As Origin Capital continues to grow its presence in the Irish commercial real estate (CRE) lending market, CEO Ross Metcalfe talks about the company’s lending activities, provides advice for borrowers and discusses current market trends.
Tell us about Origin Capital and how the company is funded.
Origin Capital provides senior debt funding for commercial real estate (CRE) investment transactions in excess of €3m.
In the two years since we started in business we have credit approved over €300m of transactions, and we have drawn down over €100m of loans, with many more in the pipeline.
Our typical lending parameters are as follows:
We are funded by two separate lenders: Tricadia Capital Management LLC, who have backed us since we launched Origin Capital, and more recently we announced a funding agreement with Morgan Stanley. This agreement paves the way for a significant expansion of Origin Capital, as we now have (i) the ability to fund deals with no upper limit on individual transaction size (ii) unlimited capacity to fund future CRE Investments and (iii) competitive interest rates comparable to the Pillar Banks.
What does a borrower need to think about when looking for CRE lending from Origin Capital?
We recently wrote an article in the Irish Independent on the 7 key steps a borrower needs to consider when seeking CRE financing as it is very important process. I would recommend borrowers read this, as we go into more detail on the steps they need to consider.
In terms of the key points, borrowers must be aware that the process of obtaining CRE loans has changed significantly over the last 10 years. In years past, a borrower would often use their local solicitor, who often had no expertise in property lending, to complete the legal requirements associated with their loan drawdown. The borrower themselves would look after the asset management associated with their loan in their spare time. However, this is no longer acceptable from a lender’s perspective.
The use of professional advisors (legal, financial advisory and asset management) is arguably now the single most important factor in successfully funding any multimillion Euro CRE transaction.
Another key piece of advice I would give to borrowers is to have a realistic timeframe regarding how long it takes to source and obtain a CRE loan. For example, when refinancing a loan, existing funders may require refinancing to occur within two weeks, which is not realistic. It is important that borrowers make their existing funder aware of this, so they can communicate this internally. Managing everyone’s expectations is key.
That being the case, how long should a borrower allow to secure financing from Origin Capital?
The time taken to draw down a loan will vary with each specific deal, but generally speaking our typical turnaround time from the initial meeting with the borrower to drawing down funds is between two and three months, significantly quicker than the timeframes associated with traditional lenders. The speed at which we finalise a loan will always reflect the borrower’s requirements, and we encourage borrowers to ensure that they work with us to provide what we need to complete the transaction, so there are no unnecessary holdups throughout the process.
What is the typical credit process and the ongoing information requirements post drawdown?
Our typical credit process is seven working days for lender approval, and drawdown within one to two months of this date. However, each transaction is different and we are happy to work within the borrower’s timeframe.
Generally our credit approval process tends to be much quicker than that of traditional banks, as we are smaller and more nimble, and have fewer levels of approvals. In addition, our loan parameters are set out early in the process, so borrowers know our lending terms from the outset.
In terms of our post drawdown requirements, we have a dedicated Portfolio Manager who seeks quarterly information in relation to rent reconciliation, tenancy updates and asset management strategies etc. None of this information is onerous or difficult to provide. All of it should be to hand for any professional borrower, or a borrower with professional advisors.
Is the lending Origin Capital offers effectively bridging finance or is it longer term?
It’s definitely longer term. Our standard term is five years, but we have also approved facilities between three and six years in term.
Does Origin Capital only lend in Dublin?
No, we are very much a nationwide lender. Whilst a significant percentage of our activity is obviously in the Dublin market, we have credit approved or drawn down multiple transactions in cities such as Cork and Galway, and other non-city locations including Wicklow, Laois and Monaghan.
In Galway alone we have funded transactions in the hotel, industrial, residential, retail and office sectors – we’re very keen to lend throughout Ireland across multiple sectors.
Is Origin Capital in the Irish market for the long-term?
Yes. This is an understandable question, as many alternative lenders in the Irish market have a short time-frame within which to enter the market, lend money, secure a strong return and then exit. But that isn’t our business model. For starters, all of our loan terms are between three and six years, and our loans don’t have an ‘on-demand’ element to them (i.e. we can’t just call in a loan whenever we choose). This term certainty gives borrowers comfort that they have the time to execute their asset management strategy. In addition, through our funding arrangement with Morgan Stanley, we are seeking to become a long-term, significant force in the Irish market, and indeed we look forward to refinancing many of our existing borrowers’ loans at the end of their current loan terms.
Are alternate lenders such as Origin Capital an important part of a functioning market?
Absolutely. I think it’s fair to say that even if the recession hadn’t happened, the lending market in Ireland was going to change anyway. If you look at mature markets such as the UK and the US, a sizeable percentage of available funding comes from alternate lenders. In Ireland, it is often thought that the number of lenders in the market has decreased rapidly compared to 10 years ago, but in reality there are now far more lenders in the Irish market, when you include alternate lenders. The difference is that there are far fewer high street retail banks, and the alternate lenders generally don’t have a major retail presence.
Other than the recession, many factors have caused the market to change, including globalisation, the advancement of funding structures, and online / peer-to-peer lending. I think it is positive from a borrower’s perspective for the market to contain both high-street banks and alternative lenders, as it provides a greater degree of choice and reduces reliance on one type of lender.
What do you think are the biggest challenges and opportunities for the CRE sector?
There are certainly both challenges and opportunities for the sector, and Origin Capital issues a bi-annual CRE sentiment tracker to our database to track the opinions of CRE professionals on a range of ongoing and topical issues. You can view the results from the latest tracker by clicking here.
Our latest tracker showed the biggest concern for respondents in the CRE industry is undoubtedly Brexit, although interestingly it was also seen as the biggest opportunity, particularly in relation to the proposed relocation of companies from the UK to Ireland. I think with Brexit we will really just have to see how the negotiations play out, what deal (if any) is agreed, what it means for Ireland, and more specifically for the CRE industry here. But I think it will continue to be the dominant topic for the industry over the next couple of years at least.
That said, there are plenty of other challenges and opportunities for the CRE sector. The general economic environment is very good at the minute, which is obviously a positive for the industry. However issues such as the housing crisis, the restrictions on building heights and a lack of infrastructure investment are definitely perceived as challenges for the sector.
What are your predictions for the CRE market over the next 12 months?
I think we will see a lot of refinancing activity. If you consider that there were €80bn of loan sales between 2014 and 2016, it is reasonable to assume a lot of refinancing will be required, and I think alternate lenders such as Origin Capital will likely provide much of this refinancing, as we have the ability to get to the market quickly with clear parameters and streamlined lending processes. I think the traditional banks will continue to be slow to lend in the CRE space as capital charges (the funds banks need to set aside for potential future losses) are higher for CRE lending compared to standard residential mortgage lending. I think that the banks will become more flexible, but not until their balance sheets are cleaned up, and even then I think we will see them focus primarily on Private Dwelling Houses (PDHs) and SME lending.
Will Origin Capital expand and provide more products to a wider cohort of the market?
At Origin Capital our focus is to service a key segment of the market with real expertise, however our product offering will likely continue to evolve in response to the needs of the market and other factors. For example, when we launched the business two years ago, we solely provided lending between €3m and €15m, primarily focussed in Dublin city. We have now expanded this to offer lending in excess of €3m with no upper limit, and as mentioned earlier, we are lending throughout Ireland. In addition, with Origin Capital being a subsidiary of LeBruin, it is possible the wider LeBruin Group will launch new product offerings in response to market demand, something which has already been evidenced with the launch of Profunder, which offers sub-€3m online lending.