The hunt for property-related credit by high net worth clients in the UK is proving a boon for private banks that don't normally grab headlines in the domestic market.

(Editor's note: This interview was conducted shortly before the violence that hit London in recent days. To view an article on the possible implications of the riots on the capital's property market, click here.)

The hunt for property-related credit by high net worth clients in the UK is proving a boon for private banks that don’t normally grab headlines in the domestic market.

Scandinavian and Canadian banks are among some of the lenders doing business in bespoke credit, sometimes elbowing aside UK household names, according to Knight Frank Finance, the independent advisory arm of real estate giant Knight Frank.

Banks in these countries have so far avoided the heaviest blows from the recent credit market turmoil – Sweden had recovered from its own version of the credit crunch in the 1990s – and the balance sheets of such banks are relatively robust, said Simon Gammon, managing partner of Knight Frank Finance, a business running since May 2007. He declined to name the banks from these countries that KFF has used.  

“I see one of my main roles is to source new private banks, such as those that have not had a traditional UK presence, and who see London as a safe place to lend into. That has been a big success story,” he told this publication at his firm’s offices in Baker Street, central London.

Gammon did name those banks with whom KFF works regularly, however: Barclays Wealth, HSBC Private Bank and Coutts.

“We were working in the private banking arena well before others realised that was where the money [for lending] was,” said Gammon. “All our lenders tend to be predominantly private banks. They will want to do this as part of a wider wealth management relationship [with a client],” Gammon continued.

Growth

KFF’s rapid growth in around five years comes at a time when conventional sources of bank finance have dwindled. (The recent turmoil in financial markets in the past few days could squeeze such credit further.) At the same time, a flood of buyers of London prime residential properties, coming from areas such as the strife-torn Middle East, has driven prices to new highs in areas such as Belgravia and Knightsbridge. Since 2005, London’s relative cost index, according to the Savills World Class Cities Index, has risen 32 per cent. Sales of £5 million (around $8.1 million) plus residential property in London hit £1.3 billion during the second quarter, a record, Savills has reported.

Gammon’s business, which started with six people and now has more than 30, posted a 40 per cent rise in turnover for the financial year ending 30 April 2011 compared to a year before. In the 2011-2012 financial year, the target for revenue growth is 50 per cent and profit growth of 75 per cent – the firm is on target to achieve this just four months into that financial year. Some 64 per cent of new deals arranged between May 2010 and May this year – still a tough period for credit – were unavailable on the high street. The firm says it covers all kinds of financings from around £100,000 to £100 million. KFF charges from 0.5 per cent up to 1.0 per cent of the value of the total loan that a client signs up to. The firm can also charge clients an hourly rate for specific consultation and advice on an issue, such as a research report on a market.

Clients who work with KFF have varied requirements, ranging from a straightforward loan request to finance a new property; using collateral on existing properties to support debt-financed new purchases, as well as tax and estate structuring. Many KFF clients have foreign as well as domestic investments and assets.

Blessing in disguise

KFF’s launch shortly before the financial market turmoil has proven a blessing in disguise, Gammon argues, because his firm’s ability to source funding deals from private banks has been a boon for clients otherwise struggling to obtain finance.

“Throughout the recession, high and ultra high net worth people have seen opportunities with property they had bought at a bargain price to raise more money for other property they wanted elsewhere,” Gammon said.

“We are a London-based firm, advising everybody connected with London. We also advise on purchases throughout the UK and also abroad but the majority of our clients have a London connection,” he said.

About 50 per cent of clients have an international angle of some kind, such as non-domiciled residents and people with foreign properties.

Due diligence

Gammon argues that his firm’s tough due diligence checks on potential borrowers – helps KFF negotiate the cheapest possible loan deals, saving clients hundreds of thousands of pounds, possibly more.

“One of our unique selling points is that we will present them [banks] with better quality clients than any other introducer. We say no to people willing to pay lots of money if we think they are dodgy,” he said. On the morning that Gammon spoke to WealthBriefing, he had turned down a client because of a potential problem, for example.

“It’s my job as an advisor to know an individual well before I go to the banks. If I get it wrong, I hurt my relationship with a bank that I introduce the client to,” he said. The reason we believe KFF can get the best possible terms is that I only introduce the best people to banks. Banks don’t have to worry. When banks are worried about risks, then they will only use their limited balance sheets to lend to the best possible clients,” he said.

Background checks are particularly important given the number of clients coming from abroad, in some cases from countries where corporate governance can be weak. “Since the problems out there [political unrest] we have seen increased levels of activity because they want to get money out. We have seen similar issues with Russians for some time,” he said.

Intelligence channel

As a sign of the times, Gammon argues, banks are approaching KFF to ask about the market before considering if to increase lending or get into the market in the first place.

“I have banks coming to me asking for news of what competitors of theirs are doing. There are big banks that have pulled out from the market. I have spoken at boardroom level to big banks in the UK about considering entering or re-entering the market for private clients,” he said.