London’s Soho, a vibrant hub for the creative industries, is the unlikely home of UK challenger bank OakNorth. Its choice of location, away from the city’s financial heartlands, is surely a statement about how the organisation, founded in 2015, is different to its larger, more established banking rivals.

“A lot of what we do in the real estate market is the type of lending the clearing banks used to do before the financial crisis,” says Damien Hughes, senior director of property finance. That includes loans as small as £500,000 (€576,000) to fund investors and developers of a range of residential and commercial properties.

“We are often told it can take months to get a loan from a traditional high street bank,” says Hughes. “We’re not necessarily pushing leverage much higher, but we do offer greater speed and responsiveness. Blue-chip property companies are coming back to us.”

Some challenger bankers say they target niches that larger banks have pulled back from, rather than compete with them directly for deals. However, while they generate much of their real estate financing business from the sub-£15 million loan market, some have grown their lending capabilities. In November 2018, for instance, OakNorth wrote its largest property loan yet; £40 million for a residential and commercial development in suburban London.

“The mainstream banks will need to start acting like challenger banks by becoming more responsive”

Damien Hughes, OakNorth

As well as challenger banks, a multitude of niche, non-bank specialist lenders are aiming to win business from an array of UK real estate borrowers. Depending on the cost of their capital, they target distinct parts of the market. Similarly, as the financial backing behind these firms has grown, so has their bandwidth to lend to a broader field.

Alternative debt provider LendInvest, for instance, has a range of shareholders, including the European Investment Fund, an EU agency providing finance to small and medium-sized enterprises, and its funding for lending comes from banks, pension funds and endowment schemes, as well as retail money. “There is an expansion of the capital base across the challenger space,” says head of capital markets and fund management, Rod Lockhart, “and that means the cost of capital has fallen, making more lending products viable.”

In April, LendInvest secured a £200 million funding line from HSBC, backing its entry into the home loans market. It added to a product offering including development loans for residential and semi-commercial property, as well as bridging, development exit financing and buy-to-let mortgages. The firm has written individual real estate loans as big as £25 million, although Lockhart says its competitive value still lies with smaller-ticket lending “where we can use our technology to be efficient”.

Others in the market echo the point that large-scale real estate loans, written at lower margins, are not their main targets.

To many in the commercial real estate debt profession, the challenger space remains an unknown quantity. Some dismiss emergent lenders as a small part of the real estate financing market. Their activity, they say, is below the radar of the larger lenders and investors. Data on this part of the market are limited but most loan-books are dwarfed by the large commercial banks, insurers or debt fund lenders.

However, for others, the perception of at least some emergent organisations’ property lending activity is changing. Luke Townsend, who founded Zorin Finance in 2011 to provide development and bridging loans, admits it has taken time to convince some people about such business models: “When we launched, some suggested we were a lender of last resort, catering for those with credit problems. But people have seen in the last eight years that real estate financing has changed. Banks like doing homogenised lending, but the type of development loans we do cannot be standardised.”

The emergent lenders cater for a range of borrowers, depending on the risk and reward profile their capital allows them to pursue, with challenger banks and specialist non-bank lenders generally operating in different parts of the market. For most, bread-and-butter business is with small-scale developers and landlords. However, larger property firms also are increasingly willing to add newer lenders to their bench of funders, especially the challenger banks.

Speaking off-the-record, one borrower describes a visit to a challenger bank which, three years ago, indicated it would lend her £35,000. “They didn’t know who I was back then. They will now lend me £35 million. And I can take my dog there for a bowl of water.” The borrower is not entirely convinced by the challenger bank world, however. “My concern is the pace of growth, although I’m assured really good staff who lost jobs at the traditional banks are now at the challenger banks.”

Who are the challengers?

The ‘challenger’ lenders are the start-ups that aim to win business in parts of the UK property finance market that are perceived to have been underserved by the large banks since the financial crisis. Many have found their niche serving smaller-scale borrowers or by pursuing specialist strategies, such as residential development lending or bridge finance.

Some are challenger banks, funded by customer deposits. Others are so-called ‘alternative’ lenders, including fintech firms which raise retail money online, boutique companies that invest private wealth and specialist lenders that have grown by attracting institutional capital.

We have not focused on the more established of Europe’s non-bank real estate lenders: those commingled debt funds launched post-crisis by ex-bankers to provide liquidity to large-scale investors; the big real estate investment managers which launched credit funds to compliment equity funds; or the insurance companies lending from their vast balance sheets.

While Andrew Rogers, director and group treasurer of UK property fund manager Frogmore, borrows from a range of lenders, he has several facilities with challengers, including a £12 million loan from OakNorth, sourced in April, for the purchase and conversion of a London office block into a specialist dementia care facility.

Such lenders can sometimes be more expensive than a traditional bank, but Rogers says he is impressed by the “entrepreneurial” approach they take to the sponsors’ business plan, as well as their speed: “From start to credit approval can take two weeks with a challenger bank,” he says. “They are very customer-facing and as they have grown, so have their ticket sizes.”

Rogers continues to borrow from the big UK banks, but fears that slotting and other regulations have slowed their processes and sees this as a challenge for them. “The UK real estate debt market continues to broaden and, for many borrowers, speed and certainty of delivery is becoming ever more important,” he says.


Institutional investment into emergent real estate financing organisations is not a new phenomenon. Several firms founded in the aftermath of the financial crisis attracted institutional backers, including Blackstone’s investment into London-based specialist lender Pluto Finance. However, as managers of institutional capital look for yield, they are more likely to back niche debt strategies.

Octopus Property, which was founded in 2009, was an early alternative lender. Originally capitalised by retail money, the firm has since 2014 broadened its funding base. “Our loan book now stands at around £1 billion and institutional capital backs a third of it,” explains Ludo Mackenzie, the firm’s head of commercial property.

While Mackenzie says “numerous” new players have entered the property financing business since 2009, he argues the challenger lender space is polarising. “Smaller lenders are falling away, while others have grown into substantial businesses with solid backing. Lots have discovered that lending £10 million-£50 million per year does not generate the necessary revenue to keep a platform going.”

“Banks have been used to holding the purse strings for too long”

Ludo Mackenzie, Octopus Property

Investor backing can allow emergent lenders to scale their operations considerably. Last September, LendInvest received £150 million of funding from Japanese bank Nomura and alternative investment manager Magnetar, for instance. Challenger banks are also attracting capital. In February, OakNorth closed a $440 million funding round with SoftBank Vision Fund and Clermont Group, with an eye on US expansion.

Challenges facing the challenger banks

The UK’s challenger banks are relatively small retail banks that were set up to compete with long-established giants. They include Metro Bank, Aldermore, OakNorth and Shawbrook Bank.

Access to customer deposits means they have a lower cost of capital than the new wave of non-bank lenders. They take more risk than the traditional banks, but less than the start-up alternative lenders. Challenger banks typically seek 4 percent-plus returns from property loans, sources say. Most offer loans to fund a mix of residential and commercial development, as well as term lending.

Some longer established, but small-scale banks are considered to compete in ‘challenger bank’ territory, including merchant bank Close Brothers and Secure Trust Bank, founded in 1878 and 1952, respectively. Some of the returning Irish banks – although far from being start-ups – are also said to compete in this part of the market.

Supporters argue challenger banks provide the property lending services large banks used to, pre-crisis, but have less appetite for now, due to slotting regulation and the reduced size of their real estate divisions. Sceptics point out most challengers are yet to prove they have sustainable long-term businesses, having grown in a relatively benign economic cycle.

Metro Bank, the most visible of the UK challenger banks, has made negative headlines recently due to its miscalculation of its capital requirements. The BBC reported in March how the bank had become the second most shorted company on the UK stock market, with its shares losing 80 percent of their value in the previous 12 months. Metro Bank declined to speak to Real Estate Capital for this article.

Some challenger bankers have also complained that measures to make banking financially secure mean they face costs that make it difficult for them to grow.

The emergence of challenger banks is also forcing traditional banks to modernise. One borrower notes the clearing banks becoming more active in the sub-£5 million loan space and slowly embracing new technology. “The traditional banks are moving down a bit and the challengers are moving up. They’re not bumping into each other just yet, but they are not far from it,” she says.

OakNorth’s head of property lending, Damien Hughes, argues the banking market is changing for good: “The mainstream banks will need to start acting like challenger banks by becoming more responsive if they want to stay relevant.”

Challenger lenders are also sourcing loan-on-loan facilities to finance their activities, effectively meaning banks are providing credit lines to alternative lenders to gain exposure to the type of lending they are unable or unwilling to do directly.

Nick Shiren, partner with law firm Cadwalader, sees growing interest from banks in providing loan-on-loan facilities. “Such deals give the lending bank almost an extension of their origination business. We have seen a number of such loans to buy-to-let finance providers and we closed a deal at the end of last year with a bridge finance provider,” he adds.

Challenger banks are also getting in on the act, by financing other new-wave lenders. In September, property bridging finance firm Glenhawk, which launched in 2018, secured £75 million from challenger bank Shawbrook and asset manager Insight Investment.

“Challenger banks are interested in financing loan books of up to £30 million, effectively taking the super-senior slice,” says Glenhawk’s chief executive, Guy Harrington. “High street banks start to get interested in providing that funding for loan books over £50 million.”

OakNorth has also financed alternative lending platforms, including a fund finance deal in March with Lendhub, which extended the specialist lender’s capacity to £75 million. “We wouldn’t finance everyone who came to our door,” explains Hughes. “They need to fit with our underwriting expectations. But if our debt works for them, it makes sense to lend at sensible senior debt levels.”

Structural shift

While new-wave lenders’ business models vary, most define themselves as something different to the incumbent lenders which once dominated the market.

“This isn’t just about regulation,” says Octopus’s Mackenzie. “Banks have been used to holding the purse strings for too long. A new breed of customer-oriented lender emerged, post-crisis. Across different industries, new models have been born out of a generational shift in attitudes and demand, such as Amazon in the retail industry and Uber in the taxi market.”

Bankers from the established UK high street giants are not all taking this criticism lying down. Phil Hooper, head of real estate at NatWest, owned by Royal Bank of Scotland, argues the bank remains relevant to UK borrowers, with £6 billion of senior real estate finance provided last year, in deals ranging from £250,000 to £100 million. While his bank is shifting away from higher-risk lending, Hooper argues, it is doing so to ensure a focus on customers with “appropriate real estate capability” to ensure it continues to lend through the economic cycle.

Additional liquidity from a wider set of real estate finance providers is positive for customers and the industry, says Hooper. But he adds: “The challenge for the industry is, and will remain, creating an environment where this is sustainable in the long term, ensuring customers have continued access to a choice of capital. If we see a material market downturn, it is unlikely that much of this new liquidity will remain in play, [thereby] reducing customer choice and impacting market liquidity.”

How advisors view the new wave of lenders

Borrowers are increasingly willing to consider taking a loan from a challenger lender, UK real estate debt advisors claim. When sourcing finance for operating assets, challenger banks are more likely than mainstream lenders to get to grips with the business plans behind quirkier properties, says Shripal Shah, head of real estate at advisory firm JCRA. Shah recalls pairing a challenger bank with the owner of a marina property last year, for example.

“High street banks will finance hotels, student housing or private rented-sector housing, but they do not want to take the time to understand less mainstream operating businesses,” explains Shah. “Challenger banks are driven to compete in exactly those situations.”

Other types of emergent lender, such as specialist and niche alternative lenders, have higher costs of capital and are more likely to look for an element of development risk, shorter loan terms, or higher leverage.

Advisors say they compete in a different part of the market to the challenger banks.
The UK Market Trend Analysis survey conducted by Link Asset Service’s real estate debt advisory unit in Q1 showed ‘alternative’ lenders – comprising non-banks which lend from a single source of capital, rather than commingled debt funds – offered the highest average maximum leverage in the market, at 80 percent.

“The loan-to-value on offer from banks is reducing due to Brexit uncertainty, so challenger lenders are more active,” says James Wright, Link’s head of real estate finance. “If a challenger offers 70 percent LTV at a 5.5 percent margin, it might be considered expensive debt, but if a clearer will only go to 55 percent, it looks attractive. The challenger lenders are trying to pick up banking-type loans but at a premium.”

Alternative lenders and peer-to-peer platforms are among the market’s most expensive lenders, Link’s data show. While most lender types’ pricing was found in a 150-350bps cluster, challengers could charge in the range of 800bps. Pricing, however, varies significantly according to the type of lender.

While those providing expensive bridge loans to sponsors in immediate need of finance are viewed by some as lenders of last resort, advisors argue the more established challengers do not carry such stigma.

“I don’t think there is any snobbery about being seen to borrow from the smaller end of the market,” says Adam Buchler, partner with London-based debt advisor BBS Capital.

“Traditionally, the banks would have written loans from £2 million to £200 million, but their teams are nowhere near the size they were and if you approach them with anything under £10 million, they have little interest.”

The test for the sector’s new breed will be surviving less benign market conditions than today’s. Many of the smaller, less experienced operators are expected to face a rude awakening when the inevitable market correction comes. However, some argue there is a long-term place in the real estate debt market for those with robust business models and sensible lending practices.

Lockhart expects consolidation in the space. “It’s already happening in the challenger bank market, as banks consider building larger platforms. There is a huge opportunity for alternative lenders going forward, provided they have reached the right scale to survive through a downturn.”

Predicting the make-up of the real estate lending market into the next property cycle is a tough ask, but Mackenzie argues alternative debt providers can play a role, even in a downturn. “Our best guide,” he argues, “is look back to the beginning of this cycle. It was a fertile time for emerging lenders to thrive. Those that survive through a downturn will be immensely well-positioned for the next cycle.”

Do start-up lenders take too much risk?

In December 2018, specialist property lender Amicus Finance was placed into administration, a month after reports that it had ceased lending. It is not the only real estate debt start-up to run into trouble.

The influx of alternative lenders has prompted some in the property industry to question whether start-ups, especially at the smaller end of the scale, have adequate real estate knowledge or access to enough sensible loan deals to build sustainable businesses. Across the real estate debt industry, returns have compressed, encouraging some to take more risk.

Julian Healey, chief executive of Nara, the association of property and fixed charge receivers, says his members have dealt with the problems caused by some in the market.

“I hear stories from our members about the poor quality of due diligence in that space,” he says. “Recently, I heard of a fixed charge receiver finding a charge which ran diagonally through a swimming pool. We’re also seeing valuations based on assumptions best described as optimistic.”

Scepticism is often directed towards the small firms involved in high-yield bridge loans. Luke Townsend, founder of Zorin Finance, which offers bridge finance as well as development loans, agrees there are many inexperienced bridge loan providers out there.

“There are low barriers to entry in this market,” explains Townsend. “People are attracted to it by the high returns on offer, with some charging 0.65 percent per month. The problem is, a lot of them lend in distressed situations where the exit from the loan is opaque. A lot of bridge lenders are refinanced by other bridge lenders. It is a merry-go-round and, eventually, the music will stop.”

Andrew Lazare, chief executive of Manchester-based Mint Bridging, argues he has built a solid business in the last decade, by investing in staff with property expertise and by carrying out proper due diligence on each loan. Plenty of newcomers to the space are less rigorous, he says.

As challenger banks win more bridge finance business, he also sees independent bridge lenders moving into development finance. “They are not equipped for it,” he says. “Many are lending against the perceived value of the assets, rather than focusing on the cost.”

Although most agree the wave of new lenders includes some with limited experience in lending and risk procedures, many argue the more established challengers know what they are doing. Uma Rajah is chief executive of CapitalRise, which raises retail capital online as well as some institutional capital to finance lending deals in London’s high-end residential sector. She argues specialist lenders like her firm often carry out more extensive due diligence than banks and, rather than taking high risk, are arguably better placed to finance such properties.

“The banks used to do this sort of lending all the time, but regulatory changes such as increased capital adequacy requirements makes it much less attractive for them nowadays. Unlike the banks, we raise capital against individual loans so our business model doesn’t carry the same risks such as maturity transformation,” says Rajah.

She adds they have been tested in a tough market: “Prime central London has been in decline since 2014; we’re now more than 20 percent down from the peak. Despite this, we have had no losses or defaults, partly due to our focusing on a specific niche.”