When it was announced last December that Paul Coates was to swap his role as head of Royal Bank of Scotland’s real estate finance business to lead CBRE’s European debt and structured finance unit, the bank looked within its own ranks for his replacement.
Coates had led the business since 2008, when the bank’s near-collapse during the global financial crisis forced a dramatic shrinking of its real estate activities. The continued reinvention of RBS as a property lender now lies with Phil Hooper, who took the mantle as head of real estate finance for RBS and subsidiary NatWest in January.
Hooper has spent his entire career within what is today the RBS group, joining NatWest in 1986, which was bought by RBS in 2000. “I’ve been with the group for more than 30 years and in real estate for the last 14 years, so I know the organisation well,” Hooper says.
Following roles within the bank’s risk and portfolio management platforms, Hooper joined the property division in 2004, becoming head of UK residential real estate finance in 2014.
“I love real estate, it’s a phenomenal asset class,” he remarks. “It’s great to be involved in a sector where you help to create homes and places for people to work.”
Coates, speaking to Real Estate Capital in his new role at CBRE, is not surprised his replacement came from within the organisation. “Businesses should always create their own talent. That’s not to say external hires cannot provide fresh perspective, but out of the management team, two or three could have stepped into that role.”
Asked to describe Hooper, Coates adds: “He’s a really good client guy; feedback has always been very strong. He makes commitments and delivers on them.”
As well as giving him insight into the workings of the organisation, Hooper’s longevity at RBS means he witnessed the most turbulent period in its history. The tale of RBS’s hubris and subsequent fall from grace is well-documented; the rapid global expansion under former CEO Fred Goodwin; the ill-fated 2007 acquisition of Dutch bank ABN Amro; the aggressive selling of financial products at the height of the economic boom and the subsequent UK taxpayer bailout in 2008.
Today, RBS remains 71 percent taxpayer-owned. It returned to profitability in 2017 after a decade in the red, although the legacy of the 2000s continues to dog the bank. In May, it agreed a $4.9 billion penalty with the US Department of Justice relating to pre-crisis sales of products linked to sub-prime mortgages. That followed the February publication by the UK’s Treasury Committee of a report on the conduct of the bank’s Global Restructuring Group – the work-out unit which handled customers in financial difficulty – which was found to have prioritised income-generation through “made-up fees, high interest rates and the acquisition of equity and property”, according to Nicky Morgan MP, chair of the Treasury Committee.
Commercial real estate played a significant role in RBS’s expansion and subsequent troubles. At its height, RBS clocked up global commercial real estate exposure of around £100 billion (€113.5 billion). Speaking anonymously, one former senior UK banker says: “They made a lot of mistakes. Individuals within the team, pre-crisis, took advantage of the situation because the bank didn’t have a good risk-management process in place.”
The banker adds that, from his perspective, RBS has recognised past failures. “What happens in the next cycle will be the proof,” he adds.
Coates, who was not in charge of real estate financing until 2008, recalls pre-crisis conditions. “It was a very debt-driven, rapidly growing and competitive market and lenders were writing highly leveraged cheques. There was no one single deal to point to; it was a cumulative effect.” Today, RBS’s commercial real estate exposure stands at around £25 billion, concentrated mainly on the UK. During Coates’s tenure, the target was to reduce real estate lending to no more than 20 percent of the commercial bank’s balance sheet and it stood at around 17 percent when he left.
“We got the business to the right size and the right shape. The risk appetite and terms around lending dramatically changed. The business is much more resilient,” Coates says.
Hooper’s challenge is to steer RBS through the remainder of this cycle and beyond as a stable and sensible lender focused on its domestic market. He leads a team of around 300, based in 20 UK locations.
Meeting Hooper in the bank’s 250 Bishopsgate offices in the City of London, it is noticeable that the huge lobby is adorned in the purple branding of NatWest, in line with a rebranding strategy announced in 2016. In England and Wales, lending will be done through the NatWest brand, he explains, with the RBS badge retained in the bank’s homeland of Scotland and the Ulster Bank brand used in Ireland.
The repositioning is symptomatic of a wider change of culture in the organisation. “You do learn a lot when you go through a difficult period and it’s important to remember why banks, including us, found themselves in a more challenging place,” Hooper says.
Business is heavily weighted towards senior lending, although an element of the book – 2 percent – is reserved for non-senior lending, which Hooper explains is for customer developments with the right management team, track record and scheme.
Throughout the discussion, Hooper frequently refers to the bank’s need to serve its customers; clearly a message RBS is eager to get across. “What’s most important for us as a business is to remember that we are here to support our customers and to be led by them to help them achieve their ambitions. As a result, we have strong relationships with our clients. Yes, there is publicity around GRG and we have acknowledged that mistakes were made.”
Asked how things have changed and will continue under his watch, Hooper is unequivocal. “The way we lend money is different now. The way the industry lends; the governance provides a framework for how we lend into the market. We aren’t going to move back to structures and platforms which we once had, because they didn’t survive when the market reduced. We are aware of what went wrong.”
While securitisation has made something of a comeback in the market this year, for instance, Hooper says RBS has “no ambitions” to get involved.
Talk turns to the impact of regulators on UK clearers, which have been subject to ‘slotting’ since 2013. “We work closely with the regulators. Historically, their intervention has probably restricted higher-leveraged, riskier lending, which has helped support a more stable recovery as well as playing a significant role in how capital is deployed into CRE markets. More recently, we haven’t seen the regulators having an impact on our origination appetite.”
The emergence of non-bank lenders that do not face such capital constraints is a welcome development for the market, Hooper insists. “It has brought liquidity into the market. The number of competitors has grown and they are playing at different price points, so everyone has a place in the market. We welcome the liquidity, the competitive threat.”
In an increasingly competitive lending environment, he adds, staying in control of lending practices is crucial. “The value of how we operate will be determined when things become more challenging. It’s important at that point for us to remain consistent and provide capital into the sector.”
MAINTAINING THE BOOK
Last year, RBS provided more than £6 billion of real estate lending. The objective, Hooper explains, is to maintain overall liquidity in the market, likely to require such volumes on an annual basis to counter loan repayments.
“There is no intention to reduce the book to a certain size and we’re under no pressure to do that. We’re comfortable with the size of the business,” he explains. “The strategic ambition is to maintain our position in the market.”
For Hooper, the overarching aim is that RBS, as a “mainstay” of the market, is a consistent lender. “We’re not going to be one of those banks that reduces our exposure when the markets are more challenging, because that’s the time when we need to be there for our clients,” he says.
“It’s about maintaining a sensible approach to risk, being aware of potential headwinds and operating sensibly and sustainably. It comes down to each individual transaction and how you underwrite it. Our risk appetite will be effectively driven by the strength and sustainability of the cashflow of the asset.”
Asked if we are at the peak of the cycle, Hooper describes a “mixed market”. Residential across the UK remains strong, he says, with growth in the regions. In the commercial property markets, shopping centre yields are drifting upwards, while industrial yields remain under pressure as rising rents attract a huge weight of capital.
City of London offices and high-value Central London residential are fully valued sub-markets and areas in which RBS has reduced its exposure, Hooper says. However, he argues there are value-growth opportunities across the country. “Areas we are looking at include the ‘big six’ regional cities and the regeneration areas. We have the local understanding of those locations such as Manchester, Leeds and Bristol.”
Talk turns to Brexit. “We’ve seen a lot of customers continue to make investment decisions, but they are more short-dated decisions than the three- to five-year view, because there’s more uncertainty the further you go out,” explains Hooper. “It’s difficult to predict what Brexit will mean, so it’s important for us to remain sensible about our approach to the market. It would nice to know what the final position will be, but we don’t know that yet.”
The profile of buyers in the UK market has changed to a degree on the back of interest-rate fluctuations following the referendum, Hooper agrees, although he stresses that pools of liquidity ebb and flow throughout the cycle.
“We haven’t seen anything material yet on the back of Brexit in isolation,” he adds. “Investors are clearly looking at Brexit as one challenge, but they are also looking at inflation, interest rates, so it’s just part of that uncertainty in the medium term, which I think everybody would like to alleviate but we need to go through this.”
Interest rates are a key area of discussion with customers, he adds. “We’re forecasting more increases during this year as a house, and people are aware of it and it is part of their risk analysis, so some people are looking at what they should do today, making different decisions based upon their strategic options, so it’s another risk area for evaluation, but we’re not seeing people focus on it in isolation; it’s all part of the broader view.”
Among growth areas on which RBS is focused is the UK’s private rented residential sector. In 2016, the bank stated it would invest £1 billion into purpose-built rental housing. To date, it has deployed more than £400 million. “When we first went into that market there wasn’t a huge amount of debt liquidity available for PRS. That market has evolved, although it is still taking time for large-scale PRS delivery,” comments Hooper.
Development finance accounts for around £3.8 billion – 15 percent – of the real estate loan book. The circumstances in which RBS is willing to back commercial development depends on several factors, Hooper explains. “I’m not going to get into the percentage of pre-let we need, but it’s about delivering the product in the right location at the right price point and getting suitable tenants in to underpin it. It comes down to the sustainability of the cash flow.”
Another area in which RBS as a group is looking ahead is technology. Last May it launched a digital platform for sub-£5 million commercial and residential loans, promising to make credit-approved lending decisions within 45 minutes. Figures on how much has been lent through it are not available.
“It’s a system we’ve created in line with our defined risk appetite for the sector,” Hooper explains. “The benefits are that we give the customer a quick decision and can deploy capital to them very quickly, which is an enhanced proposition to that market,” says Hooper.
Commitment to customers and the bank’s appetite for risk are topics Hooper returns to, encapsulating the approach to business he is determined to take. Providing £6 billion to £8 billion of finance per year means RBS will be among the UK’s most significant real estate lenders. Hooper’s task is to ensure it remains a different type of lender from the last cycle.