The timetable of buying at auction – which is usually seven to nine weeks from first sight to putting down the money – has always been rather at odds with the traditionally more lengthy process of securing finance from a lender.
Faced with the difficulty of securing long-term funding in the time frame allowed, the alternative has been bridging finance. This is often punitively expensive and can require as much detail as a standard loan and personal guarantees. However, this situation has changed radically as the traditional clearing banks play less of a central role in lending to auction buyers and are being replaced by more agile ‘challenger banks’ and other lending sources.
The rates for bridging finance are the lowest they have ever been, with rates from 0.44% per month available. Products are offering a ‘fast purchase’ service through which auction buyers can secure their property inside four weeks, and then refinance at leisure.
The streamlining of this process is being further improved by bespoke products aimed specifically at the auction investor. Our ‘pre-approved’ bridging loan product, underwritten by Octopus Property, enables instant financing of all purchases in the Acuitus auction room for £500,000 and above. Neither a valuation nor a full legal title report are required to ensure the loan is drawn within the time from the hammer falling to completion of the purchase.
It is important to enable auction investors to make best use of their capital and get ‘back in the game’. There is a continuous supply of commercial property opportunities for investors available through the auction room and you don’t want to have a large number of potential buyers side-lined by the fact that they are still arranging finance for their previous purchases.
New loan products
Auctions are part of a dynamic process and are always bringing fresh product to the market. There is nothing more frustrating for an investor than been unable to bid on a property which perfectly suits their requirements, simply because their capital is tied up in unfinanced assets.
Typically, buyers at auction are building portfolios of multiple assets and, as such, using finance to leverage their position is essential.
While the clearing banks invariably want loans that are secured on commercial investment properties to be simultaneously paying capital and interest, one of the new style ‘challenger lenders’ is now offering 10-year interest-only loans for commercial investment properties.
Billions of pounds of lending held by private investors comes up for refinancing each year and the terms they secure are crucial in determining how much ‘dry powder’ they’ll have for continued investment through the auction room
Many investors are finding that when they come to refinance there is a restricted appetite from their existing clearing bank lender, but this interest-only lender has been taking a different view and is open for business on all types of commercial property regardless of location or length of lease to expiry. Whether this will lead to a greater pool of lenders offering these terms is yet to be seen.
In addition to the interest-only terms, this lender is also requiring a lighter debt service cover than the clearing banks which can be very helpful with lower ERV valuations. At a time when the market is challenging, the terms – with a loan-to-value of up to 75% and a margin from 3.24% over Libor for commercial assets – are notably attractive.
Similarly, it may be surprising to some that, despite some negative sentiment to the sector, there are still attractive terms available for residential development finance.
We recently saw the launch of a new development loan facility for experienced developers who want to borrow £10m-£100m. In step with the times, the facility is aimed at developers building houses or apartments for mainstream buyers, rather than those selling high-value luxury units.
Available for developments in England and Wales, this facility offers a blended interest rate in the region of 5% for a loan-to-cost of 80%, making it one of the cheapest loans available.
Refinancing
While financing new auction purchases is important, the other pivotal dimension of the funding equation for investors is refinancing.
Billions of pounds of lending held by private investors comes up for refinancing each year and the terms they secure are crucial in determining how much ‘dry powder’ they’ll have for continued investment through the auction room.
In this area of funding, “challenger lenders” can provide options that are not on offer from a clearing bank. However, they can charge higher interest rates, or have more stringent requirements for personal guarantees so it definitely makes sense to shop around.
Stuart Buchanan is a director of specialist property lending adviser Acuitus Finance
