Time to build: Exclusive interview with Relendex’s Paul Sonabend
Paul Sonabend, executive chairman at Relendex, tells Kathryn Gaw how the platform is innovating in property development lending…
Property development lender Relendex is a veteran of the sector, but the platform has not stopped innovating.
Earlier this year, Paul Sonabend, executive chairman at Relendex, unveiled a new lending product which will provide small- and medium-sized enterprise (SME) property developers with 100 per cent of the funding required to complete a development through subordinated participation loans.
Sonabend explains why property development loans are superior to other types of property loans, what investors are looking for in the current high interest rate environment, and why Relendex is the right platform to pioneer this new funding model.
Kathryn Gaw (KG): Why is it so important to fund SME property developers?
Paul Sonabend (PS): We are not building enough homes. We’re supposed to build at least 100,000 houses more this year than we’re going to build. In the UK, we have a growing population and a housing shortage, and so much of the housing that we have has to be pulled down.
With climate change, we’ve got to have houses that are fit for the future. And that’s where we come in. The housebuilders that we finance are in the main producing houses that have an energy performance rating of A or B.
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What we are building today are beautifully insulated modern homes with air management systems, which are lovely to live in whether it’s cold or hot outside. These are homes built for the future.
It’s cheaper to tear down an old property and build something new than it is to retrofit something.
KG: What is the demand like for these modern homes?
PS: There’s a massive demand for high quality new builds and they do not need to be expensive. Most of the developments we are financing have an affordable element. These homes are sold at cost – the developers make no money on the affordable homes; they make them on the others.
KG: What are the key challenges facing SME housebuilders at the moment?
PS: Access to funding. This sector came out of the financial crisis. Before the crisis, every decent SME housebuilder was getting a facility from their bank. Banks effectively stopped doing development finance after 2008.
In the SME sector, very few SME housebuilders had facilities with the clearing banks after 2008 which meant that you were either with the secondary banks, regional or specialist, or you were in the alternative sector.
We sprang up 2008 because there was a need for alternative lenders and there is still a need.
KG: How has your offering evolved since 2008?
PS: Lenders such as Relendex provide senior debt on property development projects. Sometimes we provide slightly more junior debt. This means that the debt is secured on the development or property.
It’s designed to be pretty safe for the lender. And as such it produces a rate of return that is better than you’d get on a bank deposit and is over the years better than bonds and equities but doesn’t give you the chance to make real money.
But here’s the issue. As a lender, you can only lend up to a certain maximum percentage of the value of a development. That’s fine if the borrower can find the rest of the money from their own resources.
But that is not often possible. Our new loan offering is addressing this market failure. We will provide 100 per cent of the funding on a new property development via subordinate participation loans which are designed to replace the borrower’s equity contributions.
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Developers effectively give away half of their profits to whoever is providing the risk capital. It’s a very expensive way of raising money, and very often they won’t find the equity piece.
Most developers get their equity from two or three people who are friends – they don’t have access to a pool of capital, so there could be lots of people who would like to invest with them who don’t even know they exist, and don’t know where to go.
We have a pool of investors who are very interested in a high-risk, high-reward product. So we have capital-starved builders and investors looking for higher returns. What makes us innovative is that amongst our developers we have what we call our select portfolio.
These are developers that we have handpicked. We have spent a lot of time looking at their financial records and choosing who we believe to be the best of the best.
KG: Who are the developers within this select portfolio?
PS: There are around 14 developers in the select portfolio and all of them are relatively young and ambitious. They’re all growing. Some are prize winning. They’re all passionate about what they do. They specialise in a particular geographic area, they build to very high standards and they are all people that I have gotten to know really well. And they all have the same problem – they could be growing faster if they had access to that riskier, equity-type of money.
KG: What has demand been like so far?
PS: In the early days the amount of money that will flow in will be smallish, but we have enough demand from our existing select portfolio base. We will grow the portfolio but that doesn’t mean that new members will be eligible for the product. They have to have a track record. Everything is reputation in finance. I would rather grow more slowly and say no to people in the short term than take a 50/50 punt.
KG: Have any other lenders rolled out these sorts of subordinate participation loans?
PS: I think we are the first to do this in the way that we are doing it. We’re growing slowly but nowhere near at the pace that we have the potential for. We’re looking all the time to stand out from the rest of the industry.
This product is interesting because it solves so many problems. The amount of time that developers waste putting together finance is horrendous.
Others might copy us but if you don’t build a painstaking relationship with the developers, if you don’t know them inside out, if you haven’t visited their offices once a month for the last umpteen years, if you haven’t been on site and seen the build for yourself, no algorithm can do that.
It’s not like SME loans. This is the riskiest part of the business because you get paid out of the profits last.
KG: Why is Relendex the right platform to offer these types of loans?
PS: We weren’t ready to do this seven years ago. We’re only able to do this because we’re a business that’s been consistently profitable for three years, and because we have built relationships on repeat business.
We are a slim, efficient fintech but at the core we are a relationship lender. Nothing can substitute knowing our counterparties.