In backing niche debt provider LendInvest’s drive into the UK buy-to-let residential mortgage market, Citi has demonstrated the potential for an investment bank to access property lending via fintech.
The US banking behemoth has provided a warehouse funding facility to London-based LendInvest, to fuel its entry into the UK’s £40 billion (€45 billion) buy-to-let sector. The size of the facility was not disclosed but is understood to be more than £200 million.
The long-term funding line allows the fintech firm to provide specialist buy-to-let loans over the next two years, with the aim of securitising the debt in the residential mortgage-backed securities (RMBS) market.
“The buy-to-let market is moving in favour of specialist lenders and warehouse financing enables a business to scale up originations and grow market share,” said Nick Parkhouse, associate partner at EY, which advised LendInvest in the transaction.
LendInvest, which began life as a peer-to-peer platform and now manages more than £500 million of capital on behalf of institutional investors, will pilot its buy-to-let product with a group of mortgage brokers, with the aim to roll out the scheme to the wider market over the coming months.
“It’s now a really interesting time to tap into the BTL market. The government made tax changes earlier this year, which only apply to individuals, so most of the new purchases for BTL property are now done through corporate vehicles. This is creating a real opportunity to launch a product in this space which is focused on lending to companies such ours,” Rod Lockhart, managing director at LendInvest, told Real Estate Capital.
“We had really strong interest from investment banks to provide the financing – and at a very competitive level as well. I think there is demand from banks to provide similar financing facilities,” Lockhart said.
The deal demonstrates that major investment banks are increasingly open to reconsidering their routes into Europe’s real estate markets. While the Citi deal is in the residential sector, at least one other major investment bank’s commercial real estate team has made the decision to broaden its offering to include warehouse facilities to finance conduit lending.
Speaking in September to Real Estate Capital, Stephen Dyer, Morgan Stanley’s head of European commercial real estate lending, said: “We’re seeing interest from CMBS investors in aggregated smaller-balance loans, which have been made to borrowers typically wanting to buy back their debt from private equity firms.”
The major investment banks typically source large-scale, high-yielding financing opportunities in the European markets, but with fewer opportunities out there, it seems alternative strategies are being considered. Warehouse lending is said to be profitable for investment banks, providing them with the opportunity to access small-ticket high-yield lending.
From LendInvest’s perspective, the Citi funding line allows it to enter the longer-term lending market, with mortgages written up to 30 years. To date, the firm has specialised in the UK’s short-term bridging finance space, saying that it has earned a circa 10 percent share of the market.
Going forward, LendInvest intends to refill the warehouse line to carry out further securitisations, without necessarily having to secure new warehouse lines. “The RMBS market is pretty active. Banks have been doing transactions in this market all the way through the post-crisis. The RMBS market is very mature, with lower default rates than CMBS,” Lockhart noted.