Inside RateSetter: Property Finance

In the latest in our series of blog posts looking at aspects of the RateSetter business we spoke to Neal Moy, who oversees RateSetter’s Property Finance portfolio. 

Can you give us a summary of your background in property finance?

I have specialised in property finance for more than 30 years, working across big banks like Barclays, Lloyds and RBS and other lenders, and in that time I have managed loan portfolios through a number of market cycles. My team of 16 property finance experts also has many decades of industry experience between them.

How does Property Finance fit into the RateSetter portfolio?

RateSetter spreads lending across different types of borrowers – consumer, property and asset-backed (our lending criteria for each type of borrower is here). This diversification is a strength of the RateSetter model as different types of borrowers perform differently through the economic cycle.

Consumer loans continue to make up the majority of the portfolio and we expect that this will continue to be the case in future. Over the past five years, we have steadily increased the weighting of property loans as a percentage of our overall lending, and now property loans make up just under 20% of the RateSetter portfolio.

What types of property developments do you finance?

We mainly fund smaller developments in England and Wales with our average loan size being £1.6 million. Typically, the sorts of schemes that our clients build are anything from a couple of houses up to 30-unit schemes such as new build houses or flats with resale values up to £600,000 per unit. This caters for the mass buyer market who are looking for an affordable home, and also allows the developer to take advantage of the government’s Help to Buy scheme depending on the thresholds in the area.

It is important to us that the developments are located in areas where suitable demand exists and that our local relationship managers can easily visit the sites within a maximum 2-2.5 hour travel time. In addition, we employ independent project monitors to regularly review work on site and they sign off any interim drawdown requests against evidence of expenditure and actual progress made.

Do you do any other types of property finance?

Yes, we also provide a Development Exit loan product, to provide finance until sales occur for recently completed houses where the new build warranties are in place. Development Exit finance makes up 17% of our property loan portfolio.

How do you manage the risk of property loans?

RateSetter has always taken a cautious approach to lending for property development. We only approve loans to seasoned property developers who have many years of experience and can demonstrate that they have previously completed similar projects – and have other forms of funding behind them should the need arise later. If we are in any doubt about the project or its sponsors, we decline to provide the loan.

Our property loans are typically for £1-2m over a term of 12-15 months. We take first-ranking security against the property being developed and personal guarantees to cover for any cost or interest overruns, and our average loan-to-future development value is just over 60%, which provides a cushion in case values fall or costs increase. In addition to this, like all RateSetter loans, property loans pay into the Provision Fund.

What checks do you do as a property development progresses?

We pride ourselves in adopting robust and consistent checks and controls, including by using independent solicitors, valuers and project monitors to ensure that the schemes are deliverable. On average, loan application to drawdown takes 3 months due to the detailed due diligence that we undertake.

We also use independent experts to review work completed by property developers on a regular basis. We only work with reputable and professional firms who know the market well and can protect our interests accordingly. We also make sure that we visit each property in person ourselves on a quarterly basis to check that good progress is being made and that works are on track to be completed to a good quality. In most instances we and/or our independent project monitors are still able to do this, while practicing social distancing.

Has Covid-19 affected property developments? Is building continuing?

Yes, 87% of our property developments are continuing to operate as normal. At the end of March the government wrote to builders to encourage them to continue building. We are actively involved in supporting our customers to ensure that developments are completed as unfinished schemes are more difficult to sell. Although progress on some sites has slowed, more schemes are being finished each month and, in a large number of cases, sales are already agreed and are continuing to proceed to completion.

Are developers able to sell completed projects in the current market?

As you would expect, we keep a close eye on property market dynamics across the country. Throughout 2019, political uncertainty led to somewhat muted activity in the property market, however the supply of new houses continued to trail demand by some distance, so the market for affordable houses held up well. Although the market was dynamic during the first quarter of this year, the pandemic has brought more uncertainty.

RateSetter's focus is on smaller developments and refurbishments. At this end of the market in particular there is a significant deficit of supply, and demand for these properties continues. We have seen numerous sales over the past 4 weeks along with one or two client refinances, so there is still evidence of an active market, but we continue to monitor this carefully whilst supporting our existing developer clients through these unprecedented times. In the first two months of this year 10% of our property portfolio repaid, and during March an additional 10% of the portfolio repaid.

Have you made any changes to RateSetter’s criteria for new lending since the epidemic started?

Since the beginning of March we have paused writing new property finance business. We are continuing to support our existing clients on site acquisitions that were contracted up to the end of March. We continue to monitor the position but remain focused on supporting our existing borrowers for now.

What do you enjoy most about your job?

I find it very satisfying to be helping to improve the quality and quantity of the UK’s housing stock, supporting the construction of good quality homes across the country.