This article first appeared in FT Adviser.
I own some buy-to-let homes as a private investment, but when I approached a high street lender – who I already bank with – for a new loan to buy another property, the service was so bad it was almost funny.
Except it wasn’t funny. Because if a buy-to-let investor like me with a good track record gets a terrible service then I have no doubt that is being replicated across the country for countless other private investors, professional property investors and property companies that make up the bedrock of the UK market.
Firstly, my bank was slow to respond to me, then they lost my file half way through the process so I had to start again, and by the time my buy-to-let loan was approved the whole saga had taken five months when it could have been completed through an automated process in days.
To make matters worse, at no point was I able to talk directly to a decision-maker and I was passed around in a way which made it quite clear I was just a number, not a person.
It seems extraordinary that in a digital, modern era this was my experience. However, if we go back to the beginning it’s possible to find out how this situation has come about.
September 15 will mark ten years since Lehman Brothers collapsed, triggering a chain reaction that led to Royal Bank of Scotland largely being taken into state hands, HBOS being bought by Lloyds and a clutch of Irish banks going bust.
Not surprisingly, by the time Cass Business School published its influential survey on the 2017 UK property lending scene in May, UK banks and building societies accounted for just 45% of total property loans.
The banks who continue to lend now have a whole swathe of problems to contend with:
- Their branch networks no longer serve a useful function. When did you last go into your high street branch and do you think these banks would retain this presence if they hadn’t inherited it? Running a large, complex bank is difficult enough without being saddled by this legacy property.
- Banks also have to wrestle with legacy infrastructure issues, which are complex and time-consuming to sort out.
- Their brands: these used to be the big banks’ greatest strength, with a safe, solid image, but all that has changed in the aftermath of the Global Financial Crisis and the arrival of tech-driven banking start-ups and specialist lenders who put the customer experience at the heart of everything they do. The big banks have perhaps been complacent and the public is unforgiving.
- Ambitious young people increasingly want to work for start-ups and disruptive companies that are challenging the status quo rather than any business they deem to be 20th century.
My point is that traditional lenders who have underpinned the property market for decades are going through a period where the business models are being challenged and they have to adapt.
I am not saying all banks are the same: I recently had a great experience opening an account with digital bank Monzo, which in 2016 set the record for the quickest crowd-funding campaign in history when they raised £1m in 96 seconds. It didn’t take much longer than that to set up the account! Meanwhile, people in some of the world’s least developed countries are able to transfer money between their digital banking accounts without ever setting foot in a branch.
It’s only a matter of time before that is the norm in the developed world. The digitisation of banking and the emergence of alternative, non-bank lenders, like ourselves, who are unencumbered by the baggage of property, legacy IT systems and the heavy regulation which banks are quite rightly forced to operate under, and who raise their money not from deposits, but directly from retail and institutional investors, are the future of property lending.
Some people question if businesses like ours will ever be large enough to service the biggest customers – will a £100 million loan ever be made by alternative lenders? – and my answer is, yes, absolutely. It’s only a matter of time and we’re not far away from that now. We will find larger and larger pools of non-bank capital being created. Property investors and developers fundamentally want two things – they want to know their lender will give them the money they need, quickly, and they want the overall experience to be an enjoyable one.
As the 10th anniversary of a Global Financial Crisis created by the spread of sub-prime mortgages approaches, and with many of the world’s biggest banks still licking their wounds, prepare yourself for an even bigger revolution in the property lending world over the next decade. The 21st Century belongs to the disruptors.
For journalists in their professional capacity only. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. Issued by Octopus Property. Octopus Property is the trading name of Bridgeco Ltd (Reg No 6629989), Fern Trading Ltd (Reg No 6447318), Nino Ltd (Reg No 9015082), Octopus Property Lending Ltd (Reg No 7531926) and Octopus Co-Lend Ltd (Reg No 8913299), Registered Office: 33 Holborn, London EC1N 2HT, registered in England and Wales and Dragonfly Finance S.ar.l. (Reg No B189290) Registered Office: Parc d’Activité Syrdall, 6 Rue Gabriel Lippmann, L-5365, Munsbach, Luxembourg registered in Luxembourg. Octopus Property Lending Ltd and Octopus Co-Lend Ltd are authorised and regulated by the Financial Conduct Authority. Issued September 2018.
