Neal – could you tell us a bit about your background and what you do at RateSetter?
I’m Head of Property Finance at RateSetter, which means that I’m responsible for making sure that we only approve good quality projects which will repay in full. Always at the forefront of my mind is that we are matching RateSetter investors’ money to these loans, and with that comes a duty of care that we take very seriously indeed.
I’ve been in the industry for 27 years and have worked for Barclays, Lloyds, RBS, as well as non-UK banks, but always in property finance, covering everything including offices, industrial, nursing homes… all different property types.
At RateSetter we have a team of five, experienced industry experts, each with at least 10 or 15 years in the trade. We focus on the residential side of things, with loans ranging between £0.5m and £3.5m for property development.
We estimate that we’ve funded more than 150 individual residential units now, and we’re certainly proud of those developments – it’s very satisfying to be helping to improve the quality and quantity of the UK’s housing stock.
What are the key considerations when lending to property developers?
Firstly, we have a very clear and robust policy on what we will finance – only residential property development; the size of the loan can be no greater than £3.5m (but we may consider up to £5m per transaction under specific circumstances as long as we are comfortable with the risk profile); and the loan to value cannot exceed 65%. We always take security on property loans.
Secondly, we need to ensure we will be repaid; we need to have an exit. It sounds obvious, but it’s important to set this out clearly.
Thirdly, because we’re financing property development projects, we need to be very confident that the developer can and will deliver as they say they will. Chiefly that means that we need to make sure that they have the right skills and expertise – we lend to experienced property developers who have worked on lots of projects and have proven track records – these aren’t one man bands or people who are trying their luck; they’re knowledgeable, competent and professional.
What else do you look for?
We make sure that the scheme in question is well located and is right for the area – that’s important, and is something you can really only tell by visiting the area yourself, which we do for every property development loan.
It’s also really important to understand the development team: they need to have the right skills and background to be able to deliver a project, and they also need to have put in enough of their own cash to the project to be seriously motivated to complete it and won’t just let the project drift or put it on hold if things start looking tricky.
The developers have a lot at stake, which is the way it has to be with this kind of finance: their money goes in first and comes out last. We are first in line when the property is sold on or refinanced, meaning that we get our money back first.
What are the reasons you would decline an application?
There are some obvious things: the developer not having enough cash or being inexperienced, and also location can be an issue.
One thing that people don’t always realise is that we are very hands-on if projects don’t perform as they should. I tell the people in my team that if a development goes wrong, you’re going to have to live in the area until it’s resolved. People think that’s funny, but it’s true. What that means in practice is that we’re proactive and step in early – if trouble arises, we’re on hand very quickly to see things right.
Worst case, we take the keys and take the scheme over, but we will always try and work with the sponsor first as they are best placed to complete the works not us. Happily that’s extremely rare – while projects can have ups and downs, being diligent and proactive throughout the process helps us to maintain an excellent track record.
What if there’s a property crash?
That’s a good question – I’ve worked through two significant property crashes, so I’ve seen first-hand what can happen when times are hard.
Our policy towards property finance is deliberately cautious. By only lending at conservative loan to value (LTV) ratios, we have a buffer against price falls. Our maximum LTV is 65% and our typical LTV tends to be 55% or 60%. And our lending tends to be short term – typical loan terms are 10 or 12 months – which means we can adjust quickly to changing market conditions.
We take first-ranking security on all property loans. In other words, if the developer defaults, we can take ownership of the property and sell it, either partially developed or once development is completed.
What kind of residential properties are you funding?
It’s a real mix, but it’s generally mid or high end property, typically in the South East of England, i.e Home Counties, however, we are branching out as we grow. We’re particularly cautious around very high-end properties, and we typically aim to fund developments made up of several smaller apartments which are reasonably priced and easier to sell than a single very large, highly-priced development.
For more information, visit our Property Finance page.