Wellesley co-founder Andrew Turnbull (pictured) speaks to Andrew Saunders about the transition to listed bonds, the property market post-Brexit and the benefits of cautious growth
Sticking to your knitting may not be the most exciting business strategy around, but in these turbulent times, cleaving tightly to what you know best does have advantages, says Andrew Turnbull, director and co-founder of The Wellesley Group.
“We’re a development lending business – we consider ourselves to be a traditional financier to well-backed creditworthy developers who want to build frankly ordinary housing,” he explains.
“I take great pride in that, even though it might be rather boring.”
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Wellesley continues to provide retail investors with exposure to property development lending opportunities, at a time when some alternative property lenders – such as Landbay and ThinCats – have decided to withdraw from the retail market in favour of institutional funding, he adds.
“When you’ve got [platform failures] like Lendy, and also perfectly legitimate firms just pulling out of the market for various reasons it does sign some instability in the peer-to-peer lending industry,” Turnbull states.
“But that give us an opportunity – we were one of the early players and we are an established, credible brand. People can see that we’ve been through good times and difficult times and that we’re still here.
“We have that track record.”
That track record as a property development lender dates back to 2013 when City veteran and forex entrepreneur Graham Wellesley – aka the 8th Earl of Cowley – founded the business.
The company’s goal was to help finance regional developers to play a bigger part in tackling the housing crisis, and at the same time to provide reliable and competitive returns to investors.
It’s what Wellesley still does today, says Turnbull – financing affordable homes in regional markets that typically sell for £200,000 to £300,000 each.
“We’ve funded the construction of 3,000 houses at sensible prices – non-racy housing that’s appropriate for the ordinary man or lady by its design,” he comments.
“A lot of our competitors jumped into prime residential in London but we took the opposite view. We wanted to be in places like Bristol, Canterbury and Newcastle.
“Places where people have normal mortgage multiples and are able to buy their first or second home from one of our local developers – we’ve found that is not only a social good but that it’s actually been a really good credit risk, because those houses sell.”
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But if the basic premise of the business has remained fixed, the way Wellesley serves its investors and borrowers has undergone several substantial changes. Although Wellesley began life as a P2P lender, it hasn’t operated as a P2P platform since 2017.
Why not? Turnbull says the founders quite quickly discovered that the model did not work well for their chosen funding niche.
“We started off as a P2P platform, but we weren’t a very popular one,” he recalls. “What we found was that P2P wasn’t a perfect match with development lending.”
While P2P continues to work well, he believes, for relatively simple products such as personal loans or asset-backed business loans, the combination of a fairly complex lending product – development loans are typically issued in tranches based on progress and subject to approval at each stage by the lender – with a fairly complex funding model in P2P, was too much for borrowers and investors alike.
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“We found that what our investors wanted was simplicity – they wanted the exposure to the underlying real estate risk, they just didn’t want the complexity of dealing with P2P,” Turnbull asserts.
In its quest for a more investor-friendly alternative, in 2014 the business issued its first mini-bond programme.
“Our investors preferred the predictability of a bond, in the sense that with a bond they can see that I’m paying them interest once a month, and that this is the end date.”
The new mini-bonds with their regular payments and fixed terms were a better fit with Wellesley’s target investors.
“[These are] people in their 30s, 40s, 50s, or 60s with some disposable wealth that they have chosen to invest,” Turnbull explains.
“There was a time when they could have expected five per cent from the bank, but times have changed and now they realise that they have to take some risk to get five per cent.”
Wellesley provides them with an “alternative” element for their portfolios, he adds, because it is property rather than shares based.
“It’s not really correlated to the stock market and it can give some consistent income,” Turnbull adds.
Three years later, Wellesley took the bold step of ceasing to accept new money into its P2P offering, in order to focus completely on bonds.
A move which might seem at odds with Turnbull’s previous comments on those leaving the sector more recently, but which was actually, he says, driven not by a search for alternative institutional funding but rather by the desire to keep servicing the firm’s established retail investor base.
“We took the decision to exit that [P2P] market. It was primarily driven by the desire to deliver the investments that our customers wanted.”
The firm’s next big decision – to transition from unregulated mini-bonds into fully regulated listed bonds, a process started in 2018 – followed some heavy criticism from the media and analysts both of the performance of the mini-bond and of Wellesley’s lack of profitability.
This was a wise move, given the Financial Conduct Authority’s (FCA) recent ban on the marketing of mini-bonds to retail investors, in the wake of the £230m collapse of mini-bond provider London Capital & Finance in January 2019 – a scandal which resulted in over 11,000 investors, many of them pensioners and smaller retail customers, losing their money.
But Wellesley had completed its move to listed bonds by July, four months ahead of the FCA ban. Turnbull says that the move was driven largely by fears around the wider state of the mini-bond market.
“By 2018 we were seeing headwinds,” he reveals.
“We felt uncomfortable, because the lack of regulation around mini-bonds meant that you could have people who were clearly not doing things properly. We thought something might happen, although LCF was way worse than we expected.”
Although the shift to fully-regulated listed bonds was not without its own challenges – it took some months for Wellesley to secure the necessary regulatory permissions to hold the bonds itself – it has been more than worth the trouble, says Turnbull.
“It was a wise move – it meant that our customers could feel fully reassured that they were investing in our regulated product. Every listed bond has to issue a prospectus that is approved by the regulator. That’s really important, because it means that they are all done to a common standard.”
On the lending side, Wellesley’s niche is regional developers with local market expertise.
“We have good relationships with regional developers who have decent net worth behind them,” says Turnbull.
“They probably do three or four developments a year, they have an office and some infrastructure. They aren’t one-man bands but neither are they among the Barratt’s of the world.”
These kinds of borrowers are underserved by high street banks because of the cost of serving smaller loans and the inherent complexity of development finance, he says.
“The banks don’t really want to do development lending – the capital requirements for a bank are significant and having a book of lots of £5m loans is hard for them to manage,” Turnbull explains.
And because development finance involves an ongoing relationship between lender and borrower, it’s also hard for banks to automate.
“You can’t computerise this kind of lending because construction risk has lots of moving parts,” he says. “You need senior people to be able to take risk decisions at short notice – they are not usually very big risk decisions, but they are not the sort of thing that a bank can do with a computer.’
That all means, says Turnbull, that Wellesley can provide a speedy, reliable and competitive service in a market which is not yet awash with competition.
It’s a lending model which has only really been subject to one significant tweak: in 2015, the decision was made to increase the average loan size from around £1m to its current level of between £5m and £10m.
“What we used to do was back one or two-million-pound loans – those developers were often doing a great job socially, but they tend to be less experienced and less well capitalised, and you still have to monitor the credit risk,” he states.
“Our strategy since 2015 has been a winner – you don’t get higher returns but you do have much better credit quality.”
In terms of that conversational staple of British middle-class life, the state of the property market, Turnbull is sanguine.
He doesn’t believe there will be a serious recession and says that the combination of greater clarity on Brexit and an end to worries over the impact of a Corbyn government on house prices is already translating into better sales.
“I’m pleased there is clarity on the political position over Brexit, because political uncertainty is risk, and irrespective of whether you take a leave or remain position that risk has now reduced,” he says.
“We’ve seen reservations starting to increase on all the developments we back, whether in the North or the South. People feel comfortable enough to move forward.” So what of the future for Wellesley in post-Brexit Britain?
More of the same is the essence of Turnbull’s position, with a focus on careful, steady – and yes, perhaps even slightly boring – growth.
“We’ve been wanting to deal purely in listed, regulated bonds for years and we’ve finally got there,” he comments.
“Our greatest challenge now is to get the business to a point of scale, to drive a profit and become a larger player.
“But as ever we want that growth to be temperate, we want to keep doing things in a high quality, considered and measured way. It’s very important to us that we don’t get into a position where we are trying to grow too quickly.”