In the first of a series on niche lenders, Doug Morrison talks to south-east based Urban Exposure
“I honestly don’t know of anyone that specialises solely in development funding – debt, mezz or equity – and certainly not on the transaction scale and size we like to do,” says Randeesh Sandhu, managing director and co-founder of Urban Exposure.
By development funding, Sandhu means residential, from prime Knightsbridge houses to multi-unit suburban London schemes. This speciality has brought Urban Exposure into partnership with no less a company than Topland Group, the vehicle of veteran entrepreneurs Sol and Eddie Zakay.
Their latest deal is at Surrey’s Wentworth Estate, where Urban Exposure is an equity investor alongside Topland in the purchase of 3.4 acres, which has planning permission for a 25,000 sq ft mansion with an estimated £30m gross development value.
In January, Urban Exposure and Topland – this time augmented by LaSalle Investment Management – set out their stall by providing senior debt to developer Hadley Mace for Greenwich Square in south-east London, where the potential end value is £130m.
As one of London’s higher profile regeneration projects, Greenwich Square shifted this specialist lender from relative obscurity into the spotlight. It is Urban Exposure’s largest deal to date, although Sandhu declines to reveal the terms of the deal. The purchase price at Wentworth is also undisclosed, although Surrey property sources say the site fetched about £7m.
Sandhu says he is working on far larger deals – again, all residential – which together would have a gross development value of £1.5bn. “It doesn’t mean we’re going to do them all,” he says before flagging up an imminent transaction that will be “nearly 10 times the size” of Greenwich Square.
Other lenders will write loans for residential development, but sparingly and not to the exclusion of all else. Then again, few lenders start out, as Urban Exposure did in 2002, as a residential developer.
Former Deutsche Bank credit risk analyst Sandhu set up Mayfair-based Urban Exposure with his wife Daljit and co-managing director Adrian Mediratta on the back of the buy-to-let boom. The business soon expanded from the UK to projects in eastern Europe, Greece and Turkey, before development finance dried up in the global downturn.
In 2006 the trio founded UX Mortgages, a short-lived buy-to-let mortgage provider, which paved the way for Urban Exposure’s reinvention as a lender to other developers.
Urban Exposure first used its capital reserves to provide mezzanine debt, then progressed to senior debt and latterly equity investments. Sandhu says that nearly £500m of loans have been written since 2007 and that Urban Exposure will now only consider minimum loans of £5m and £30m for mezzanine and senior debt respectively.
Typically, Sandhu says, he seeks a 15% internal rate of return on senior debt and 25% or more from mezzanine debt and equity investments – bullish figures that partly explain why he has stuck to projects in the buoyant London and south east.
Cherry picking the best schemes
“We felt we’d focus on cherry picking a handful of the best schemes – usually the larger ones as well – rather than setting out to be a mass lender,” he says. “We’re hands on. We’re not a lender that will just rely on a valuer and project manager to go and view a site for us.”
The deals have grown in size via Urban Exposure working alongside Topland, culminating in Greenwich Square, a joint venture between Hadley Property Group and contractor Mace that includes 331 private flats and 314 affordable homes. The latter have been pre-sold to London & Quadrant.
Urban Exposure’s partnership with Topland has thrived since the latter launched its lending arm two years ago. Sandhu unearths opportunities and suggests them to Tom Betts, Topland’s structured finance director. They have completed six deals together, with the promise of more to follow.
“A lot of lenders have a finger in a lot of pies. Urban Exposure know their niche area; they analyse it very well,” says Betts. “If they want to do the deal we get a lot of confidence that they’ve done a lot of analysis to get to that point.”
The three-way club deal with LaSalle is unusual. Sandhu says: “It’s debt finance at higher levels than a bank would do.” Sandhu seems unfazed by Greenwich Square’s chequered history. The original developer, First Base, pulled out in 2010 after the scheme succumbed to the downturn. Hadley Mace came on board in 2011 and construction is belatedly under way, just as some forecasters say London’s recent surge in house prices is unsustainable.
“If it’s the right pricing, we’re happy,” says Sandhu. “We never lend on hope value; only on today’s values. We don’t factor in a drop, but we don’t factor in growth, either.”
However, at a corporate level, Sandhu is factoring in growth. He says fund management is Urban Exposure’s obvious next stage. Plans are being drawn up to launch a fund next year – again, with a development focus to set it apart from other residential funds.
“People who don’t get development often don’t get comfortable with the risk associated with it,” he adds. “We’re comfortable with it and that must be because of our background as developers.”