"SMEs need to work closely with their brokers to find the right mid and long-term finance solutions."
We spoke to Agam Jain, MD of Vector Capital, about how the Covid-19 pandemic will continue to affect the sector and how Vector is supporting the developers by deferring interest payments and extending redemption dates.
CR: What are Vector Capital’s main product areas and specialisms?
Vector Capital specialises in finance for land and property development, bridging, loans and secured business finance. Established in 1978, Vector Capital has extensive experience in backing developers and entrepreneurs and provides ‘behind the scenes’ support to companies.
Vector Capital serves the market via a team of industry professionals from the finance, legal and property sectors. Quick loan processing, transparency and agility enables Vector Capital to overcome most issues or problems in loan applications swiftly, compared with larger lenders.
Vector Capital works through established brokers who support their clients from the initial loan application and drawdown, through to the end of the loan term. Loans are business to business and are secured by a first charge on land and property.
CR: How will the Covid-19 outbreak affect the market and how can lenders and advisers overcome these difficulties?
Covid-19 is providing many challenges to the development finance sector. Many national and smaller, independent developers such as Galliard Homes, Taylor Wimpey and Barratt Developments have closed construction sites to protect employees and prevent the spread of the virus.
Lenders including Vector are supporting the developers by deferring interest payments and extending redemption dates. This will help see some through the crisis.
However, many developers are likely to get into serious difficulty, with many going into receivership the longer the lockdown continues. As a result of the pandemic, the market to re-sell or auction these sites, has diminished. The inevitable consequence is that lenders will be left facing significant bad debt write offs.
CR: What are Vector Capital’s main aims or focuses in 2020? Do you have any exciting news or plans you can tell us about?
The plans before the lockdown were to substantially grow the business. In fact, we were getting ready for an IPO on the London Stock Exchange in Q2 of this year.
However, the aim now is to support our existing customers with personalised deferral arrangements to help them ride out the crisis.
Our growth targets are on hold and will be re-visited when the crisis has passed and we can assess the strength of recovery in the market.
CR: What trends do you expect to see within the development finance market in 2020?
As a result of Covid-19, many building sites have been closed across the country. According to GlobalData, the UK’s construction industry is expected to contract by -2.5% in 2020. Rising costs, a labour shortage and the pandemic is severely hindering the market.
However, the Government’s ambitious plans to increase the number of new homes built to 300,000 per year remains unchanged. The good news is that major builders are being supported by the Government. For example, housebuilder Redrow plc has been confirmed as an eligible issuer of the Covid Corporate Financing Facility (CCFF) with an issuer limit of £300m. The CCFF is available to companies and their subsidiaries who are considered to make a material contribution to the UK economy, according to the Bank of England website.
Smaller developers have a significant role in the housing market. Although, their market share has steadily dropped from 40% in 1988, to just 12% by 2017, they face a major hurdle – securing development finance. At a time when we need to be building a far greater number of homes, lenders need to give this sector the helping hand it needs.
We are committed to supporting smaller developers and work with several across the UK on single and multiple developments. Through this difficult trading period, we are providing as much support as we can and we urge fellow lenders to do the same. It is vital the alternative lending market continues to provide development finance for SME developers, during and post-Covid-19, as very few high street banks will lend directly to this market.
CR: What opportunities and issues do you think SMEs will face in the next twelve months?
Over the next 3-6 months, many SMEs will be facing finance issues such as commercial and residential rent arrears, or extended void periods; difficulty raising funds to exit loans as a result of lower property prices and slowing demand; and a continued lockdown delaying development sites opening up again.
One of the biggest challenges that SMEs will face is access to development or bridging finance. Many large lenders have pulled products all together and this is contracting the market. SMEs need to work closely with their brokers to find the right mid and long-term finance solutions. This may involve renegotiating loan terms, or refinancing with a new lender that is still open for new business.
There are some smaller, established lenders, like us, who are working in partnership with clients, supporting them through the good and bad times. We have worked with some of our developers for over ten years and are currently in discussions with them to provide workable solutions. If SMEs can’t have constructive, helpful dialogue with their lender or broker, they should be looking for new finance partners.
CR: If you could see one headline about the commercial lending market in 2020, what would it be?
The very best news would be that post Covid-19, the property market has bounced back with demand for the development finance and short-term loans on the increase and property values showing recovery.
Unlike the financial crisis of 2007/2008, this is a short, sharp burst that has virtually switched off the property market. However, thanks to strong fundamentals, I believe that when we are on the other side of this pandemic, the property market will recover and start to boom again.