Topland’s guide to building a loan book

The words “It’s a great time to be a lender” haven’t been falling from the lips of traditional financiers or challenger banks for some time. But this is exactly how it looks from the vantage point of the lending division at Sol and Eddie Zakay’s Topland Group, where short-term bridging loans are bread and butter and demand for refinancings is offsetting the current dearth of acquisitions. “We’ve had one valuation correction. We’ve got to keep an eye on the second valuation correction. But if you get your loan-to-value correct, this is a great time to be a lender,” says Tom Betts, head of the single-family office’s structured finance division. “Unfortunately, you have the clearers and some of the debt funds and challengers [being] overcautious and not providing the facilities.” That problem has been particularly acute for development, with lenders unable to extend a loan beyond practical completion. “We can come in and we can provide that support while the borrower gets to that stabilised position and can go back to an investment lender,” Betts says. Although he makes it sound easy, refinancings also fall down: the original lender may take comfort in the knowledge that someone else was willing to lend and offer a six-month extension. “For borrowers it’s a really tricky time because they’ve got this uncertainty,” Betts says. “Is the bank providing them a relationship? Are they serious about supporting them or are they ready to put the knife in? There’s this nervousness that there will be another valuation correction, and that’s when the banks may consider enough is enough.” Make the call Decades of knowledge and expertise, built up since Topland was founded in 1991, not to mention entrepreneurial instinct, leave it well-placed to decide which situations to get involved in. “We don’t mind making that call. We’re here to provide a solution to those difficult situations. Some are going to fall down, but the majority don’t because you know there has to be a solution found. And it’s just getting probably both the bank and the borrower to be realistic on what is achievable,” Betts says. Invariably, that means the borrower has to put more equity in to demonstrate their commitment. And the asset must be good, in other words liquid, so the capital can be clawed back if things go wrong. Sticking to these criteria for quality sponsors and quality assets, the lending arm has deployed more than £1bn into UK property since its inception just over a decade ago. It has invested Topland’s cash reserves across the entire capital stack, providing senior, whole loan, mezzanine and preferential equity. This includes pre-planning assets and strategic land, development spanning prime residential, mixed-use, hotels and student accommodation, refinancings and stabilisation loans and capex infrastructure loans. It currently has a loan book of around £450m. Not bad, even if it is dwarfed by Topland’s close to £2bn of real estate assets and its committed development pipeline of £850m – including big projects such as Verdant, EC1, the pioneering sustainable building soon to be TikTok’s new London HQ, and hotels such as the redevelopment of Brighton’s Metropole. Topland’s lending has also morphed into longer-term development joint ventures, such as Islington retail and office project 1-7 Upper Street, N1, with Northstar Capital and the residential redevelopment of Allen House in Kensington, W8, with Residence One and O&D London. Hats off Ex-Barclays and Aviva, Betts joined Topland in the aftermath of the global financial crisis to establish it as a key player in the alternative lenders market. The Zakay brothers needed to diversify away from their old model of buying long-term income streams in sale-and-leasebacks with 80% debt. When they were refinancing their own portfolio prior to the crash – drawing out cash to fill their war chest in readiness for the market to bottom out – the quality of tenants such as M&S, Tesco and Sainsbury’s meant they were able to do so without the LTV covenants that became so problematic for many of their peers. “That’s why they could then have the comfort to go and diversify and utilise that cash pile, knowing the original model that served them so well for probably 20 years had evaporated overnight,” says Betts. “Hats off to them. It was an entrepreneurial call.” Topland bought operational hotels and backed renewable energy start-ups. “If you’d said we would be doing those things prior to the crisis, you’d have been laughed out of the building,” says Betts. In a reversal of its old approach, the group bought short income streams from 2009, spending some £500m on picking up assets at yields of around 14% without debt and selling them from 2018 at yields of around 6% or 7%. “The profit line on that part of the strategy was fantastic,” Betts recalls. Lending became another string to its bow, giving it a return and access to deals which hadn’t come across its desk as an investor. Loans range from just £5m up to £100m, averaging around £25m. “Topland hadn’t done any lending before, but they saw it as great way of getting a return. It was initially started as a treasury function. It was just a matter of: right, well, we’ve got all this money we’re not going to deploy for a while, we might as well put it to good use and just churn it,” he says. “That’s why we’re bridge lenders – we don’t like going beyond that 18-month window. We started that way and it’s now a very successful profit line to the business.” Dealmakers Showing its appetite to diversify, one recent deal took Topland into the fuel forecourt retail sector for the first time. It provided a £25m refinancing package to MPK Garages, which operates a 28-strong portfolio of UK service stations covering the Midlands, Yorkshire, the North East, Oxfordshire and the South West. With a new deal under its belt with Nisa, MPK’s growth strategy was a key attraction. Another recent deal saw Topland back urban regeneration and property investment specialist United Properties London and Gold Wynn Group with a £21.5m six-month senior debt facility. The loan made possible the partners’ acquisition of the Northern and Shell Tower on the Isle of Dogs, which had consent to be transformed from offices into a 209-flat development with a GDV of £85m. Gold Wynn principal Ben Friedland described the structured finance provided by Topland as “pivotal” in completing the acquisition within tight time frames and allowing a swift start. The broad collection of assets under “beds” is another area where Betts sees opportunities. Topland exited its own Hallmark Hotels business for £250m in 2019, but hospitality remains a priority sector as demand strengthens post-Covid. Last year, it backed the newly opened 104-bedroom IHG Hotel Indigo in Exeter, following a multi-million-pound restoration of the former House of Fraser department store building. Topland provided a £20m development facility with a stabilisation period for owner (and long-standing client) Exeter Hospitality. At the smaller end, it backed a private investor early last year when buy-to-let lenders had withdrawn from the market. It provided a £6.85m bridging loan for the refinancing of a portfolio of nine flats in Hull and the acquisition of a further 39 in the same building. The loan was arranged on a nine-month term, with low early repayment charges, at a new LTV ratio of 64% and a pricing margin of 5.5%. Perfect storm Meanwhile, Betts, like his peers, continues to watch the office market closely as it takes a battering from the perfect storm of hybrid working and energy efficiency legislation. “Only the strongest products will survive in the long term,” he says. “The cream will rise to the top.” From a lending perspective, Topland has been stepping in as a mezzanine provider to support “quality sponsors” with grade A or B office buildings looking to meet ESG targets – something senior lenders want to see happen to the assets on their books, but in many cases aren’t comfortable financing. “We can step in as a mezz provider to provide that capex [infrastructure loan] because we know it’s going to add value,” Betts says. “They should then be able to recover a lot of that cost in 18 months to two years through the service charge to the tenant… if they can recover it.” That’s another story. With a sizeable office portfolio of its own, Topland knows well the shifting sands of this sector. “I think everyone is taking a step back, especially the funds, [from offices] as an investment class and asking themselves whether they want offices long-term in their portfolio,” Betts says. But, he points out, funds will always need to match what their annuity pension business is all about: long-term income. With leases now so short, offices must be repositioned as businesses with a core income stream worth paying for. “What will happen is that there will be a recognition that an office building is a business, and it’s all about supply and demand,” Betts says. “How much income can that business generate? What is the core income it can generate? And then what is the top slice depending on where the market is? If you have the right kind of asset, you will always have a core income,” he says. “Yields will correct themselves to establishing what price a fund is prepared to pay for core income and what it’s going to pay for that uncertain top slice,” Betts predicts. But that is a little way off. “That [appetite] might come back at some point, and we might be talking three years away, but you can see how the funds will be desperate enough at some point, when they haven’t got any core long-term income streams,” he says. “They will consider that only for good-quality offices that have got a track record, a large tenant mix.” For now, everyone is nervous. How does it compare with the single market shock which led to such immediate distress in multiple areas in the GFC? “What we’re seeing now is a much more protracted process, with distress appearing in pockets and at different speeds,” Betts says. Clearly some lenders have begun to “stick the knife in”. Betts expects more areas of distress to emerge in 2024 as increasing numbers of asset owners reach the end of their financing agreements and the long-term impact of Covid on markets such as offices works its way through the system. Topland looks different from the business it was when the GFC hit. But just as before, it looks ready to make more of those all-important entrepreneurial calls. Main image © Topland Group; Verdant images: Verdant London; The Northern and Shell Tower: Nicholas Bailey/Shutterstock