Of course nobody saw this COVID-19 situation coming. We certainly didn’t, and it would be pretty despicable to claim we did. However, that’s not what this is about.
What it’s about is the fact that, as a platform, we’ve always taken our duty to our investors seriously. Not just to roll up the cash for them in the good times, but to keep doing so in the bad times. Even when the less circumspect were pulling out.
To do that, you don’t need a crystal ball. Nor do you need a clear vision of what might happen. But what you do need is a clear vision of what you’d do in case anything bad happens.
That’s why the directors of CapitalStackers – seasoned property lenders through more upticks and downturns than any journalist would care to remember – used their hard-fought experience to build as much certainty as possible into their business model from the outset.
Specifically, they always ensured that every penny of the capital required to finish any of our borrowers’ developments was screwed down before the first trowel was lifted.
In other words – our investors are never asked to part with a single penny until the entire project is fully funded – end to end.
Along with the developer, we’ll fund the site acquisition (and sometimes some early stage building work).
From that point on, all the money required to pay the contractor – through to the laying of the last roofing slate and final lick of paint – is in place before the first bag of nails is ordered. These funds usually come from a bank (which we often help organise through our own contacts).
In brutal terms – this means that the development is never dependent on us hunting around for new investors to meet future construction costs. Even when the world is facing unheard of uncertainties, the contractors on all our sites are still certain they’re going to get paid, whether they’re just knocking in the last nails or just turning the first sod.
All of the sites we’re funding are still working (albeit slightly hamstrung by their supply chain). Of course, some of them may be forced to down tools for a while, but we’ve already gone in and remodelled the deals to take this eventuality into account.
Some of our sites are nearing completion – and here again, we’ve already planned for the potential of sales being delayed before we even heard of COVID-19. Experience told us to plan for the worst happening, and so if it doesn’t everyone still wins.
As it happens, this actually isn’t turning out as badly as one might expect. Of our new developments up for sale, the proportion of buyers who’ve pulled out is extremely low (we’ve had just one – and this is a buyer who is unable to progress the sale of their current home due to the lockdown). Most buyers are still buying, and at the price agreed beforehand – so there’s actually been no drop in value.
This is the story across every site we’re dealing with, and purchasers are ready to go when the lockdown lifts.
Unfortunately, even though we’ve warned repeatedly about it, the necessity of fully funding projects from the outset is still pretty much ignored across the rest of the industry.
Many projects funded by other lenders (some of them well-known names) will be finding themselves in difficulties because those responsible simply trusted in the Finance Fairy – believing, as many do, that new investors could always be found to keep topping up their buckets.
However, while many senior lenders are now substantially lowering the LTV ratios at which they’re prepared to lend to the point they might as well not be there at all, the banks we deal with remain active and still have an appetite for new deals.
And we’re the same.
Ironically, and despite us tightening our criteria in response to the climate, the situation is actually increasing our own pipeline – because it’s where the strength of our model shines through. It might make it a little slower to get our deals up and running in the first place, but it’s actually what keeps us strong at times when other lenders are forced to fall away.
Deals are now being brought to us that have fallen out of bed elsewhere – due to senior or junior lenders pulling out. And it’s not because of the risk – it’s because the platforms are struggling to fund their own loan book. Their blind faith that the money tap would keep dripping has left them high and dry.
So although only a lunatic would say they were happy with the state of the world right now, at least we can say we’re fairly happy with what we’ve done to prepare our investors for it.
Of course, we sincerely wish our brothers in the P2P market well, and hope they do come through it unscathed. At the very least, if they do have funding shortfalls, we hope the Government can step in to plug any gaps, given that it will be secured on the properties being built, and redeemed on the sale of them.
And far from revel in our current USP, we nurse a fervent hope that, having come through this and out the other side, our P2P brethren will adopt the practice of ensuring that all building finances are locked down from the outset.
The construction industry and the housing market are too important to the UK economy for them not to learn this lesson.
It’s incumbent on all of us to keep it going.