To foreign banks the UK property market holds huge appeal. In order for them to compete seriously with domestic lenders, however, the right blend of home-grown expertise and international experience is vital.
It was with this in mind that Indian bank Axis hired Andrew Ferguson to spearhead the launch of its UK arm into the buy-to-let market in April this year. Ferguson will soon celebrate his first year at Axis, having joined in October 2014.
Previously the bank’s UK focus had been on commercial lending and retail deposits. Its savings products are regularly in the best-buy tables and provide the main source of funding for the bank’s buy-to-let mortgage lending.
Rather than entering the UK with all guns blazing and seeking to capture all markets at once, Axis has taken a highly strategic approach to deciding which sectors to target. For the Indian parent bank, specialist buy-to-let lending holds a number of advantages over the mainstream residential mortgage market.
Ferguson says: “The board decided prior to recruiting me that they wanted to get into the buy-to-let arena, for obvious reasons such as channelling the retail deposits, diversification in lending and also because it is a lower-risk market with lower default and arrears rates than residential. It’s relatively attractive from a capital perspective – the limits are more favourable.”
But even within the buy-to-let sector, Axis has been selective in its focus, says Ferguson.
“It identified a space within the specialist lending arena, which is lending to landlords through limited companies, the houses of multiple occupation market and expatriate lending. We are completely geared up and focused on experienced landlords. To even take one of our products, the landlord must have at least three existing buy-to-lets and two years’ experience. We don’t do the dinner party landlord or the first-time buy-to-let.
“The number of lenders that deal in those more specialist areas are fewer than 10, so the market opportunity was to build on the existing credit skills that Axis had and get somebody like myself who is experienced in the UK market to come in and lead the business. I’ve had the excitement of building a proposition from scratch.”
In terms of competition, Ferguson says Axis does not regard other foreign banks as its main rivals but rather all the players that operate in the same niche sectors, many of which are UK businesses.
“It’s the guys that are already in the specialist lending space that have built up good businesses and a good reputation since they launched,” he says. “There was a lot of background research into the distribution network, building a proposition and designing products so that we could become a credible UK specialist buy-to-let lender.
“There’s a real focus on service. Whenever I’m engaging with members of the board or other key people within the business, of course there are questions about how the business is growing and the bottom-line performance but it’s also refreshing that a major part of any discussion is about our turnaround times, straight through processing and broker feedback.”
As one of the largest private sector banks in India, Axis has 15 million customers and assets of over $70bn (£45bn). It has offices in Columbo, Dubai, Hong Kong, Singapore and, of course, London.
“The UK is a subsidiary business,” says Ferguson. “But it operates very much as a bank in its own right and is managed as an autonomous entity.”
Although service is at the heart of the proposition, Ferguson says Axis believes this can be achieved with a lean base of in-house staff because back-office processing and IT are outsourced.
“The frontline staff and control functions such as the compliance, risk and treasury teams are in-house. They are involved in the buy-to-let business but also with the other sectors we work in, like savings and commercial lending.
“There are 20 staff who are specifically within Axis in the UK but we will look to expand that as our distribution grows and volumes increase.
“I’ve appointed a new business development manager who has just started with us. In addition, Capita Mortgage Services has a dedicated team of eight individuals up in Ipswich who help with all our mortgage processing and loan servicing. They provide the origination platform that enables our distributors to submit cases to the bank online. They have already agreed, based on our forecast volumes, to front-load some additional recruitment as the business grows.”
Another factor that enables Axis to keep a low headcount of in-house staff is its distribution model, which uses specialist packagers to check that the submitted cases meet the bank’s criteria and have all the documentation required. Any broker can access the product range but only through one of these specialist distributors.
Ferguson says: “By the end of this month, we’ll have six of the key packagers on our panel. We’ve got Mortgages for Business, Complete FS, AToM, TBMC, 3MC and The Buy-to-Let Business. I know those firms well from previous roles that I’ve had so I know the managing directors well enough to have them as really trusted partners.
“I was able to articulate the proposition to them about how we want to move the bank forward and that the focus is on service. That, aligned with the fact that they’ve dealt with me previously and there’s some degree of trust, meant that they were more than happy to distribute our products.
“The next phase for us is looking at a handful of firms that I’ll give direct access to. Those will typically be your larger London-based brokerages.”
After the credit crunch, packagers received a lot of criticism and many went out of business because some had been used by unscrupulous brokers as a means of getting high-risk cases placed with lenders and gaming the system.
However, Ferguson believes that those operating in the current market play an important role.
“If you look back three or four years, the market sentiment was that the future of packagers was not good.
“I can honestly say now that there’s a real value in packagers within the distribution chain, particularly where you’re a new lender that doesn’t have all the infrastructure in place on day one.
“If you launched a good product to every broker firm in the UK, as a small lender you would be deluged. Packagers provide a really good mechanism for filtering that business. It’s a lot easier to train an office of packaging staff to really understand your products and your proposition.
“The ones we work with are some of the most respected in the sector and I think they all know that, if they were ever seen as the easy route for a borderline case, that reputation would soon spread and have an adverse effect on their business. The ones we work with make sure that, when a case comes to us, it’s represented in its entirety.
“There are always a few instances where brokers won’t be fully up front even with the packager when submitting a case, but I think the good ones can sniff out any obvious issues. There are times when the packager will give me a call and say they have a concern about a case, rather than waiting for me to pick it up, which is nice because that’s partnership.”
He believes the Chancellor’s proposed move to restrict tax relief on mortgage interest to the basic rate for buy-to-let landlords is more likely to affect ‘accidental’ landlords, who are higher-rate taxpayers, than the more experienced, professional property owners, who will probably restructure their finances to ensure they are not hit by the changes.
“They would need to get professional tax advice to understand all the potential ramifications,” he says.
“But one of the ways that a landlord can mitigate the impact of the tax relief changes is by running their buy-to-let business through a limited company structure, which is something that Axis offers. We’re already starting to see more enquiries about limited company structures.
“I guess the question that is being discussed in many buy-to-let lenders that don’t offer limited company lending in their stable of products is: ‘Do we need to consider that?’ It’ll be interesting to see what happens over the next few years.”
Does Ferguson think it may be politically difficult for some of the mainstream and state-backed lenders to allow loans to be made via limited companies to circumvent the Chancellor’s new rules? And more importantly, would it be morally right for lenders to do so?
“First, the limited company structure is fully legal and already utilised by many professional landlords.
“While there are benefits and savings from using a limited company, landlords will need to make sure it is right for them and obviously, if needed, take advice from professionals. There may be a need to pay stamp duty land tax and capital gains tax so I am sure George Osborne will appreciate the immediate revenue raised.”
In a year in which the regulators are keen to curb growth in buy-to-let in favour of the residential, owner-occupied market, how does Ferguson envisage the end of 2015?
“I think the buy-to-let market won’t be far off the £30bn level that was predicted for this year. In Q1, we saw levels reach as high as 18 per cent of the mortgage market but Q2 has dipped a bit. The historical average for buy-to-let is more like 12-13 per cent.
“My own view is that it’s going to be somewhere between the high level we saw in Q1 and the historical average, so something like 14 or 15 per cent of the market. If it was to continue much beyond that, I would anticipate that the Treasury would be a lot more likely to consider ways of reducing the market.
“Around 20 per cent of people live in rented accommodation in the UK so the private rented sector plays a key role. This is because of affordability and also the transient nature of the population. When people move job, if that job is 100 miles away from where they live they may want to stay in their current house, where the kids are at school, and rent during the week.
“The risk is always that there will be a knee-jerk reaction to one quarter’s data and that the Chancellor will decide to implement some really sharp tools that end up with unintended consequences. But I do think 18 per cent [market share] is a bit too high and probably most people within the sector would take that view.”
Before April this year, when the Chancellor’s radical pension freedoms came into effect, many believed that his reforms would see money pour in to buy-to-let as people opted to invest in bricks and mortar over intangible funds and stocks.
But Ferguson says: “I don’t think it was the seismic change that some analysts anticipated.”
Meanwhile, much has been made of the effect of the predicted interest rate rise on owner-occupiers – but what about landlords?
Ferguson says: “The latest BoE outlook suggests rate rises are most likely in Q3 2016, with rises being slow and steady from that point and base rate being around 1.5 per cent at the end of 2017.
“Borrowers on fixed rates will have a degree of protection but those on variable rates will feel the pain immediately, although a sizeable proportion will be on low-paying base rate tracker rates.
“Rises will have an impact on costs but most experienced landlords will have factored in increased rates to their forward planning. So most will be well equipped to deal with rate rises.”