Not entirely 'business as usual'

As the year draws to a close, Daniel Fireman, Head of Banking & Real Estate Finance at Howard Kennedy LLP, looks back and considers what might be in store for the specialist lending market from the perspective of a lawyer focussed on that space.

At the beginning of this year there was very much a sense from most stakeholders in the industry that all that could be predicted was the likelihood of continued unpredictability, fuelled by market uncertainty and underpinned by potential economic and political chaos. Not only did many financial intermediaries, lenders and borrowers observe that the UK is cyclically overdue a material downturn, one had to factor in the double whammy of not knowing if there would be a Brexit deal and the prospect of a change in government.

Notwithstanding all that, throughout the first three quarters of the year and for most of October, it seemed like business as usual. On reflection, though, perhaps it's not been entirely ‘business as usual’ as we know it. Deal flow appeared to be consistent or up, but the benefit of hindsight reveals a number of established lenders becoming more circumspect in terms of the size and nature of new lending propositions. At the same time, new bridging lenders emerged and some existing players with an eye on contracting rates of return evolved their operations towards and started to focus on development and even mezzanine funding. Whilst bridging, development and mezzanine loans have been written and completed at a rate, these have not necessarily originated through the usual suspects.

None of this is surprising given that at the time of penning this column, the prospects of a swift Brexit resolution - deal or no deal, in or out - seem slim. Those lenders that are either sufficiently spooked or see no reason to stick their necks out seem to be battening down the hatches, whilst other lenders see this as a time to capture and seize opportunities in terms of being able to service a demand, raise their own profiles and grab market share.

The latter half of October and first half of November appeared to be quieter in terms of new loan originations. This may be due to would-be challengers to the market encountering their own obstacles in terms of being able to offer competitive pricing or beginning to appreciate the necessity for skilled and experienced personnel to support development-related or other more sophisticated deals.

Looking ahead to next year, many acknowledge that whilst lending business will continue to be written, appetite is bound to stay suppressed whilst the economic and political horizons are unclear, and it remains to be seen whether pricing can remain as competitive as it is at present. Clearly, though, there will be a continued demand for specialist finance (particularly refinancing), and for housing and development in certain sectors and regions which will fuel borrowing requirements that the more agile specialist lenders are well placed to service.  At the same time, the prudence (or otherwise) of underwriting decisions made during the current year will be put to the test, with the bleak prospect of casualties amongst the less robust members of the specialist lending community. Whilst any such departures from the sector should have little impact in terms of completed single drawdown bridging loans, at least whilst the uncertainty continues, FIBA members will no doubt give serious consideration to the ability of prospective development funders to meet their ongoing multiple-tranche payment obligations.

In the meantime, the usual Christmas rush has commenced, heralding the seasonal manic - though often futile - pursuit of completions this side of the New Year.