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Filling the Void in the UK Real Estate Debt Market

by trusted insight posted 7years ago 3260 views
Real Estate

Rod Lockhart, Managing Director, Montello Capital Management: “There is a great opportunity for us to fill the void in the UK real estate debt market for developers seeking short-term property financing.”


Several factors have come together to create good opportunities in the UK private debt market. Reduced bank lending is one such factor; European banks, constrained by Basel III capital adequacy rules, have greatly reduced their lending appetite since 2008. Commercial borrowers are also increasingly seeking to diversify funding lines away from the traditional bank lending model having seen the problems caused by over-reliance in the global financial crisis. This has created a mismatch between the quality of borrowers and projects and the finance options available to them.


Montello was established in 2008 to capitalize on the opportunity created in this market due to a lack of credit supply. Montello is a leading provider of short-term real estate finance with loan applications exceeding £150 million per month, and has been labelled a “one stop shop” for real estate developers and entrepreneurs, providing funding from acquisitions to bridging finance and developments.  


The backdrop of structural under-supply of UK real estate (particularly residential property), exacerbated by a growing population and tight governmental planning policies, underpins the market in the UK. As all of Montello’s loan portfolios are secured against UK real estate, this collateral serves as an important part of the underwriting process and asset management plan.


Rod joined Montello from CBRE where he was a senior director, advising institutional fund and pension scheme clients on direct and indirect real estate investments. Rod is focused on portfolio management for Montello.


What is your geographic focus and outlook for these markets in the coming years?


We are a UK-centric firm and focus on Greater London and South East of England. While there are many pan-European funds we stick to our core market, where we have deep local expertise and a strong origination platform. Consequently we plan to remain UK-centric.


Our loans tend to be for residential and mixed use and we have significant cross collateralization and personal guarantees for extra security as needed. Although there has been a fairly large increase in asset values, the UK residential markets are underpinned by strong fundamentals. In fact, CBRE predicts London residential property will rise by 31% over the next 5 years.


What is your source of deal flow?


Montello’s transactions are underwritten in-house and we have several options when it comes to sourcing deal flow.


Our primary source is our sister company LendInvest, which is a loan origination platform and the largest peer-to-peer marketplace for mortgages in the world. We have a team of loan origination experts along with an in-house underwriting team. LendInvest attracts approximately £150m of deal enquiries per month, which is narrowed down to around 10% of deals which end up being completed across the business’ funding lines.


The MREOF also benefits from a formal relationship with CBRE as transaction adviser, which is another source of deal flow, in addition to the vast network of developer contacts enjoyed by Montello. Approximately a third of our business comes via direct repeat borrowers – relationships where we have a strong mutual business understanding.


We are focused on deals ranging from £1 to £5 million and have short duration (3-18 months, 6 month average) loans, which ensures strong liquidity and accurate values of the underlying security assets of the portfolio. The speed at which Montello allows counterparties to drawdown a facility creates a risk-return disparity; speed is a precious commodity in the real estate financing market, and often makes the difference between grasping a time-sensitive opportunity and missing out entirely. This speed and flexibility we can offer borrowers translates into strong returns for our investors.


Have you taken advantage of technology for sourcing deals?


LendInvest has originated £300+ million of secured loans since launch, making it the world’s largest peer-to-peer marketplace for real estate mortgages. LendInvest has its own tech development team creating proprietary systems and software, in addition to a data science team closely analyzing trending borrower patterns and asset values; all of which has streamlined and automated much of the loan application and origination process.


We believe that lending and capital connection online is only just beginning a large structural shift and we are proud to be an early adopter.      


What is your main investor base and how does Montello fit in their strategies?


Montello aims to deliver stable cash flows with low volatility of return. As a consequence our investors generally see us as part of their yield and wealth preservation strategy. We do not use additional leverage to deliver our returns and our loan book is relatively conservative at around 60% LTV. We like our investors to engage with us and we endeavor to promote transparency; many of our investors come from the family office (44% of investor base) and institutional space and this approach sits particularly well with them.

Thanks a lot to Rod Lockhart for his time with us.