are embracing the different financing options available to them. One size does not fit all when navigating these various funding types, but ultimately seeking out those offering expertise, a good track, flexibility and a true understanding of real estate finance in all its forms is the best place to start.