Warehouse credit lines are fast becoming the “lenders” bread to their butter. From main stream, commercial to bridging and development lending all have a need to access significant volumes of credit for the benefit of the uninitiated a warehouse line of credit is like an overdraft facility, where the funder provides said facility to the distributor who then lend on a retail basis to a borrower and they take the arbitrage between the two rates charged this makes up a sizeable proportion of most “lenders” balance sheets.
But do we think lines are drying up with the low cost of credit and what does that mean for borrowers?
My company has been working with an assortment of “lenders” to date on both a consultancy and a direct basis, to help arrange credit lines from £10m GBP to £200m GBP. With sectors covering bridging to equity release raises, and from my experience every single “lender” has their clients in mind, whether they want the right product, the right rates and obviously the right margins for their business to expand and grow the client is the key to all of this.
So, let’s break it down, how to work with a “lender” and an investing party to create and equally beneficial proposition?
What are some key factors: -
• Look at the yield, fixed or variable; are they attractive returns compared to other asset classes which match against specific liabilities. Currently the market is looking more closely at how variable compare to the fixed rates we can structure and so lending companies are having to adapt their models to fbe competitive
• Look at the security – does the nature of this type of lending/sector mean that the asset class is well insulated against major capital market changes and other external economic events. With Brexit coming up and investing companies looking at this closely how do you protect clients and your lending business from a knock-on effect and mitigate potential financial losses?
• Work out the longevity of the book – what is the length and exposure of the investment.
• Who would be interested in a specific book? - pension funds, funds and privateThe nature of LTMs means that they fit well into a diversified pension schemes, private venture investment looking to offer strong levels of return when compared to similar asset classes. This also would match the medium- to long-term liability profile of many UK pension schemes, funds and private offices depending on the “lending” business.
We would then look at the Investment Model-
This depends on the extent to which the funding partner wishes to involve itself in direct oversight of the end assets. In one scenario, there is a direct relationship with the funding scheme under which legal title for each mortgage passes to the scheme, which in turns oversees compliance with the agreed lending policy.
Alternatively, there is a fund model, which would suit investors who wish to have less direct contact with the actual end assets and enables application of the policy on behalf of a number of pooled investors. This second approach is also suitable for funding partners who want to take a smaller initial investment in the model. But these are just two combinations of structures that can be put in place.
But coming back to the main point, the graph below shows the average interest rates for mortgages with a loan to value ratio of 75 percent, in the United Kingdom (UK) in March 2014 and June 2017. In 2014, the average interest rate for a 2-year fixed rate mortgage was 2.37 percent, whereas in 2017 it decreased to 1.48 percent.
This shows the dramatic fall in rates but at the same time shows that there is a lot of room for manoeuvre, which I feel supports the continued investment into the UK mortgage and debt market.
So, leading on brings me to believe the future is bright with sectors like Equity release mortgages becoming more common for a generation of people that are retiring today and facing significant changes in the choices, challenges and risks faced as they plan their later life. The principal challenge is that of providing sufficient funds to maintain a preferred lifestyle or manage existing debts.
The bridging and development market remains strong for the consumer with costs low and public sector reforms on affordable housing and planning rules changing to make developers build out their land with planning in this sector.
I feel the market has the strength and backing to allow lenders to obtain warehouse credit lines similar to those available in the mid-millennia at competitive rates but with the benefit of the experience surrounding the credit crisis guiding their strategies for the future, and perhaps making their decisions based on a wider risk profiling basis with increased emphasis on auditing the lines more frequently and with greater control I think we had it right the first time round but just let it get away from us, do, with the benefit of hindsight we can now push on to bigger and better with the emphasis on whats right for everyone involved …………..especially the consumer.
Sources: Global Property Guide; Bank of England Survey by: Global Property Guide Survey name: Property Prices in United Kingdom Published by: Global Property Guide Source link: globalpropertyguide.com Release date: September 2017
Housing white paper - https://www.gov.uk/government/collections/housing-white-paper