Instant gratification culture is affecting how we borrow money

Adam Buchler, co-founder of London-based real estate debt adviser BBS Capital, argues that the culture of instant gratification is feeding into the debt market.

The seemingly never-ending march of new technology and the access to instant information, goods and services are combining to make people less patient than ever before.

And who can blame us? Not content with next day delivery, we now expect Amazon to deliver to our doors in a matter of hours; Deliveroo riders bring food from our favourite restaurants in minutes; and we don’t just choose what TV to watch – but when we want to watch it, too.

But is this culture of instant gratification in our personal lives now also starting to have an impact on the way we do business and, in particular, how we borrow money?

The evidence from our business would suggest that the answer is yes. Both buyers and sellers are more reluctant than ever to wait weeks or months for transactions to complete.

They want deals to happen quickly – and certainty of performance has become critical for both sides. Arranging debt finance has always been one of the elements of the acquisition process with the greatest potential to cause delays.

As a result, debt-backed buyers have often struggled to compete with those able to close in cash. This is no longer the case.

The recent surge of alternative lenders such as debt funds, hedge funds and challenger banks – many of whom market themselves on their speed of execution – has dramatically reduced the time it can take for a deal to close.

Speed and certainty

There has been a distinct increase in demand for short-term finance as a result. Last year, 26% of our business (by volume) was for loan facilities with a duration of 18-months or less, excluding development finance. This compares with less than 5% just three years ago.

Our clients are increasingly demanding speed and certainty and they are willing to sacrifice the pricing advantage of traditional lenders in order to achieve this.

At this point in the cycle, with low market liquidity and rate rises on the horizon, many investors – both large and small – are increasingly choosing debt over equity for their real estate exposure.

In the first quarter of 2018 alone, Laxfield Group, TH Real Estate and UBS Asset Management all launched new debt funds of approximately £500m each.

We continue to see new entrants to the debt market who compete aggressively to gain market share and disrupt the traditional lending market. In 2016-17, we closed deals with 12 lenders with whom we had never previously worked. This was unprecedented for us.

While the new lenders can’t always compete on price, they can often provide the speed, liquidity, flexibility and certainty that the market needs. It’s about getting the deal done, fast.

In November 2017, we arranged a £31m loan for a private client with Octopus Property. The facility was required to fund the acquisition of an office park that had secured one of London’s largest ever permitted-development consents.

We had just two weeks to arrange the finance as our client was competing with institutional bidders. The point is that debt facilities – like our shopping and restaurant food – really can now be delivered more quickly than ever before.

Nevertheless, the traditional lenders continue to have a significant role to play, whether in refinancing situations, or where deals are not necessarily time sensitive.

The continued burden of capital adequacy regulations in the mainstream banking sector is likely to increase the attractiveness of more agile lenders in certain situations.

Two-speed market

What is clear is that we are seeing the emergence of a two-speed market, largely fuelled by an increasing number of property investors willing to compromise on cost of capital in return for certainty and speed of execution.

Most debt funds and challenger banks work to their own bespoke short-form loan templates, which can save considerable time and cost compared with the more traditional, institutional LMA documents.

With the number of new entrants, the debt market is rapidly becoming more competitive and complex. Lenders are having to differentiate themselves through pricing, sector or niche focus and creative structuring.

For the savvy property investor this means there are many more borrowing options available than ever before.

But more options doesn’t necessarily help us make a better choice; especially in a world of instant gratification, where pressure to act quickly increases the chances of choosing the wrong option.

A decision from a lender may well arrive almost as quickly as your Hawaiian Poke or Chicken Ramen form Just Eat but it’s still best to ask advice and read the menu fully before you order.

View the article on Estates Gazette

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