Imagine if you could apply for a £2m bridge in the morning and be in funds by the afternoon. Combine that with the super-fast planning I theorised about in yesterday’s article and you’ve just solved all my job-related problems. (Nearly, I’ll discuss conveyancing tomorrow.)
Raising commercial debt from banks and lenders is, in my opinion, a drawn-out and archaic system. Let’s not even start on the mortgage industry… I must highlight immediately that I have great relationship with our lenders and brokers. It’s not their fault that there are issues, it’s just the system.
When I first researched blockchain technology it was the simplification of the lending process which really excited me. Allow yourself to imagine how it would be if you could submit your commercial lending application and have approval, a professional valuation report and finalised legal documents instantly? Final checks would be carried out by a human before funds are released.
As a small housebuilder we have tens of millions in commercial debt. The largest share is with one high street bank, some is with two larger lenders and then we have a few projects boutique lenders. So while I’m not an industry insider, I know a bit about the debt raising process. The more I pay in interest the faster the process. High Street banks tend to take about 12-16 weeks, smaller lenders about 4-8 weeks.
Let’s look at the current system in a very simplified way for a bridge of say £500,000.
1. The borrower, or her broker, submits an application to the lender, often on paper, with personal information and details of the project. This is sent along with an appraisal of the project and development CV.
2. The lender undertakes a quick analysis of the deal to ensure it meets internals metrics. If so a valuation report is ordered. The lender might also, depending on the size, need to send the project before a credit team. A formal offer letter is sent to the borrower.
3. The valuation report costs £5-10k and takes up to a month to produce. Apologies if this sounds demeaning but the information is readily available if you have a Rightmove Plus account – it’s simply the latest asking and sales for equivalent properties in the locality. The surveyor does look at micro and macroeconomic data but this will be a “house” view and the same for all properties in any given area. The important thing for the lender is that the valuer provides an insurance policy if things go wrong.
4. Monitoring surveys might be called upon depending on the size of the development. Again, if the developer is experienced all this data is available from their internal accounting systems. Yes there are exceptions but with material inputs roughly the same it’s just the skill and efficiency of the developer’s team that differs. This report costs another £5-10k for the borrower.
5. Once the loan is approved the solicitors prepare the legal packs. The borrower must foot the bill of both the lender’s solicitor as well as their own – another £5-10k a piece.
6. Once through the final scrutiny the borrower must visit his or her solicitor and sign the personal guarantees.
7. A bank transfer is arranged for full or part of the funds depending on the loan type. I’m not going to touch on monitoring and partial payments of development lending.
Let’s allow ourselves to fanaticise (perhaps it’s just me?) for a moment that we can use blockchain technology to streamline this process. How would it look? Let’s assume the developer is known to the lender and the development is fairly straight forward.
1. The borrower completes a full application online including a full appraisal in the format required by the lender. Much of the site information is pre-populated from land registry data, the planning database and various financial databases. The development CV information is completed if the application is a new developer otherwise the information is pre-populated.
2. Upon submission the system immediately notifies the prospective borrower that the loan has been approved in principle based on the lender’s criteria.
3. A valuation report is automatically created from the land registry data which is updated live following each property transaction. Asking prices are live and updated by estate agents on a single, open source database.
4. A monitoring survey report is automatically generated based on the costs associated with thousands of other similar builds in the same area. The borrower’s own data is also factored in to the figures.
5. Legal packs are produced immediately from the blockchain systems now available for conveyancing (more tomorrow). A restriction is placed on a proportion of a developer’s assets held within a digital currency wallet which can be seized by the lender should the deal go wrong.
6. A credit committee reviews the project perhaps deciding to visit the site or meet with the developer.
7. Upon human approval of the loan funds are immediately released.
The exciting thing about the hypothetical scenario above is that steps 1 through 5 happen instantly. Yes, instantly. As soon as the application is submitted into the system all information is matched against various lender policies and the outcome is instant.
From discussions with those in the know we’re still at least two years away from this technology. But it’s clear that the first lender who grabs the opportunity and rolls it out across the market, at a reasonable cost, will benefit greatly. As developers we’ll benefit too not just on the cost savings but the speed in access to finance will allow us to focus on what we do best, build homes.
Tomorrow I’ll discuss access how the conveyancing model and land registry database might look.