This makes us stop and think: what is it about the UK buy-to-let lending market that is attracting institutional investors to commit long-term finance in this way? And what are they looking for from the lenders they back?
Since the lending market contracted in the aftermath of the 2007 crash, the channels to property finance investing have remained relatively niche and limited for institutional investors. Many of the banks closed their doors to what might get called ‘specialist’ lending.
Tapping into a lender’s expertise
Today, investors are in the market to find efficient origination platforms that give them a gateway to a market they might not otherwise have access to. Gaining access without the infrastructure is a powerful incentive.
Institutional property finance investors are rarely property market experts. Instead, they rely on the lending platform they invest through to exploit their own market expertise to make the right lending decisions. In buy-to-let for example, the variety of property types a lender might lend against can be vast.
Institutional investors are comforted by a lender’s track record operating extensively across a broad spectrum of standard and non-conforming property types, HMOs and MUFB.
An appetite to lend across multiple property types requires the lender’s book to have an exceptionally strong credit profile and the lender must be able to assess risk profile on a sliding scale, according to the variables attached to each and every loan it underwrites.
Investors want to see lenders apply interest coverage ratios that are higher than the standard product pay rate. Added to that, investors take comfort from seeing a loan book that is as well balanced as it is unbiased.
Diversification is a well-worn word in the investment world and it is as important to investors as it is to a lender. Lenders that spread their risk across a variety of borrower types – individuals and corporate for instance, or portfolio and no-portfolio landlords – are a natural destination for those seeking well risk-adjusted income from the property debt market.
And finally, technology. Technological innovation is weaving its way into the fabric of the mortgage market (at last), but it continues to be a differentiator that investors depend on when choosing the lenders through when it comes to investing in property loans.
Investors want to see how deep and pervasive the application of technology is in the DNA of the lenders they work with. The better a lender’s ability to automate their workflow and improve the customer service their brokers receive is considered by investors to be a firm indicator of a lender’s potential to be the best-in-market for the long term.
In our experience, investors want to understand what it is that frustrates brokers about finding and acquiring the right finance for their landlord customers and how lenders are fixing that. Whether it’s end-to-end online applications, faster know your customer checks, instant ID checks, or an openness to trial and implement Open Banking practices into the borrower journey, investors are becoming swiftly conversant in what technology innovations are being made, and selecting who to fund based on their findings.
Property finance investing by institutional investors is seeing a massive resurgence in popularity, as it takes an ever more prominent position at the core of many alternative investment portfolios.
And as the buy-to-let market grows, so do the choices investors need to make about which originators to back. It often seems like a tight game with fine margins, but the qualities expected of lenders by investors are becoming firmer and clearer.