Flying high

14 November 2011 | By Natalie Thomas

Walking into the offices of Dragonfly Property Finance, it is easy to see why the bridging sector has earned a reputation for being where the money is.

Alongside the Old Bailey, its opulent foyer makes you feel more like you are entering an upmarket spa than a bridging business.

“We rent our office space from Octopus Investments, which is great for us as we like to be near the money,” says Jonathan Samuels, chief executive officer of Dragonfly.

Octopus, which has £2.5bn of assets under management, is not just Dragonfly’s landlord but its main investor as well, and Samuels says the relationship between the two is close financially as well as physically.

And aptly for a firm called Dragonfly, Samuels says this mix creates a buzz in the office.

“I encourage our guys to socialise with the Octopus team,” he says. In February Dragonfly secured an additional £250m in funding from Octopus, and it seems the relationship is mutually beneficial.

We saw a 35% uplift in our business partly due to the rebranding and partly because we changed our strategy

“It is happy with what we do we are the highest returning business in its portfolio, which is good for a number of reasons,” says Samuels.

“It means Octopus is more likely to invest in us and we can draw down on money as we need it, so we can be flexible with rates.”
Dragonfly’s latest results, filed at the beginning of November, are evidence of the current bridging boom. BridgeCo, which trades under the name Dragonfly, reported a pre-tax profit of £5.9m for 2010, compared with £1.2m in 2009. The accounts reveal that the number of loans completed over the period rose steadily, with over 150 transactions funded.

With stable arrears and its loan book weighted in London and the South-East, it clearly has a positive story to tell. But this success, as has been the case with the bridging market in general, is a result of the malaise that continues to blight the mainstream market.

“The performance of BridgeCo’s property finance activities for the financial year exceeded all expectations, fuelled by the continued lack of liquidity from the high street and property professionals,” the accounts state.

WHAT’S IN A NAME

When Mortgage Strategy last caught up with Samuels, the firm was trading under the banner of Drawbridge Finance, which it decided to ditch for Dragonfly in April this year. The rebrand certainly raised eyebrows in the industry. Drawbridge was launched in 2009 and had already built up a reputation, so why junk it after only two years?

“In the months immediately after the rebrand we saw a 35% uplift in our business,” says Samuels. “This was partly down to the rebrand and partly because we changed our strategy from being all about bridging to include other products such as buy-to-let and second-charge loans.”

But even though it is only two years old, the recent influx of lenders into the bridging market means that by today’s standards Dragonfly is one of the more established lenders in the space.

Samuels could not be described as a novice in the bridging market however. He first became acquainted with it in 2006 when he launched a bridging firm in South Africa. He had moved there in 2004 to look after a bank acquired by his then employer Standard Chartered. He spearheaded a mortgage brokerage and bridging firm but then moved back to the UK after selling both businesses to a private equity firm in 2007. Instead of returning to his hometown of Manchester, Samuels opted to put down roots in London. But he has not ruled out returning to the North again sometime in the future.

“My family is still in Manchester and I love the place,” he says. “I’m an avid Manchester United fan as well. Growing up in Manchester in my late teens was exciting. The city had some cool bars and clubs, and the Oasis/Blur battle was going on.”

So does Samuels fancy taking inspiration from Manchester United boss Sir Alex Ferguson and staying in his profession for the next 25 years?

“I am ambitious and my ambitions lie within the business,” he says. “I think you can be ambitious but stay with your company.”
And it would appear that ambition is paying off. According to figures from the Association of Bridging Professionals, Dragonfly has a 30% share of the bridging market.

“In terms of volumes our business is roughly made up of 60% bridging, 30% buy-to-let and 10% mezzanine and development finance,” he says. “In terms of value it differs month-on-month but we have worked hard to get to the top and intend to stay there.”

IS THE BUBBLE ABOUT TO BURST?

As Samuels points out, it seems that not a week goes by without another lender launching into the bridging sector, which has led some to question its sustainability.

“I’m pleased the sector is growing, but supply is expanding at a faster rate than demand,” he says. “The Association of Short Term Lenders has around 40 provider members, but a healthy bridging market probably only needs half that.”

Demand is holding steady, he says, which is good news for brokers because they are seeing prices being pushed down. Rates have come down from around 2% a few years ago to below 1% now.

“This has upped the game for all lenders in terms of service,” he says.

Just this month an unnamed lender launched a bridging product offering an initial rate of 0.60% for the first three months, reverting to 1% per month for a maximum of 18 months one of the lowest rates on the market.

So does Samuels have any fears that the price war will become so fierce that it could lead to a situation similar to the sub-prime market before the 2008 downturn, with providers pricing products so aggressively that they don’t make a profit?

“I would hope lessons have been learnt,” he says. “We are not going to be led into a strategy that doesn’t work for us. Our proposition is about being innovative and offering a good service, not about rock bottom pricing. If others go down that route good luck to them, but we won’t be following.”

And living up to its name as a pond-based predator, part of Dragonfly’s game plan is to grow the business both organically and through acquisitions.

SPREADING ITS WINGS

Samuels says he hopes to take advantage of the number of lenders that will drop away when they realise their models are not built for the long term.

“It is unsustainable to have so many players in such a small market and we will see a few fall by the wayside, which means there is room for consolidation,” he says.

Dragonfly has already acquired mezzanine lender Maslow Capital. As part of the deal in September this year, it took over Maslow Capital’s multimillion pound loan book.

“We have an organic growth strategy through products and service but we also have an acquisition strategy,” he says. “There are a couple of firms we are looking at and are in the first phases of due diligence on them, one of which is a player in the bridging market.”

But Samuels does not expect to have any news on the acquisition front until at least Q1 2012. He predicts significant change in the sector over the next few years, including seeing around half its players either go out of business or get snapped up by rivals.

“I see these things not as concerns, but as opportunities,” he says. “The barriers to entry are low in bridging they are rising but a lot of investors are sitting on the sidelines, attracted by headlinegrabbing returns.

“Providers come to the market without understanding the risk and a lot will back away over time. You can tell who is in it for the long run and those that are there to make a quick buck.”

BATTLING THE EUROPEAN UNION

Something else keeping Dragonfly busy is its Financial Services Authority authorisation application for its bridging business, but Samuels says its ambitions do not stretch to the residential market.

“It’s a detailed process and it seems to be going well,” he says. “The regulator likes the fact we have such a close link with Octopus, which is already regulated .”

As it stands, the European mortgage directive would include bridging loans within its regulations. But some of the proposals, such as a 14-day cooling off period for all loans, would be impossible to move across to the bridging sector. Speaking this month at a Council of Mortgage Lenders conference, Sheila Nicoll, director of conduct policy at the FSA, also confirmed that the directive covers bridging loans.

“Some of the proposed regulatory changes in the European directive would be hugely damaging to the bridging industry,” Samuels says. “But it’s almost certain the sector will become FSA-regulated along with buy-to-let.

“FSA regulation will be a market disrupter for some firms. Those that are not embracing it will realise they cannot live outside it forever it will be a new world.”

Samuels feels the level of regulation that would come in from the FSA would be appropriate for the market but worries that interventions from Europe could create problems for the sector.

“There is a need not to over-regulate the space to the point that it can’t function,” he says.

LOOKING FOR REDEMPTION

From an outsider’s perspective it seems that just as the bridging market has blossomed, the residential mortgage market has withered.

But Samuels argues this is not the case, primarily because the bridging and residential mortgage markets have a reciprocal relationship.

A bridging loan needs to be repaid by a remortgage deal with a mainstream lender. Without this assured exit there would be no bridging sector. On that basis, he argues that the mortgage market is a lot rosier than is often painted.

“Since we started the business we have had more than £100m worth of loans redeemed, which is in excess of 200 loans,” he says. “We are getting a lot of money back, with just over 73% of our loans being redeemed through finance rather than sales.”

Samuels says he finds it hard to understand why there is so much doom and gloom about the mortgage market in the media when Dragonfly’s experience on the ground is that mortgage lenders are redeeming its loans.

“What happens in the bridging sector is a function of what is happening in the mainstream market,” he says. “If on the horizon we see further contraction in the mortgage and buy-to-let markets, growth in the bridging sector will be capped.

“The bridging sector needs a certain amount of liquidity in the mortgage market so borrowers have an exit strategy. There needs to be a balance between the two.”

He believes the bridging sector hit its peak before the credit crunch. Samuels is confident the sector will continue to grow, but at a slower pace than it has been experiencing over the last two years.

“A few years ago the market had shrunk to such a point that it now feels like it has suddenly exploded and that there is a bridging lender launching every week,” he says.

Bridging provider West One Loans has estimated that the sector would be worth £800m by the end of the year, but Samuels disagrees.
“All the analysis I have done seems to be pointing towards the market being more like £1bn,” he says.

A BRIDGE TOO FAR

A sign that the sector has grown rapidly over the last few years is evidenced by it having two trade bodies to represent its interests the ASTL and the Association of Bridging Professionals.

“I think they complement each other,” he says. “There is a place for both of them as they both do different things. The latter acts like a forum for brokers within the industry, whereas the ASTL’s role is to provide a voice for bridging lenders to the regulators, such as the FSA and EU, which it does well.”

The ASTL will have its work cut out if it wants to make Europe listen to its concerns, but Samuels does not believe the job requires a full-time chief executive.

At the moment, Adrian Bloomfield is chief executive officer of the ASTL, but juggles the role with other responsibilities outside the bridging sector.

“I don’t think it requires somebody full-time as that would make the membership fees too high,” says Samuels. “We are a niche industry and our issues are limited.”

One area where the ASTL comes into its own is fraud. Like many industries, while bridging lenders might disagree over the size of the industry, they unite when faced with a common threat.

“ASTL members discuss fraud and how the industry can combat this,” says Samuels.

“There are attempts by borrowers to commit fraud, but we discuss fraud attempts, such as valuation and Land Registry fraud, and alert each other to them.”

Although Samuels admits that members are competitive in the business environment, the mood changes when they convene for ASTL meetings. “When lenders are at ASTL meetings they are open about issues,” he says. “It’s a competitive market and we want to do well, but I wouldn’t want that to be at the expense of another lender suffering fraud, for example.”

But one subject which does seem to divide the bridging sector is override commission.

In July the FSA warned short-term lenders not to offer override commission on regulated business due to concerns over their practices towards unregulated loans.

It is believed the FSA was alerted to the issue of override commissions on unregulated loans by lenders promoting them to introducers.
Override commission is a bonus paid to brokers if they introduce a certain amount of business to one lender. At the time the ASTL advised its members against such practices.

“It’s not a big issue for the bridging market,” says Samuels. “If there is extra to be made from a deal that will be seen in upfront commissions and no one will be worse off. But I can understand the FSA’s concerns.”

TOO CLOSE FOR COMFORT

Dragonfly hit the headlines in September when it suspended its relationship manager Martin Gilsenan. At the time, Samuels said he had been suspended pending further investigations. There are rumours that Gilsenan is planning a move to rival Omni Capital.

Samuels says he is unable to comment on the matter but that it is surprising how much events in the bridging sector hit the headlines, considering how small it is.

“Maybe that’s a consequence of it being a niche market,” he says. “Lots of lenders know each other and socialise at functions, as well as dealing with the same brokers.

“There are some colourful characters in the market and as a consequence of that when small things are said they are publicised. The sector is definitely punching above its weight in terms of headlines.”

Optimism in the bridging sector and the growth of the market over the last 12 months perhaps goes some way in explaining why it has played such a prominent role in the trade press lately.

The bridging sector has been one of the few success stories in the intermediary market in the last 12 months and no doubt many will be hoping this continues for another 12.

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