Tony Whetstone is managing director and Head of Special Services at Voltaire Financial Group. A former senior property finance banker, Tony now specialises in providing advice and support to clients in connection with contentious property finance issues and has provided expert support in a number of high profile and high value disputes.
The changing breed of UK property lenders
“The more often a stupidity is repeated, the more it gets the appearance of wisdom”, or so said our namesake Voltaire, one of France’s greatest writers and philosophers from the Age of Enlightenment.
It is clear from more recent history and most recently the events leading up to the global financial crisis (GFC) of 2008-09 that traditional property finance lenders have tended to adopt a “follow the herd” risk mentality even where that road has led to catastrophe. Property lending mistakes of the past are numerous, well documented and often cited as being the main cause of the near systemic failure of the banking system during the troubled GFC period. It is no wonder therefore that clients, their lawyers and expert witnesses specialising in this field have found themselves busy dealing with the consequences of this collective misjudgement.
What is yet to be established is whether the new breed of UK property lenders which have emerged since the GFC have learned the lessons of their predecessors, or whether similar problems will emerge in the future. Whilst some “new lender” problems are appearing, the real extent of any poor practice will only become obvious following a marked deterioration in economic conditions.
We see from data prepared by the highly respected De Montfort University in Leicester that the UK clearing banks maintained a dominant market share in the period leading up to the financial crash.
It was very difficult for other organisations to gain real traction during that period, notwithstanding new funding techniques such as the advent of Commercial Mortgage Backed Securities (CMBS) which created new and cheaper funding options for borrower clients.
However, the property finance markets started to experience material change from the third quarter of 2007.
Hitherto, the UK had witnessed an explosion in volumes of UK property finance lending, but this position changed markedly following the liquidity crisis suffered by banks during the last quarter of 2007, exacerbated by the collapse of Lehman Brothers in September 2008. The closure of the CMBS markets (by then also being used by the UK clearing banks) had a dramatic effect upon banks’ lending appetites and the corresponding insolvency of the property sector. New property lending was virtually non-existent for several years following the GFC whilst lenders wrestled with their legacy “zombie” problem loan portfolios.
It was perhaps inevitable that the UK and other regulatory authorities would alter financial regulation following such seismic events, so as to ensure future stability of the financial sector. New capital regimes and extensive reporting requirements emerged, which led to an erosion of the dominant position previously held by the UK clearing banks.
The capital intensive nature of the property industry and the lack of traditional financing liquidity meant that new sources of money were required to bridge the funding gap. Whilst the UK banks remained active on a risk constrained basis, new and more entrepreneurial sources of finance started to emerge, encouraged by the ability to charge higher rates given the prevailing illiquidity. Since that fateful period, the property finance marketplace has altered beyond recognition.
A database which my firm now maintains and which covers more than 500 willing and active property finance lenders shows major changes from the pre-2008 position. Whilst it still includes the traditional UK and overseas banks, it now also contains a plethora of US and overseas hedge funds, new and emerging entire capital stack debt funds which can provide equity as well as senior and mezzanine debt, institutional private equity firms, large insurance companies, challenger banks, private individuals and family offices. The property finance market has never, in my experience, been so fragmented and it is telling that from over 50 new lending transactions completed by my firm during 2018, only 5 were completed with “traditional lenders”.
Whilst property finance litigation will undoubtedly continue, it seems clear that future litigants will be different and varied. Our response as lending experts may also need to develop to represent the changing approaches and practices of the new breed of property finance lenders now active in the UK marketplace.
