BBS Capital: Reacting to a rebound of confidence

Joanne Barnett and Adam Buchler, co-founders of London-based BBS Capital, winner of Debt Adviser of the Year (Development Financing): UK, discuss opportunities in the construction lending market.

This article is sponsored by BBS Capital.

How would you sum up 2021 for BBS Capital?

Joanne Barnett: After the challenges of 2020, we saw confidence return to the debt market. There was a marked increase in enquiries, particularly as the lockdown restrictions began to ease. We closed several refinancings with borrowers looking to capitalise on what were historically low mid-term rates at the time.

Adam Buchler: We worked on a wide variety of projects across all sectors, both development and investment, but experienced a notable increase in activity in the residential space where we financed several schemes including build-to-rent, for sale and co-living.

Which UK sectors were borrowers most focused on in 2021?

Joanne Barnett
Joanne Barnett

JB: We saw significant activity in the ‘bed’ space, with a clear focus on large scale BTR and PRS funding particularly outside London where affordability ratios were higher and build costs were still more manageable than in the capital. All types of lenders are active in this space, from the lowest margin clearing banks to stretch debt funds.

We saw the emergence of co-living as a more widely understood and considered asset class amongst lenders. We completed three transactions in this space and have others in the pipeline. Purpose-built student accommodation rallied after a period of uncertainty in the 2020-21 academic year due to covid.

Borrowers have been prevalent in this sector, buying sites with residential planning permissions for re-purposing to more profitable PBSA consents, resulting in short-term lenders being active in this space.

How strong was activity in the traditional sectors?

Adam Buchler
Adam Buchler

AB: Most companies have now established their hybrid working policies, and as a result we are seeing growth in the office sector. Enquiries are mainly around ground-up development or heavy refurbishments; mindful of ESG and carbon neutral targets that could create a two-tier market between prime and non-compliant. Appetite amongst alternative lenders for such transitional financing is strong.

In the competitive industrial market, any small edge of urban industrial is being rebranded as ‘last mile’ or suitable for self-storage. Investors are looking to aggregate in this space, supported by strong liquidity in the debt markets to create a pipeline for hungry institutional takeout.

The retail market has taken a lot of punches. But there has been strong private investor cohort in the retail park and prime high street sectors looking to take advantage of post-covid yield shift. This activity has been supported by challenger banks and debt funds, but market stabilisation has caused these sectors to tighten quickly. Meanwhile shopping centres remain out of favour, except for redevelopment situations.

How did the pandemic impact lender appetite?

JB: The initial ‘pens down’ approach of some lenders seen in the early stages of the pandemic was not repeated when the Omicron variant surfaced in late 2021. Lender appetite remains strong, although cautious around some specific sectors such as retail and hospitality. With such a large volume of capital raised for real estate debt strategies and loan-on-loan financing, liquidity feels at its highest level since before the global financial crisis.

AB: Whilst retail and hospitality remain the more challenging sectors from a debt perspective, there is still lender appetite for projects supported by well-capitalised sponsors with a strong asset management team and robust business plan. The non-bank lenders will no doubt be more aggressive in these sectors.

How do you expect sponsor demand to change this year?

JB: I predict similar themes will be seen in the year ahead. There is a lot of equity on the sidelines looking to capitalise on distressed situations that may follow the expiry of the eviction moratorium. We are starting to see the first discounted payoff style workouts and restructurings. ESG is increasingly relevant, so we can expect lenders to start shaping their loan books accordingly and implementing clearer policies to entice borrowers who are purchasing, developing or repurposing low carbon future proofed assets.

Which types of lenders and borrowers do you expect to do business with in 2022?

“Liquidity in the debt market will continue to grow, adding to the already borrower-friendly environment with huge optionality for strong sponsors with good projects”

Joanne Barnett

AB: The expectation is that alternative lenders will continue to grow their market share as much of the banking sector struggles with greater regulatory scrutiny and an increased focus on balance sheets. In 2021, debt funds accounted for around 25 percent of total financing in the UK CRE market, and we expect this to rise further as institutional capital continues to seek exposure to debt. We anticipate growth in our business from institutional borrowers who are becoming ever more accepting of the need to use debt advisers to navigate the increasing optionality in the market. As business travel resumes, there should be more inflow of overseas investors impacting the mix of borrowers.

What will be main challenges and opportunities this year?

JB: The number of investors chasing opportunities in the logistics and PRS sectors may well result in continued yield compression, which would in turn limit achievable leverage due to debt yield constraints. This will only be exacerbated as short- to medium-term rates increase. As real estate is perceived as offering some inflation hedge, we don’t expect a short period of inflation to have a significant impact on transaction volumes and lending activity. However, a prolonged inflationary environment could see capital exploring alternative fixed income instruments away from real estate.

AB: The ‘Green’ agenda will continue to feature heavily as companies will rightly face increasing demands to prioritise ESG issues which could be costly. Meanwhile, the value and contribution of a good adviser will never have been more important. We expect transaction volumes to increase as more stock finally comes to market. Liquidity in the debt market will continue to grow, adding to the already borrower-friendly environment with huge optionality for strong sponsors with good projects. This dynamic will provide a real opportunity for debt advisers to demonstrate their value. The gap between the old-style “debt broking” model and the full-service debt “advisory” businesses will continue to grow.