The Irresistable Rise of the Non Banks and Challenger Lenders
Potential rising interest rates, the political climate, the looming threat of Brexit, tighter regulations and increased capital requirements for traditional banks have all resulted in uncertainty. Indeed uncertainty, uncertainty, uncertainty is all the rage in the UK.
Traditional banks appear to have retreated and concentrate on deleveraging loan books and reducing exposure to bad debt.
Meanwhile non-banks and challenger lenders have leapt into the void left behind by the traditional banks and have emerged victorious as a new breed of lender.
Insurance companies and debt funds have increased their product range. New non-bank lenders have emerged since the global credit crisis and continue to emerge. All are hungry for business and they have grown exponentially since the last recession stealing market share and taking on more leverage. They boldly go where traditional lenders don’t go. The liquidity funding gap that was left by the global credit crisis has narrowed and there is now more variety than ever across the whole funding spectrum. And non-banks and challenger lenders genuinely offer an alternative to the traditional banks.
Confidence and optimism in the sector is high for 2018. Traditional lenders have not retreated – they have just retrenched. They are instead concentrating on what they do best – lower risk loans with lower leverage. The challenger banks were waiting in the wings but now they are offering alternatives and strengthening their offerings. And other non–bank lenders have emerged chasing higher margins with higher leverage and higher risk appetite.
Polling some non-banks and challenger lenders about their thoughts on the current climate, Luke Townsend, CEO of Zorin Finance commented “Alternative lenders are no longer seen as an option of last resort; due to the retrenchment of mainstream banks as a result of continual regulatory chocking, they are now part of the mainstream. Indeed, a study carried out by the IPF found that in 2012 debt funds and alternative lenders accounted for 20.2% of the development finance market and by 2015 this had risen to 38.4%. I expect the 2018 figure to be significantly higher when the triennial report is published early next year.”
Luke is not alone in the current climate. Ben Barbanel of Oaknorth commented: “We launched in September 2015… since then, we have managed to grow our loan book to £1.25bn – half of which is in property”.
“We’ve managed to compete with the big five banks by taking the time to understand each business and working to the client’s time frames. Where large banks typically take months to complete a transaction, we take weeks, and clients are willing to pay a premium for that speed…and our loans have directly helped with the creation of over 5,100 new homes and 4,000 new jobs in the UK. We’ve also done this without a single default to date.”
Recent research shows that it does take a lot longer these days to get a real estate loan from the traditional lenders but this is often down to the internal processes and checks of those lenders. But now non-banks and challenger lenders with more expensive margins have the ability to complete deals quicker (usually within 1 month). Bhavna Toase, Senior Credit Manager at peer to peer lender Invest & Fund commented: “The alternative finance sector is now an established source of finance for the property industry and the trend is up – we are seeing new entrants to the development and bridging market every week. That level of competition is good for the property market, particularly when you factor in the decline in bank lending to SMEs over the past 5-10 years. It has been very difficult for smaller house builders to access finance from traditional sources, and this has hindered their ability to scale up and build more. This is where alternative financiers have a huge opportunity and competitive advantage. And Britain’s housing shortage isn’t going to be solved by large scale schemes from the big developers alone.”
Speed and execution of deals are a major factor and it seems that customers are willing to pay a premium for this service. Jonathan Nail, Property Development Director, United Trust Bank also commented that “Post credit crisis the traditional High Street Banks have been weighed down managing their legacy issues whilst incurring significantly increased regulatory and capital costs in running their businesses. As such, they have been inwardly focused and afforded less time and capital to develop new business, especially in the SME House building sector where they have found economies of scale can be difficult to achieve. SME House builders often have restricted access to capital and consequently need a finance partner who can deliver funding quickly, confidently and with a degree of certainty that allows them to react quickly to new opportunities.”
And with such a diverse supply in the market of non-bank lenders and alternative financiers, the market may be crowded but there is still a funding gap and competition is good for the industry. Developers, property companies, entrepreneurs, family offices and borrowers (big or small) are all keen to do business. And here is a thought – in another downturn will these non-bank lenders and challengers stand by their customers or will they pull the plug given that they have certain return requirements to their investors. Time will tell!