In a week that it was announced that the UK economy has crawled out of recession it is worth taking a moment to think about what opportunities exist for commercial mortgage brokers at the moment.
Commercial mortgage brokers have had something of a difficult time over the last couple of years. Obviously the availability of cash rich lenders has somewhat changed, but at the same time the number of optimistic entrepreneurs has shrunk.
One interesting snippet of news is that Birmingham based lender/broker "Crystal Mortgages" have launched a 100 per cent commercial mortgage product aimed at the medical sector.
These specialist commercial mortgages are available for terms between 7 and 30 years with a minimum loan of £30,000. Rates are apparently variable and start from 2.51% over BBR (or Libor)
Considering market that these mortgages are aimed at you can take it as read that management accounts showing comfortable levels of affordability will be expected, along with a near perfect credit history. Seems that some goodwill can be included in the overall loan.
An Opportunity for Commercial Mortgage Brokers?
On a completely separate note, there is one interesting theory doing the rounds at the moment. It relates to an often overlooked clause in most mortgages agreements (particularly commercial mortgages) that requires the borrower to ensure that the loan does not exceed a specified Loan-To-Value (LTV).
One of the mainstream residential lenders tried reminding their customers about this type of clause and then retracted in the face of some fierce media reaction. Such reaction is probably unlikely in the case of commercial mortgages.
Essentially the clause permits for the lender to demand cash to reduce the loan to an acceptable level if the value of the asset shrinks, or introduce additional security to reduce the loan ratio. Here's where the business opportunity for commercial mortgage brokers could present itself:
Assume that a business took out a 65% LTV commercial mortgage with a mainstream lender on a property valued at £200,000 in 2007. Three years later the value of the property has shrunk to £155,000 – the loan now stands at around 85% so the bank demands that the business introduces some capital to reduce the loan. Businessman is stuck.
Up steps the switched on commercial mortgage broker and takes a customer from a mainstream bank to a suitable alternative lender who offers a higher loan to value.
Well OK 85% on a self cert commercial mortgage might be a bit of a stretch, but the principle is sound, what do you think?
Property website Zoopla has launched a live online Property Auction. This exciting venture is a partnership between Zoopla and Real Estate Disposition Corporation (REDC). Don't worry if you have not heard of REDC before, they've been in America for years and apparently sold over 30,000 properties in 2008.
Zoopla is something of a rising star in terms of property portals and claims to be the number two site after Rightmove.co.uk. You could be forgiven if the idea of a property auction website sparks ideas of Ebay, but it's very different.
The next "event" is 7th February and so far there are 73 properties up for auction, but how does it work?
- As you would expect the first step is to register on the site, this is important because unlike Ebay auctions the property details can change before the auction start date.
- You are buying a house! Each listing has extensive property details under the label "due diligence". Remember that once you enter a bid it's binding and you are stuck with whatever you win – even if it's a lemon.
- Arrange your finance before the auction starts – just like a "real" auction you don't have long after the virtual hammer strikes to complete the sale. There are penalties if you fail to complete in time.
- If you wish you can visit the property to carry out an inspection or survey (vital if you are using finance).
- The action starts and the bidding begins. All online.
- Within 48 hours of the end of the auction you will be expected to transfer the 10% deposit and buyer's premium. You will also be able to verify your identity.
Before you start thinking about putting your own property up for auction, the system is only available to Estate Agents – so no dodging the agents fees!
What About The Properties Being Sold At Auction?
From what we understand this is just like regular property auctions and so will include just about any type of residential property. Possibly properties that have been on the market for a long time with no buyer or sales under pressure, such as repossessed homes or probate sales. Just like a regular auction the property is being offered very much "as is". So it's up to the buyer to ensure that they can cope with anything they find under the floorboards.
Zoopla and REDC have obviously created partnerships with the usual property professionals, so you should be able to use their services for conveyancing and financial services. As well as residential mortgages and buy to let mortgages they should also be able to arrange bridging finance.
Remember that you have no recourse to the seller if things go wrong post-auction. The contract is formed when you place a winning bid and the auction ends. That means the full purchase price and no negotiation.
A property developer has won a High Court case against property investors forcing one to pay £133,000 after they backed out of an agreement to purchase flats "off plan".
The High Court, in Bristol, has ordered the person to pay a whopping £133,282 in damages, costs and interest to Plymouth's Prestige Homes South West Ltd, after pulling out of a deal to buy two Zero 4 flats in Plymouth.
This is one of a number of cases that this property developer is pursuing against people who paid deposits on a number of flats but then walked away from the deals once property prices started to fall.
It would appear that in addition to deposits being paid, contracts were exchanged on an "off plan" basis. This was common practice during the height of the property boom where investors were agreeing to purchase a property (often at a discount) before the development had started. The property developer would then secure ongoing finance against the security of knowing that the sales would complete.
The challenge for the hapless investors was that the property values were declining, loan to values were following and many of them were faced with no option other than to pull out of the deal. Sadly for them, once you have exchanged contracts you are committed to the sale and liable for consequential loss if you fail to complete.
This is not the only case of its kind, among the developers reported to have filed claims are Ballymore, which has lodged more than 130 claims, Trelford Homes, which has filed 50, and Imagine Homes which issued 40 before it went into administration.
There appears to be two types of purchaser affected by this situation; the would be homeowner and the property investor.
However some would be purchasers are putting up a fight. One group has formed the Berkeley Homes Collective. They say they are private purchasers only and that they were ‘mugged by slick sales staff’. They claim Berkeley Homes used “high-pressure sales techniques".
This could well turn out to be a tough lesson for property investors, one that could end up with many resorting to bankruptcy.
We thought that Mezzanine finance in the property industry had all but disappeared. Two or Three years ago there were plenty of options with Mezzanine finance with lenders keen compete with each other.
Coupled with increasingly aggressive funding terms at ever lower margins,and senior debts pushing past 90% of the value there was not much room for Mezzanine type arrangements.
And then we saw this advert:
When you need something bigger take a look at our ”Jumbo” Mezzanine Loans for Commercial Property Investments.
- Mezzanine Loans available from £5m to £50m
- Up to 90% LTV
- Interest rate from 15% per annum
- All asset classes considered, mainland UK only
Suitable for:
- Second ranking behind existing or new senior loan
- Partial pay down of existing senior loanRepair for breached LTV covenants
- Interest only
Which would appear to suggest that Mezzanine funding is back!
85% Buy to Let Mortgages are back!
A new BTL mortgage has been released which is apparently taking the market by storm. This product is ideal for investors buying property below market value as the lender will consider loans of 70% of the open market value to 85% of the purchase price!
For Example:
Purchase price £20000 (Max 85% = £170000)Market value £250000 (Max 70% = £175000)Mortgage Loan £170000 (lower of the above)
Not only that, but if you have recently purchased your property with cash, say from an auction, they will allow you to remortgage on the same basis even though you may have not owned the property for 6 months!
Rates and terms are competitive, and the lender will even consider multiple flats arranged on one freehold title or houses that are let to multiple tenants!
For more information about this please contact us and we will forward you details of the broker offering this deal.
The FSA has today launched a discussion paper on consumer responsibility and said that it wants to explore what steps it or others could take to help consumers understand and protect their own best interests more effectively.
The protection of consumers is one of the FSA's four statutory objectives and the discussion paper aims to provoke debate and bring greater clarity to the FSA's approach to consumer responsibility.
Dan Waters, FSA director of retail policy & conduct risk, said:
“Responsible and well managed firms that treat their customers fairly are crucial. Indeed, to this end, the FSA is strengthening its supervision of firms through the Supervision Enhancement Programme and its Enhanced Strategy for Small Firms. All firms have been warned that they face stronger and more intrusive regulation to ensure they are aware of their responsibilities to treat customers fairly.
“However, we also believe that markets will work more effectively if consumers are more involved, more capable and empowered. While we do not regulate consumers, we believe that we can work with firms, industry bodies and other stakeholders to encourage and enable consumers to consider their own interests more effectively in their decision making.
“We acknowledge that this is a debate that elicits strong feelings on both sides and we are keen to try to find common ground in order to contribute to better understanding and better outcomes for consumers in financial services markets.”
The Financial Services Consumer Panel (FSCP) questioned why the FSA is focusing on consumer responsibility at a time when it claims “large| sections of the industry are not giving consumers a fair deal It says that this is not the time for the FSA to be debating responsibilities for consumers.
Adam Phillips, the FSCP’s acting chairman said:
“Clearly, the industry has been putting pressure on the FSA to increase consumer obligations. While we are not arguing with the need for consumers to answer questions honestly and read key information, the FSA document provides an opportunity for the industry to attack consumers’ rights, when it is the industry itself which needs to get its house in order and take responsibility for its actions. Over the past few months we’ve seen consumer confidence fall to unprecedented low levels. It’s also a time when many firms have been exposed as not giving consumers a fair deal, from the selling of Personal Protection Insurance (PPI), to pension transfer advice and dealing with mortgage arrears.
“We have told the FSA that this is not the time to be discussing consumer responsibility, and we will continue to pursue this line vigorously with the FSA over the coming months.
Although it might seem odd that the FSA should be seeking opinions about how to "force" consumers to act responsibly it must be argued that consumers insatiable hunger for finance over the last few years has contributed to the problems we are having. A better informed and educated consumer has to be good for all sides of the industry.
There are increasing signs of improvement in the property market, but does this mean that property developers will be able to get 100% funding again any time soon?
Well, think back a few years and you will recall that relatively inexperienced developers were able to make good money just by purchasing a property and hanging on to it for six months. In fact several did and thought they were turning into professional property developers.
That may seem like a dig at novice property developers, but there is no doubt that some lenders were quite comfortable offering very high loan-to-value deals to effectively finance the purchase and development of sites. They believed that they were safe in the knowledge that if it all goes wrong price inflation alone will ensure that they are secure. And more importantly the set-up fees, interest rates and exit fees on these deals were really lucrative, meaning that the lenders were making a small fortune on deals that completed.
In today's market the lenders are steering well clear of anything that could hurt them, and this includes novice developers looking to turn a quick profit.
So What Can a Property Developer Do To Secure Funding?
In some respects it's back to basics. Think about the eventual sales process and work backwards. Identify sites that are in high demand arrears and focus on getting planning permission to create attractive and functional homes that will attract prospective purchasers easily. Put plenty of thought in to the marketing process of the finished product, and be prepared to share that research with your financial partners.
At the moment many areas have an over supply of two bedroom apartments and a woefully short supply of affordable two and three bedroom family homes. Prospective property developers would be well advised to consider building more family homes to meet with the current demands.
As always location is all important, especially in a competitive market. It is crucial that property developers build the right product in the right place and complete the build quickly. The key is to find areas where there is a low supply but high demand, coupled with thriving local economy and strong employment opportunities, and good commuter links. Also consider less obvious areas where there are signs that employment opportunities are on the rise; however you will need to be able to prove where this assertion comes from.
When working with a finance partner, whether it is a broker or lender, it is really useful to listen to what they are saying, take on board their comments and demonstrate that you are willing to learn, and be guided by their experience.
Environmental issues are top of the political agenda with local authorities and individuals looking for ways to maximise their energy efficiency and reduce their carbon footprints. Think about whether your project is tackling these points, and if they are shout about it!
Lenders to have money to invest in good quality and well managed projects, and if you look carefully at the specialist property development lenders that were busy 4 or 5 years ago you may be surprised to see that the majority of them are still there, and they didn't take a penny of tax payers money to bail them out of bad deals.
You still may not be able to get 100% property develpment finance just yet, but with the right preparation and support you can still get some very good deals.
Anyone who has a Commercial Mortgage will (or should) be familiar with LIBOR. So they should also be quite pleased that LIBOR has reached a record low.
LIBOR is the rate which determines the cost of most commercial mortgages and many other forms of borrowing. The rate coming down may bring good news in that interest rates on mortgages and other loans may follow suit.
Having said that, a recent Moneyfacts article reported that:
On an unsecured loan the rate is set at outset and repayments are fixed. Most secured loan repayments move with base rate or LIBOR, but despite being in a low interest rate environment the average rate has increased from 9.9% to 12.4% in the last two years
Just before things started to go badly wrong some of the independent Commercial Mortgage lenders were starting to offer variable rate mortgages. Good example would be Commercial First – although they have shut-up shop for new business they had a significant market share of small commercial loans. Many of the later loans were sold on variable rates.
Anything that reduces outgoings for businesses right now is going to be good news, but anything that gives banks good reason to start selling commercial mortgages again is going to be even better news.
Sadly, the majority of Second Charge loans (homeowner loans) were sold on fixed rates – at the peak of the property boom Second Charge loans were being sold at an incredible rate, and by a market that faced no significant regulation.
Second Charge loans on homes are very often linked to LIBOR ( which often comes as a shock to homeowners) and are notoriously slow to change with the main rate – if at all.
Are you on a LIBOR loan? – have you seen a change in rates?
In their response to the Rugg Review of the Private Rented Sector the CLG clearly believe that landlordism is word that anyone involved in private lettings should be aware of!
Aside from made up words (?) there is quite a lot of good stuff in the response and I will try to summarise the main points as follows:
- The headline is the idea of a Landlord Register – web based and involving an annual fee, membership would be a prerequisite for taking any legal action and carrying a threat of strike-off if a landlord does behave.
- A requirement that all tenancies are in writing – so obvious, but it might surprise some people to find out that a tenancy does not have to be in writing.
- A minimum standard for tenancies, or possibly a guide – I'm guessing that something prescribed will be the preferred route.
- An increase to the higher limit for AST's to £100,000
- Full regulation of Letting Agents – racing certainty that this will happen.
- Local Authorities to set up bodies to liaise with the private sector, and make better use of the housing opportunities it provides.
Inferred in the response is that there may be tax breaks for Landlords and a rather guarded hint to the voluntary sector to start building bridges with the private lettings sector ( paragraph 64 could have just said stop arguing and start talking!)
It would appear that the government is keen to keep the amount of primary legislation required to bring about these changes to a minimum so some aspects of their proposals may happen quite quickly.
What is worrying is that the attempts to regulate Tenancy Deposit Protection have been so bungled that the law is almost unenforceable, so look out!
Be interested if anyone has any other examples of the word landlordism being used in conversation!
Housing Benefit has often been criticised as an overly complex benefit that does not promote self responsibility and can even act as a deterrent to working. So with a view to improving the current system the government is introducing some major changes.
The Local Housing Allowance is a new way of working out how much Housing Benefit private tenants will receive and has been undergoing trials in 18 different areas of the country. From the 7th April 2008, the system will be rolled out across all of England and Wales.
From the private landlord's viewpoint this new system carries some mixed signals. Although there are definite benefits from letting to Housing Benefit tenants there are an equal number of problems. Currently it can take a long time to process claims leading to uncertainty about how much benefit a tenant is going to receive, if indeed they are going to receive any at all. On the plus side it is common practice for local authorities to pay the Housing Benefit directly to the landlord giving some piece of mind.
In theory landlords with tenants on Housing Benefit can be subject to payment claw-backs where a tenant's circumstances have changed and authorities have not been informed, although this is rarely enforced.
One of the main objectives of the introduction of the Local Housing Allowance system is to give tenants more responsibility for running their own lives, to encourage them to open bank accounts and to get them into an employment.
More worryingly for the landlord the introduction of the Local Housing Allowance will mean that rents will in future be paid direct to the tenant and not to the landlord, unless the tenant has a history of rent arrears and debt. During the trials it was found that a tenant had to actually be in arrears with their current landlord for this to happen. Simply proving that a tenant had a history of rent arrears was not sufficient to trigger payments to the landlord or agent.
Many landlords are sceptical and concerned about this change and fear future rent money will be used for other other living expenses instead of rent. The new system is intended to give the tenant more choice of where they live and the types of accommodation open to them. As per the current Housing Benefit system the option for the tenant to top-up their rent exists.
The Housing Benefit entitlement rules are not about change. Housing Benefit will still depend on personal circumstance: age, incomes, savings etc. although it is hoped that the Local Housing Allowance process should speed-up decisions on whether or not a tenant gets the benefits and how much.
Speed of decision making has often been cited as the major stumbling block for many landlords accepting Housing Benefit so any improvement is to be welcomed.
The local authority housing officer will publish reference rents for their local area which will give landlords and tenants a quicker way of determining likely Housing benefit payments meaning that they will no longer need to wait for Rent Offer assessment visits.
