Hello and welcome to our webinar. I'm Ben Sheriff, Head of London for Knight Bank Finance. Over the next 30 minutes, we will be talking about prime property markets and more specifically, how private bank lending has been impacted by recent events. We will be discussing questions frequently asked by our clients in recent weeks and we will also be taking the opportunity to answer as many live questions from our audience as we can in the time. So what do we mean by private bank lending? Well Knight Frank finance covers the whole market from mainstream High Street lenders to specialist lenders, short term funders and most relevantly here a large network of private banks both domestic and international with appetite to lend. What type of clients is it for? We typically consider using a private bank where the loan size is over £1,000,000. A client's situation, income or assets are sufficiently complex. Or a client's financing requirements are such that bespoke lending solutions are the most appropriate. But why are we talking about it now? There has been recent well documented coverage of significant mortgage market turbulence with rising interest rates and lenders pulling products with little or no notice. We are also seeing a potential change in the investment and wealth strategies across our client base, more clients than ever. Needing our advice when making the decisions on how to navigate headwinds both now and in the coming months, I'd like to introduce my speakers today. Flora Harley, Executive Editor of The Wealth Report, Alex Agario, Head of the Knight, Frank Finance, Private Office and Mark and Drucker, one of our prime brokers working across central London. If we can get straight into it, Flora, my first question is for you. Where are we currently with inflation and interest rates and what is the trajectory? Well, I think that's an increasingly difficult question to answer because at the beginning of the year we thought that the peak of interest rates would happen in the first, maybe second quarter of this year. But then the April inflation figure came out much higher than expected. It came out at 8.7% compared to where markets were expecting around 8.3 or 8.4. Then there was a little bit more bad news with the the May reading where it stayed at 8.7%. So because of that the Bank of England. Has sought to raise interest rates quite aggressively to now 5%, whereas they have been going at 25 basis points per rise, they now increase that to 50% basis points for the last rise. Now where we're expecting that to go, well it's it's mixed. The forecasting houses are saying some are saying as low as 5.25%, so maybe just one more rate hike, some are saying 5.75% and markets are really now pricing in well over 6%, but we can't be sure on where that goes. In terms of inflationary figures, I think the July one will be a really interesting read, although we'll only see the June before the next Bank of England meet and I say the July 1 because we saw the energy price cap last July. So it will be when some of those base effects start to come through. Interestingly, when you look at sort of that producer price inflation, we're seeing some of the the biggest sort of deflationary jumps that went from sort of over 5% to just under 3%. Obviously that takes a long time to feed through, but it's just it's. Inflation is definitely proving stickier and more persistent than we perhaps would have hoped or would have thought at the beginning of the year. And thank you, Flora. Mark, just listening to some of Flora's comments on the market, how are we seeing lenders reacting at the moment? What's the current behaviors and what what are the current product options available to people? And how does that potentially differ between private banks and some of the mainstream lenders that we have access to despite the consecutive rate adjustments? That's been happening. The private banking lenders are still very conservative with their lending margins and the appetite to lend is still there. However, due to the lack of of of demand, we are now seeing more lenders competing for market share. So they have to be very competitive with their pricing against their competitors to retain their existing clients and also attract new relationships with assets to manage. From the lending side of things, we can still benefit from the private banks flexible underwriting criteria more so we need that in in this in this market. So when it comes to that, there's a big difference between the mainstream lenders and and and the private banks, The mainstream lenders will have a very rigid lending criteria with offers no flexibility to clients that have complex income or ownership structures. So that is. What's needed at the moment as we need a lender that can give our clients with sophisticated income structures to have an holistic view and how they underwrite these specific lending needs. To give you an example, I was assisting a client that was then chief executive of a global firm who was serving his two year non compete with a particular company. So most of the mainstream lenders will not agree to lending with the client because the end of the uncertainty of after the two year period. So I presented this case to a private bank based on the clients professional profile and employability after his non compete period. And we've also accounted for the clients investment portfolio in the background which helped boost his affordability and mitigate that risk that got the lending approved. So essentially stuff that wouldn't fit in the kind of box ticking exercise that most mainstream lenders apply, but actually quite a good underlying client. So the bank's still very willing to lend. That is clear. Flora, if I can come back to you briefly, how are market conditions weighing on the approaches and attitudes to wealth generally for debt and more more specifically for property just across the the high net worth client base? Well, some of the findings from the most recent wealth report, which came out earlier this year, found that around 29% of high net worth are looking to deleverage because of the higher interest rate environment that we're now in. But that doesn't mean that they're not looking to gain more property and the property doesn't remain incredibly intractive. According to our survey, around 15% of ultra high net worth are planning to purchase property this year and that plays into very many different ways that they're putting their money to work. So around 1/3 are looking for capital appreciation opportunities with around 1/4. To putting income generation and capital preservation at the heart of their wealth. So property can play into many different factors of that be it for rental income on the income generation or or looking for those more value opportunities for the capital appreciation plays. And Alex, just based on what Flores just told us, how are you seeing your clients responding to that kind of market context? Are there goals and attitudes shifting in terms of what they're looking to achieve? Yeah. I mean it's, it's obviously been a huge monumental change and evolution. So there's definitely been a change in sentiment, change in attitude. But I think it's important to realize that most of our clients are not borrowing out of necessity. They're borrowing really to achieve certain efficiencies and those goals, those efficiencies still exist so. There has been a rebalancing, there has been a psychological change in sentiment, but the goals, the goals remain the same. I mean to give you an example, a lot of clients borrow money for tax planning reasons. So the the sort of forefront of that is them getting good quality tax advice from professional advisors. And once they've done that many of our clients use debt to mitigate things like inheritance tax in the UK. Now that that that efficiency still potentially exists and actually what people need to consider is that. We've gone from an environment where sort of in the Zerp 0 interest rate policy environment that we've been in returns or the risk free rate has been or was very low. We're now in a position where the risk free rate is a lot higher. So just to give you an example, if you had, you know a client buying a property of £30 million borrowing say 70% of that, so £21 million previously, you know, depositing that money in cash, earning effectively 0 or very close to 0 on that cash. Now there are cash rates, cash returns available with some of the banks that we work with which are in and around 6% for those kind of sums of money. So you could be borrowing the money at 6% or thereabouts and you could be returning circus 6% on cash. So people need to think about how that has actually rebalanced and how you almost have sort of a neutral carry, especially if you're in a in a sort of no income tax jurisdiction, which many of our clients are. And so it's not, it's not all negative. There are actually some positives to be to be had. We've also seen clients that are sort of resnondom and are paying tax on a remittance basis using mortgages for. Creating clean capital pots or preventing themselves from having to bring clean capital into the UK and pay tax on it again that that still exists, that's still an efficiency that can be leveraged. So I think you know in summary, yes attitudes have changed, but our clients are generally pragmatic, unemotional. Sophisticated and goals orientated and those goals still exist. So I think the the, the use of debt as a tool is still very much a useful one. Yeah, it's interesting, I mean we talk about headwinds in the mortgage market, but we've had headwinds in the kind of tax regime underlying and how we treat for example, resident DOMS for quite a few years now. So those those haven't really changed recently. Alex, can I can we just touch on you. You mentioned obviously resident on Dom and our international client base when we're looking at properties outside of the UK and you know rising interest rates are common in a number of countries. France is an area that we particularly concentrate on is it, is it a similar story there, Is that still a useful tool? Yeah, I mean in, in answer, yes it is. Again those also the foundation has to be around good quality tax advice. But once a client has sought tax advice, we find that, yeah, even in international markets such as France where you have wealth tax, people are taking debt to help manage the wealth tax liabilities or the potential liabilities that they may they may have in those other jurisdictions. Flora, if I can come back to you specifically looking at the UK property market, how are things shaping up in terms of sales and lettings at the moment? I think the the housing market is sort of returning to Earth after a pandemic boom period over the last couple of years when you look at some of the latest data, so nationwide puts the UK house prices down around 3 1/2% over the year. Halifax data released last week was around just under three, so that's coming around 4% off the peak which happened at the end sort of third quarter of last year. Now because of all this sort of interest rate rises that we've been speaking about the the there is undoubtedly a hit to confidence and that means we're going to return. To a little bit more of a needs based market. So discretionary buyers may sit on their hands and sort of wait to see what the path for interest rates look like and and let the dust settle a little bit. When we have a bit more certainty over the peak and the sort of course rates they may then start to act. Obviously if there's any buyers that had a sort of mortgage offer in place before the inflation read that I spoke about earlier, they may want to act sooner rather than later. But because of this sort of return to needs based, there's a gap widening between seller and buyer expectations because sellers are still wanting sort of prices from last year, whereas as I said it's more of a discretionary market at the moment. So that gap is widening. One thing that we have seen through the pandemic years has been that sort of constraint on supply and that is starting to unravel a little bit, but we don't see a huge boom in supply coming forward from sort of distress sales because. The jobs market remains incredibly strong and is definitely a supporting factor for the housing market going forward. Now in terms of there are some obviously some variations between different price brackets and in different locations. So prime London for example has been remarkably resilient compared to the rest of the UK market as a whole and particularly at the higher price bracket levels. So when you look at 10 million plus properties in prime Central London. Year on year there's actually price growth whereas prime Central London, there's a whole prices are down around nought .5% compared to June last year. Now what we're expecting is that that fall in in transaction volumes and we're expecting prices to fall by around 10% across the UK as a whole. Now in terms of what that means for the lettings market, because as I said those sort of more discretionary needs based buyers. Some sellers are opting to hold their properties and put them into the rental market. So we're starting to see that demand supply imbalance in the rental market, which is we've seen over the last few years start to correct. And we expect rental price growth to come back down to sort of more single digits where it has been up in the double digits most recently. OK, interesting. Thank you, Flora and Mark and Alex, This this one's kind of for both of you. We're seeing more and more of our clients actually look at other forms of debt. And borrowing against different assets in the current economic conditions, can you both just give a brief overview of some of the options available? Maybe Mark, if we can start with you, sure. So a Lombard facility is something that we're exploring more and more with their clients. It's basically investment back lending. So we use our clients portfolio and leverage that up to a certain level, which at the moment pricing is significantly cheaper compared to the standard mortgage rates. Lombard facility, we're looking at maybe a percent over base or even less and cash back facilities as well, which is different type of lending solution. We're looking at maybe 50 basis points over base or sometimes cheaper depending on the currency it's held. To give you a bit more of an example, I'm assisting a client that's currently purchasing a 7.5 million property at 75% loan to value 10% of his cash deposits already held under various accounts. The rest are tied in its investments. So instead of liquidating his invested investments, now we have a much more blended approach where we structured 50% of the loan to value on a standard residential mortgage around 1.2% over base on a two year tracker, 40% loan to value will be on the investment bank facility which we're pricing at .75 over base. Which now gives the client a savings of around over half a percent. So that's something that we can our clients can benefit and we're exploring more often with our clients now. And with that with that arrangement, the clients able to hold his investments, he's not had to liquidate that's the most important thing is his financial and his portfolio is intact, all right. So really useful tool Alex Lombard loans and I suppose investment bank loans are still reasonably vanilla for us. Is there anything else that we can lend on and and you're seeing appetite from clients for, yeah, I mean absolutely we can look at a number of different asset classes. So whether it's cars, whether it's watches, whether it's art collections, fine wine, all these sort of socalled passion assets are things that a bank or a lender more more usually a specialist lender or fund can lend against and what we what we might see as a I guess we're in this economic environment on. More uncertainty, maybe less liquidity in traditional lending markets, these sort of passion assets tend to be the assets that are more likely to be unencumbered. We could start to see more clients looking to raise capital to meet you know cash flow requirements or or gaps in in their capital. And yeah, we we can structure facilities against these these type of assets. We've recently looked at intellectual property as well where a client had. And intellectual property rights in a in a business and because there's a a cash flow being generated, there's income from royalties, A lender will essentially secure a loan against those that cash flow essentially. So yeah, a lot of things can be done. We can be very creative and I guess given the economic circumstance that we're in, plants may start to look at these other avenues more closely. And in terms of lenders that would look at these these type of approaches, it's it's quite a varied pot. Yeah. So I mean you have private bank lenders, some private banks will lend against more esoteric assets, but it tends to be more either specialist lending businesses that have us focus on a particular area whether it's art for example or maybe classic cars or funds. So you know we work with hedge funds or or debt funds that will basically. Be fairly creative and it's a a pretty carte blanche approach to their lending proposition if it makes sense. If the numbers add up, they're willing to look at a lot of different types of assets, a lot of different types of scenarios. So they can be very creative tends to be as you sort of get more esoteric and more niche that the cost of the debt will go up. So you know our job is obviously to assess the circumstance and try and obviously optimize the financing cost for the client depending on. This, this scenario, fantastic. We've had some questions in from the audience. I'll I'll try and run through as many of these as we can within the time. The first one and probably one that's familiar for a lot of people, mortgage rates have just gone up again, are they likely to come down by the end of 2023, So relatively short period of time. Flora maybe you can comment on that for us. Well, I'll take the view from from the base rate. I think the next two inflation reads will be absolute key for what the Bank of England does next. We'll only see the June rate before they meet again in August. But I think there was some sort of slightly more dovish musings coming from the Bank of England last last meeting with two of the members actually voting to keep rates on hold, whereas the remainder went for that 50 basis point. But if we do start to see inflation cool down then the Bank may be. More likely to sort of hit pause because there's some interesting factors at play. So historically it's taken about 18 months for base rate rises to feed through the system and because of the prevalence of fixed rate debt, it's going to take quite a bit longer. So there might be again more reason for them to sort of take the rhetoric of rates probably won't come down anytime soon, but then they're not going to maybe go up as far as potentially markets think but. I think a lot will rest in those inflation figures. But yeah, it's, it's, it's going to be trickier. Yeah, understood. I think from our side on the mortgage rate side, we're really just waiting for that slight underlying confidence that we may be seeing the peak of base rate rather than continued rises. Mark, if I can come to you for this one, how are the recent market conditions affecting portfolio landlords, We know the bite to that markets obviously been put under quite a lot of pressure. Well, yes, and they're currently under pressure. I mean our current high interest rate environment has a direct impact on the ICR calculations which determines how much the landlords can borrow against these investment properties. So now they're looking for other avenues or other solutions to reduce their portfolios loan to values to be able to refinance them against these challenger lenders which are interest rates are about 7 to 8% to some for offshore clients. It's also the private bank option is now a good solution for clients because the way how they underwrite this portfolio is quite different. It's not just heavily targeted on the ICR calculation, but more of a holistic approach and they look at the clients profile and their assets in the background and also liquidity that helps an overall affordability assessment. But definitely they are currently under pressure. When we talk about ICR just for the benefits of the audience, perhaps you could just explain that. So it's interest cover ratio which is the amount of rental income in excess to the the mortgage payments, right. Understood. Thank you. And. The next question that we have and maybe one that Alex can answer for us, are lenders showing more or less appetite for lending against particular assets or types of lending? What kind of trends are we seeing? Yeah, I think as you'd probably expect given the environment, there's there's definitely a more risk aversion. So at the margins things are slightly more difficult if you think about you know trophy assets or assets in secondary locations. Assets where there's less liquidity in the market, so there's less demand in the market maybe there is definitely more sensitivity from lenders to lend against things like that. Not that they weren't, they weren't lend against them, but they may be taking a much more careful approach, much more considered approach than than they may have 18 months ago. Understood. And final question before we run out of time, one, maybe I'll ask both of you if I can, Mark and Alex, is there anything that a client can do now to put them in a good position to buy six months down the line? Mark, if we can come to you first, I think clients should start exploring their options now and more importantly is to speak to a mortgage professional like ourselves, they can offer outside the box lending solutions which is key in this current market. And Alex, yeah, I think given the context of this conversation where we're sort of talking about private lenders, I think it's important to realize that the, the due diligence process, the source of wealth process, the fact that a private lender has to, generally speaking open a bank account or a number of bank accounts as part of the transaction just means that sort of further to what Mark was saying, it's important that clients are. Doing that as earlier in the process, in the process as possible before they put a bid on a property just so that all their ducks are lined up. And I think in again in this environment where from a buyer's perspective it is more of a buyer's market in their mind. If you want to put yourself in a in a more competitive position and and be able to bid in a stronger fashion, you need to have your financing in place before you you come to the table. Yeah. That's a really good point to finish on actually. And this period of pause where some people might still be considering what they're doing, actually gives people really good opportunity to line things up early, speak to the right people. And as we're seeing with this currently quite volatile market, actually having really good sound advice is paramount. Well, that's all we have time for today. Thank you to all of my panelists. We do hope you found the session useful. Please do get in touch with us directly if you would like to discuss any of your own lending requirements with one of our specialist advisors. Thank you all for joining. Goodbye. _1715901338365