In this final email of our Risk Management with CrowdProperty Series, we explore:
- How market conditions have impacted the property lending industry.
- The work our Credit and Portfolio teams do to support the successful completion and redemption of a loan.
Market conditions
As you will be aware, developers have faced a number of consecutive headwinds over recent years, and it is therefore to be expected that we would be carrying more late loans than we have historically.
Developers with live and active construction sites between 2020 and 2022 faced labour and supply chain delays as well as significant increases in the costs of materials as a result of Brexit and the Covid-19 Pandemic.
More recently, inflation soared which further challenged the economics of both developing property and the cost of living for prospective buyers.
This was followed by central bank interest rate rises driving mortgage rates significantly higher, especially during the uncertainty over rates through 2023, causing buyer demand to stall. Whilst housebuilding supply continued to significantly under-deliver which upheld end values, there were fewer transactions and, by definition, fewer exits for developers through this time. Market conditions, driven by the easing of financing costs, mortgage market competitiveness and reduced demand-side uncertainty, have improved in 2024. Agreed residential property sales have been significantly above pre-pandemic normal levels in 2024, which will flow through to more completed transactions as we move through the year, supporting developer exits and them moving onto their next projects. However we’d like to go into more detail on how we manage late-running loans.
Handling overdue loans
The handling of overdue loans requires diligence, experience and skill to support an efficient completion and exit at all times and even more so during challenging periods. Our experienced Credit and Portfolio teams treat late loans with the highest priority, applying over 100 years of combined industry knowledge as senior surveyors and turnaround experts to each unique situation.
As previously mentioned, when a loan goes late, it is typically best that the site is progressed and completed by the principle developer. The first charge security we hold on all projects is only enforced as a last resort when all other avenues have been exhausted, and only ever when it is in the best interest of all investors in that loan – institutions and private investors alike.
CrowdProperty processes
We review each project weekly on a case-by-case basis against a number of early warning indicators (EWIs) to ensure progress is continuing, and to identify any potential issues as early as possible. This is a proactive approach that allows us to minimise and, in some scenarios, mitigate emerging risks altogether.
When asked about the portfolio team's role Martin Bray, who is an experienced Quantity Surveyor with over 10 years’ experience and our Head of Portfolio, said:
"We speak to all borrowers at a minimum on a monthly basis and even more so as they reach the end of the loan term. Simultaneously, our appointed Independent Monitoring Surveyor (IMS) visits a site whenever funds are requested by the developer to validate the spend against works completed, submitting a detailed report that covers a number of monitoring factors, and acting as an additional layer of risk monitoring.
"Because of the level of in-house experience we have within the construction, development, and banking sectors we are able in many cases to see risks before they become realised and where they are realised, find solutions others may not. This helps protect our stakeholders and their investments as well as our developers and theirs."
As the developer reaches the end of the loan term, we may allow for an extension, provided that we can see clear progression and the exit strategy is still valid and achievable. Our priority is to ensure we are able to achieve a successful exit strategy and the best way to do this is to ensure there is a completed development.
It is worth noting that we do not ‘re-term’ the loan in your portfolio – we continue to present, and report against, the original contract end date of the loan.
Where progress has slowed or difficulties have been encountered, we will meet with the borrower to discuss all possible options, always thinking about the best outcome for investors. These options could include resequencing works, restructuring the team or helping to secure further debt or equity capital injection. We will also initiate further meetings with the borrower and their wider professional teams to discuss buildability and programme solutions, introductions to finance providers, and to explore exit bridges with institutional partners.
Mark Davidson is our Head of Loan Management and has been in financial services for close to 30 years, 25 of which have been in property finance. He says:
“Yes, there are difficult conversations to be had but these are necessary to get all parties to work to the same outcome. My primary concern is ensuring our investors get their monies back. Part of my role is to rectify problems and issues and take the Borrower on a journey to ensure they also come out of the difficult situation they find themselves in.
“Only once all avenues have been exhausted and/or the borrower is no longer engaging or meeting deadlines will we then escalate, which could mean instructing receivers.
“A good example of a late loan which did not warrant instructing receivers was a project that repaid in full last week that was 27 months late. The borrower communicated well, continued to do what they had said they would do, made slow but reasonable progress on site, and made reasonable progress selling down completed units through a more challenging market.”
Enforcing the first charge
When the first charge is enforced and receivers have been instructed, receiver fees are due as a priority from any capital received, and securing the site incurs a monthly expense.
Putting a project into receivership does not guarantee a successful exit, which is why we carefully assess if we should use this formal recovery option. In some instances, there are external factors at play that are outside of both CrowdProperty’s and the developers’ control, and therefore instructing receivers too early could lead to unnecessarily incurred costs and therefore impact the exit position.
As Andrew Hall, our Chief Credit Officer, mentioned in the first email of this series:
“Although it can be frustrating, allowing more time to exit the loan is often the best option, as stepping in and forcing a quick-fire sale can negatively impact the potential sales value and therefore impact the returns for our investors.”
It is important to note that we will only allow this time if the developer is continuing to make reasonable progress with the build and/or towards securing their exit strategy, and that exit strategy is agreed to be viable by our Portfolio and Credit teams. If the developer stops engaging or is not meeting agreed deadlines we will consider this very carefully in assessing our next steps, as progressing the project is a key risk mitigant.
An improved landscape
Emerging from recent challenging times, we are now seeing improvements in progressing exits. However, it’s important to recognise that results may not be immediate. With fluctuating expectations about future inflation and interest rates it may be that full confidence takes a little while to flow through the system.
In late 2023, swap rates declined significantly, resulting in far better priced capital to the mortgage market. According to Zoopla, the average time to sell a house currently stands at 25 weeks and consequently, property transactions that were agreed upon late last year as the mortgage market improved are only just reaching completion now.
We saw slower paybacks lasting right through Q1 and into Q2 2024, as fewer agreed transactions in the more uncertain times were completing. We are now seeing many more exits (both refinances and/or sales) agreed and moving through the exit pipeline, which expect to be repaying over the coming months, including many of our long term late loans.
The further improving conditions and benefits from the well-publicised competitive mortgage market of early 2024, which brought volumes of market transactions agreed back to 2019 levels, are still working through the system.
This, coupled with the latest inflation figures (annual CPI at 2.3% in April), clarity on when the next election will be, ongoing undersupply of housing, and confidence from developers who are out shopping again (with a record £1bn of projects applying for finance from CrowdProperty in April) shows that the market is moving confidently again.
Tom Short, who has been with CrowdProperty since 2020 and is our Head of Credit commented:
"The increased volumes of applications that are coming through are of good quality, and we continue to focus on the best lending propositions to progress."
We hope this has been informative, and as always, if there is anything further you would like to hear from us, please don't hesitate to get in touch on 020 3012 0166.
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