Through offering investors an alternative source of lending, second-tier lenders have begun to make a significant impact on the property sector. Never far behind international property markets, South Africa has followed this trend with non-bank lenders offering comprehensive lending solutions to cash-strapped investors. Since being introduced in South Africa, non-bank (second-tier) lending is swiftly become a factored component of the local property sector, with short-term asset-based lender, Paragon Lending Solutions, at the forefront of this new industry.

Comments Gary Palmer, CEO of Paragon Lending Solutions, ‘’The current, unstable financial climate has left many investors uncertain as to what the remainder of 2011 will bring and irresolute as to whether the banks will change their fixed lending policies. As a result of the credit crunch crippling vital aspects of the property industry, access to bank funding has not only been limited, but banks no longer have the liquidity to support many transactions. The fact that banks are increasingly tightening their lending criteria, even with credible clients, has spurred investors to begin looking at alternative credible solutions for funding.’’

In addition, the reduction in the volume of lending has been accompanied by slow turn around times in the processing of bank loan applications, further enhancing the sector’s need for alternative lending solutions. In catering for a specific segment of the population, that the banks could not, Paragon Lending Solution’s novel funding method of providing funds against the security of property for a maximum of 12 months, allows clients the breathing space required to secure long-term financing from commercial banks or to realise assets within a few months. Their innovative approach, has resulted in the successful funding of a host of new clients across South Africa and the creation of numerous success stories.

Second tier lenders do not compete with the banks. In fact, Paragon will often finance clients until they are in a position to comply with the banks lending criteria. ‘’We have a good relationship with the banks,’’ says Palmer. ‘’The banks also refer many deals to us when they feel we are in a better position to assist investors.’’

Borrowers approach Paragon Lending Solutions mostly for time-sensitive transactions, where clients need a short respite before securing long-term funding from commercial banks.

Historically, banks used to lend up to a max of 75% loan to value (LTV) against investment property and 67% against owner-occupied properties. However, commercial banks are now carefully analysing the serviceability arising from the property and they use this as a basis to determine the amount of the loan that can be granted. This means that the average LTV has decreased and borrowers can now expect between 60% and 65% of the value of the commercial property from commercial banks, but only with long term leases with blue chip tenants. Short-term, asset-backed funding, has thus been a welcome alternative for those previously unable to secure funding.

Adds Palmer, “Many perfectly acceptable clients are having their applications declined by the banks at the moment. This presents a big opportunity for non-bank (or second tier) lenders to fill the void. This year the banks will continue to focus on cash flow, cash flow and cash flow. They will place less reliance on the quality of the assets and more reliance on the cash flow arriving from the property.’’

Paragon’s client range typically includes owner-managed businesses, property investors and property developers with unencumbered immovable property, who have a need for working capital, or want to unlock equity in their properties. Loan amounts typically vary from R1.5million to R8million, with loan-to-value ratios of a maximum of 60 percent.

"Our clients are sophisticated borrowers who simply need working capital,’’ says Palmer. ’The previously negative connotations associated with the second-tier lending sector has dissipated in recent years, with the service making a certifiable comeback. This is due to a recent dramatic increase in the number of professional and ethical operators entering the property lending industry, spurring the market to acknowledge the pivotal role which short-term lenders are now playing in the industry.’’

With an integrated approach to financing, Paragon Lending Solutions’ focus on swift credit approval and funding has resulted in the company being able to provide a credit decision within 36 hours and formal guarantees within 10 days. ‘’Paragon can offer such a facility because we take a unique approach to lending. When we evaluate loan applications, our decision is based on a more holistic appraisal of the borrower’s financial position. To us, the value and potential of the property that is offered as collateral is the most important aspect of any deal we consider,’’ says Palmer.

With the second-tier lending sector forecasted to advance further in coming months, it is expected that a spate of additional second-tier lenders will enter the market in a bid to meet increasing investor demand. The tight lending constraints implemented by banks have further propelled the non-bank lending service into the financial spotlight. By focussing on a previously sidelined segment of the market and catering for asset-rich clients, in need of short-term liquidity, as well as clients requiring short-term finance secured by commercial or residential property, Paragon has not only identified a viable gap in the market, but succeeded in creating a sustainable need for the service of second-tier lenders in South Africa.