Brick by Brick

Brick by Brick meets Brickflow

In this episode…

Brickflow founders Ian Humphreys and Robert Lange introduce the loan search engine that’s revolutionising the development finance market. They discuss their personal experiences in the worlds of tech and commercial real estate, their motivation for launching Brickflow, and why it was imperative to bring the property finance industry online to help solve the UK’s housing shortage. There’s also advice on finding and choosing the right development loan, and why getting the finance right will ultimately make property developers more successful.

 

Full transcript of episode here

ZOE

Hi all, and welcome to Brick by Brick, a brand new podcast for the property development industry. My name is Zoe Kiff and I’m the director of communications here at Brickflow, and one of your hosts.

Each week, we’re going to be speaking to experts and stakeholders from across the property development sector. We’ll share advice on how to get ahead of the game as a developer, as well as trends and insights from across the sector. This series is designed for all experience levels. So, whether you’re starting out on your property development journey or you’re an industry veteran, we’re going to be hand picking topics with universal appeal.

Before we get started, I wanted to share some of the inspiration behind the series. Every property developer experiences a different journey. Let’s face it, nobody goes to school to be a property developer, we all do something else first, and property development is usually a bit of a side hustle. If we’re good at it, we do more of it and eventually, some of use become full time.

The point is, we all have different experiences and knowledge. There’s no right or wrong way to be a property developer. But no matter how big or successful you are, there’s still things that you can learn from others.

Life is a development project itself, we’re all building brick by brick. Each day we lay a new brick and if we lay the bricks at the right place and at the right time, we get closer to where we want to be.

Property development is rarely a solo effort and normally involves different partners who share different ideas and skills. Brick by Brick is an extension of that. We want people to collaborate and help each other, to build a community, it’s the only way we’re going to address the UK’s chronic shortage in housing supply.

We’d also love to share the podcast with your development industry network. Our mission is to make development finance better. The current system is well and truly broken. Every year, somewhere between a third and half of SME property developers cite lack of finance as one of the main reasons that they don’t build anymore.

It’s only through raising awareness of the problems that developers face that we’re going to improve the situation. The more people hear about this, the more the industry will pay attention and the better it’ll be for all of us.

So please share as far and wide as you can. We also want you to join in the conversation. If you have any suggestions for future topics or guests, or thoughts on any of the podcasts, we would love to hear from you. Please get in touch through LinkedIn or Facebook, or email us at podcast@brickflow.com.

I hope you enjoy the show.

 

ZOE

So, to kick off the series, I am delighted to welcome Ian Humphreys and
Robert Lange, two of the founders of Brickflow and the UK’s first search engine for development finance, allowing you to search and apply for loans 24/7 from your phone or laptop. Head to Brickflow.com to check your finance options for your next development.

So today we’re going to talk about some of the challenges that property developers face and how Brickflow is trying to tackle them. So here we go, welcome Ian and Robert.

So we’d like to start the program with you introducing yourselves and telling us a bit about your background and your career to date, but also what attracted you to the property sector in the first place and what you love about what you do.

 

IAN

I do love what I do. I started in property finance accidentally. I left university, I wasn’t really sure about what I wanted to do. I wanted to work in London and in finance but nothing more specific than that. It’s actually a university friend of mine that introduced me to a company called Alexander Hall, which is where it started and learned the property finance ropes. It was a great starting place, I really enjoyed it there, really good training. I think it was about five years.

And then I left to join a couple of other guys that I had worked with. They had set up their own business. We specialised in the more higher end, complex transactions. We worked with some pretty serious property entrepreneurs, so developers and investors from all around the world. Again, it was a fantastic experience learning how to start and build a business. We grew from four people to around fifteen or twenty when I left, which was around six year ago. 

I then set up my own business and carried on working with similar clients. But very much had one eye on the development of technology in the residential mortgage space, that was something that was very interesting to me. It was becoming really efficient through technology, but the commercial development finance markets were still so archaic and had zero adoption of technology.

I then became a property developer myself for a little bit of time, I built some of my own properties for a few years and I went through that experience that all borrowers face as well, so being a developer and funding property developments. And I think it was those experiences together with my interest in the future and how technology was being used in other sectors that led me to wanting to innovate in a commercial real estate sector.

However, to answer your question, one of the reasons that I love what I do is undoubtedly the people you meet. No two projects are the same, no two borrowers are the same and learning about people’s journeys in property is absolutely fascinating to me. Learning how people have got to where they got to, the hardships, the sacrifices, and seeing them become successful. Real life stories are what I’m all about. Also, I love sharing, so the whole idea of Brickflow is to help borrowers access better finance but also to understand the market as a whole better so they can be more successful. So, we want to share our ideas, our knowledge, our experience of the commercial real estate sector and help people in their journey. We want people to come away from Brickflow enriched basically. Not only knowing more about finance but also knowing more about everything to do with property development.

 

ZOE

Sounds like it’s all come together at the right time then.

 

IAN

Yeah, the tech’s there, I think we can use it to our advantage.

 

ZOE

That’s great, thank you Ian. And how about you Robert?

 

ROB

I’ve been in software development through university and since then I’ve built software in every sector there is, from e-Commerce and Telecommunications but they’re primarily in Engineering and Finance. Because there are two sides to what I do, it’s taking business ideas and understanding, then implementing them in software. It’s usually quite complex algorithms and calculations that kind of thing for the finance sector. 

I’ve been attracted to the commercial finance, development finance area because of the coming together of the different situations that people are trying to turn that into code algorithms.

 

ZOE

Sounds like clever stuff. Thanks for that guys.

So now I want to move on to Brickflow. Just to chat about the software, the two of you have come together to develop it. So, what I would like to know is why did you create it and what are the problems that you’re trying to solve.

 

IAN

Okay, so the primary problem we see in the development finance space is access. It’s not a choice, there’s actually lots of lenders, we estimate around 50 at any one point in time, depending on the economic climate. But most developers don’t know more than a few, or how to find them.

So, most developers seem to find a lender either through other developer friends, through a broker or through other channels. There’s nothing wrong with any of those but most borrowers don’t seem to understand loan offers will vary hugely from lender to lender. I’ll let Robert explain a little bit more about how development finance is calculated and the algorithms that underpin Brickflow. But essentially if you speak to ten different lenders about the same site you will get ten different answers, loan amounts, loan pricing. So, our job like any search engine is to show you as many answers as possible and organise them in a way that makes sense.

 

ZOE

So that sounds like half of developers are missing out on a huge opportunity, so can you just expand a little further on that in terms of that every lender a borrower speaks to will give a different answer.

 

IAN

Sure. So, every lender has different criteria that they have to satisfy. They’ll also have different niches, so some lenders prefer different sectors, different geographies than others. So, they vary by loan size, leverage, geography and asset type, they’re the four main ones, but that’s not an exhaustive list.

So, for example if I have a site in the South East of England, and I’m building twenty apartments, and I’ll ask ten lenders what I can borrow, every one of those lenders will come back with a different loan size and a different loan size. The differences can be huge as well. So, by only speaking to one, two, three lenders there’s a small chance that I’ll have the best deal, both in terms of pricing and/or leverage. 

If I rank those loans in order, I would normally have one lender that would lend me the most money and they would generally be the most expensive as they’re taking the most risk. I will then have smaller loan amounts for the next lenders, normally accompanied by cheaper pricing. However, it doesn’t always work like that, the borrower’s job is to strike the balance between price and leverage, to find a loan that works best for that and gives them the best return on their equity.

But to speak to ten lenders every time you’re interested in a site is impossible, it takes too much time. So, to get ten lenders to quote development finance would take most people weeks or months. So Brickflow aids them in that process by giving them instant visibility as to which loans are available and putting them in order. Essentially, like any other search engine you ask a question which in this case is how much I can borrow and at what price. Then Brickflow provides you with the answers or in this case loans.

 

ZOE

Perfect, so it’s a bit like MoneySuperMarket then but for development finance.

 

IAN

Yes and no. But for those that haven’t seen Brickflow then that would help you understand how it looks.

 

ZOE

So why yes and no?

 

IAN

Well, we’re very keen not to have loan price and loan size as the only determining factors as to why someone would choose a particular loan or lender on Brickflow. For simple products like car and pet insurance, price could be the only factor that people are interested in, but development finance is a lot more nuanced than that. And there are a lot more factors to consider such as the speed, how good the service is, ease of working with that chosen lender, their process and many others.

 

ZOE

That all makes sense but MoneySuperMarket tells me about other factors so for example which insurance has free legal cover, roadside assistance and is that not the same?

 

IAN

I guess so, although some of our factors are most subjective so it’s not quite the same and we don’t show that yet, so I guess we’d show that in the future.

 

ZOE

Right, okay. So back to where we were, we now understand that there are potentially ten different lenders, all with different loan amounts and pricing for the same site. But you mentioned that there are other criteria, niches to be aware of. Correct, so if you take the same site and move it from the South-east of England and move it to the North-west of England or to Scotland for example, then the order of lenders and the amount they would lend and pricing would change again.

Similarly, if I reduced a block of twenty apartments to ten apartments, or increased it to forty apartments, everything would change again. If I change the asset type to residential, hotel or student accommodation then again everything changes. So, if my land purchase price or my build costs increase or decrease by 50k or 100k then again everything changes.

Essentially any variable that changes will change the lender and the loan options that are best for you.

 

ZOE

Right, and you’ll get instant results back after you tweak those variables.

 

IAN

Exactly, you can change the loan in the system, change the variables and we’ll feedback immediately as to what the best loans are.

 

ZOE

Wow, so pretty much every project a property developer looks at would have different lenders offer the biggest loan, or the best price each time?

 

IAN

Correct, the development finance market and the method of calculating development finance are incredibly dynamic. The current method of finding development finance is very static and the two don’t match. So, as an example if I ask a lender for their best offer on a Monday, their answer could be different by Tuesday. And there are things that go on in the background that we will never see. So, for example a lender will normally have restrictions on how much they can lend in one geography/region or in one particular asset class.

So if you’re borrowing to build a hotel for instance, then let’s say the lender breaches the threshold in that sector in between your first conversation and then when you apply for a loan a month later they may no longer be able to help you or they will be less competitive.

 

ZOE

So that’s why you say by only speaking to one or two lenders you’re likely to have a much lower chance of finding the next deal.

 

IAN

Exactly, if someone only speaks to one lender, the chances of them finding the best deal are close to zero.

 

ZOE

Wow so Brickflow is potentially a bit of a game-changer then, so moving on to Robert, can you tell us a bit more about how the system works and the technology behind it?

 

ROB

Sure. As Ian explained there are lots of different factors that need to be considered. There are really four main ones. The loan-to-cost, the loan-to-GDV, the Day 1 loan constraints and the minimum equity.

There’s lots of rules around these and each lender has a different rule. As Ian said the rules change at the asset type, the loan size, and on. So, we need to build a system which would adapt to all of these which was not easy.

I think we originally talked about that three years ago, and it’s taken us to where we are today to get as many factors in as we had. The maths is quite complicated, and a number of attempts have been made with some mathematicians and we didn’t quite get there but at the end we got the model we need and that’s where we’re at.

 

ZOE

Perfect, so what is it that’s so complicated?

 

ROB

I suppose the main reason is getting the loans in the right order into the right presentation has been the biggest problem. Most lenders, if you approach them, will have calculations but they all work forwards stepwise from where you are. Whereas we have to reverse engineer everything backwards to produce what we need.

 

ZOE

Sounds like clever stuff. So how does it work with lenders? They give you their criteria then you do the calculations for each loan?

 

ROB

Yes, each search is a new calculation, and these can change all the time a Monday, the lending criteria can change overnight and get different answers on a Tuesday. So, the information is current, where you have your dates of your search, that’s all saved on your dashboard and each time you look at the results you’ll get the live information, what you got is up to date.

 

ZOE

Okay, so what do you think is the biggest value-add that Brickflow provides?

 

ROB

For Brickflow we talk about the concept of the development finance paradox. With most financial products really what you’re after is cheapest and cheapest is best. You want the cheapest mortgage, the cheapest insurance, that sort of thing. With development finance that’s usually a false economy, property development you have a multiplier effect on your inputs, your time, your equity and you need to be efficient with those.

So, let’s take an example where it’s going to take 3.6m to build and a growth development value of 5m. If I decide that that was cash, then I have a profit of 1.4m but that’s putting in 3.6m of my own money and my return on capital is very low. There’s usually very little people in a position to do that.

If I take the finance and I can then increase my return on capital. So different lenders will want different things some want 30% deposit some want 10% deposit. So, if I put in 30% (1.2m) then I can get some cheaper debt from a mainstream and finance cost for about 200k then I make 1.2m profit, of 100% return and I still have to come up with quite a lot of money.

However, if I put in a 10% deposit, that’s probably about 400k and the same for the finance cost (another 400k), I’m making slightly less but that’s making a million. But the return on capital is 250%. With this, if you took exactly the same developers, one of them goes with low leverage and the other one with high leverage, after the time they’ve been through three developments, then one of them is going to be a lot further ahead in terms of what project sizes they can undertake.

 

ZOE

Right, so that’s really interesting. Essentially looking at more lenders can potentially make the project much more successful.

 

ROB

Yes, although that’s only one variable, there’re plenty of other factors to play, the economy, what happens if there’s a rogue contractor, and so forth.

 

IAN

And that’s if you’re measuring success by profit. But a lot of developers do that.

 

ZOE

I was going to say surely that’s the measure for most property developments.

 

IAN

I think the point is that time is one thing that none of us have an endless supply of. So, if it’s a two-year development cycle, you want to maximise your returns each time. Most people don’t want to be developers when they’re 70 or 80 so you only have a finite number of times you can do this.

 

ZOE

Right, so leverage really is king then. So, the more I borrow the bigger my multiplier effect, is that how it works Robert?

 

ROB

To a point, yes. Although at some stage you’re going to borrow too much and it’s going to cost you a lot more. If you’re going to pay another 150k tomorrow, and extra 100k etc it’s going to make very little sense. But on Brickflow, it’s all laid out and illustrated so the borrowing costs are there and the profitability and the deposits to pay to strike the right balance between what’s good for you and where the best loan is.

 

ZOE

So, the Brickflow will essentially do all of that for you.

 

ROB

Yes. We’ve worked hard to make it do those things and to present it clearly and concisely.

 

ZOE

It always sounds too good to be true, this is really quite a game-changer for the market. So, what happens next, I’ve found a loan, where do I go now?

 

ROB

We display the results and you can see what’s there. That’s likely to change because we’re working on a number of assumptions at the beginning as you go further into the process it will get more precise and you will get more information about a particular site and your particular circumstances and so forth. But you can narrow that down and get some loan terms and agree to that loan.

Ian’s probably better to explain that than I am.

 

IAN

So, once someone’s found a loan, they’re then encouraged to apply and go through what we call a pre-app. So that’s a term that most developers are familiar with. We ask borrowers to provide more information on their developer experience, developer appraisal and their property schedule. We pull through all the information from the initial search, and then this information is sent on to the chosen lender for review. 

The lender takes a look though that information, does the initial checks and due diligence and confirms they’re still interested based on further information and then provides a final quote. So that might still be slightly different from what’s in the system, might be slightly more or slightly less. But the idea is that they come back with their final offer which if that is accepted, then we move to the next stage which is the full application and credit approval and at that point we charge as a platform 999£ to make that application for credit approval, but that’s refundable in the event that the loan isn’t approved. And then we manage the loan to completion for the client. All the documents can be uploaded onto the platform and sent securely to the lender so there’s no paper, everything’s very slick and very easy. We’ve done manual development finance applications before and it’s not something we ever want to go back to if I’m honest.

 

ZOE

I can imagine, the developers listening to this would be music to their ears. So, to summarise, you’re offering developers clarity but also having a digital process that presumably is much quicker and easier to apply.

 

IAN

Yes, some lenders still won’t pay for applications. And some won’t accept dropbox, so we have to send them all the documentation through the post. It’s back to the stone age with some lenders. So, we really try and force change in the market

 

ZOE

I think you said when you first started in this project it was mind blowing that these guys have not come into the digital age.

 

IAN

Some are better than others and some are getting there. But as a whole, yes, it’s probably one of the last industries to be untouched by technology.

 

ZOE

And you also say that the average loan completion time is six months.

 

IAN

Yes, I mean there are a lot of things outside the lender’s control with regards to completing the loan quickly, satisfying the planning conditions is one example. There is also a huge number of people involved in the process, so two quantity surveyors, several lawyers, a bank valuer, all of them have a pivotal role to play and you only need one of them to go on a holiday and the whole system breaks down.

However, some lenders don’t help themselves. There is plenty of technology available that can make the whole process better but it’s not in use. It’s like the last twenty years not much has happened in this sector.

 

ZOE

Basically, you think the industry is very ready for a change.

 

IAN

Reluctantly, some people I think, but I think it has to be. The current system is really broken, if you speak to anyone, any stakeholders, so lenders, borrowers, brokers, agents they’ll all tell you the same thing. For me, other than maybe the planning system, finance is the biggest contributor to the chronic shortage of housing in the UK. If we solved that problem, then it’s good for everyone’s benefit. Anyone involved in the industry is doing more business so that’s good for the economy. And ultimately if there isn’t a housing shortage then everyone in the UK would have access to accommodation they can afford.

We see our role as a business is to help the whole industry be better and more efficient. IF developers had true visibility in the finance market then we could hit the annual housing targets easily for the next five to ten years and address the shortage we have.

 

ZOE

Okay so we’re approaching the end of the show and there’s one final thing I wanted to ask you both which is what is your biggest hope for Brickflow? Should we start with Ian?

 

IAN

I think it’s pretty much what I said at the start, the hope really is that we can help people be more successful, help people be better developers and that isn’t, you know, we’re not going to find the better sites or teach them how to build, but really everything starts with the finance, if you make a bad decision on the finance, you’re chasing your tail all the way through the deal.

If you pay too much for your finance, or you have to get investors where you’re paying profit shares, or you don’t borrow enough, it means you’re doing smaller sites. All of these things are built around finance and I think it has such a huge knock-on impact. But for most developers it’s really a secondary consideration, they find a site, they know what they can build and how much it’s going to sell for, they find a builder and it’s all about the finance? It really should be the first thing that you look at, and that’s how a lot of people use Brickflow as well as running through sites through the software and won’t bother to see sites that aren’t up to the numbers, they need on Brickflow. So rather than wasting your time in ten sites of which eight you could never afford based on the deposit level you have, you just go and see the two that you can because you’ve run the numbers through Brickflow.

It creates more opportunity, more awareness, it allows people to set their sights higher. A lot of people are surprised on how much you can actually borrow on sites. If the numbers align and lenders really fancy the site, you can really mobilise big sites, big profit margins with very small profit margins. I hope everyone that uses it comes away knowing more about finance and knowing more about the industry and hopefully can be more successful as a result.

 

ZOE

What you guys have said sounds like an absolute gamechanger for the market and an exciting piece of technology. Robert so what are your hopes for Brickflow.

 

ROB

My biggest hopes are really about seeing it become the standard for developers to go to, we will extend it to make the process smoother, provide more value in terms of value added, in terms of what it’s doing for you. That Brickflow becomes a verb, the thing to do for your finance and for the whole process.

 

ZOE

And I think that’s what I’ve got from today, I think you’ve given us a really great insight on how you two have come together to develop a software and the real difference that it can make for developers as well. I for one am excited to be involved in the project.

Thank you very much for your time, I hope you all enjoyed it. Stay safe until the next time and if you want to get in touch about today’s topics or anything else please reach out to use through the company pages on LinkedIn or Facebook or email us directly at podcast@brickflow.com.

I’m Zoe Kiff, director of communications for Brickflow and host of Brick by Brick, the podcast for the property developer industry. Thank you and Goodbye.

 

IAN & ROB

Goodbye!