While the pandemic was a challenging time for any UK lender specialising in home finance, Gatehouse Bank is a UK financial institution with a difference.
Not only is it among a handful of fully Shariah-compliant banks, it also lends heavily to borrowers across the globe, particularly in the Gulf region with the UAE and Kuwait its two key overseas markets.
Despite temporarily lowering its finance offerings to UK and overseas customers at the start of the crisis, the bank has emerged from the pandemic with a robust balance sheet.
The lender returned to normal business when the property market reopened in July 2020, with new GCC customers increasing by more than 10 per cent in the first half of 2021.
Gatehouse is looking to change the way tenants are treated in the UK’s rental market through its flourishing build-to-rent portfolio.
It offers affordable, two and three-bedroom homes, which come with features such as built-in wardrobes, white goods, turfed gardens with sheds and private parking, that are built specifically for the private rental market in the UK. It puts heavy emphasis on tenant services.
Rather than grappling with poor plumbing and faulty boilers, tenants renting from Gatehouse Bank can call the bank’s maintenance team, with staff arriving promptly in branded uniforms to fix any issues.
“It will revolutionise the rental market going forward,” Paul Stockwell, chief commercial officer at Gatehouse Bank, tells The National. “What we are talking about here are modern two or three bed houses, newly built for the private rented market, but actually, they're very affordable.
“We offer those as institutional managed properties and we adapt them for the private rented sector. All the white goods are standard, the boilers are all the same. A lot of them have car chargers now. That’s the way forward for the rental market.”
Raising the bar in Britain's private rental market
Gatehouse considers itself “an early mover” in the build-to-rent market, first investing in 2014 as it looked to replicate the North American model of building high-quality affordable rental properties in key locations to meet the growing demand for new-build rental homes for families.
“This model has been very successful in the US since the global financial crisis and now it's becoming pretty big in the UK as well now,” says Mr Stockwell.
Over the past decade, there has been a significant increase in the proportion of households with children in the private rented sector, up from 30 per cent in 2008-09 to 37 per cent in 2018-19, according to the Ministry of Housing, Communities & Local Government, highlighting the need for a broader range of high-quality family-friendly rental options.
“We work with house builders, taking anything between 50 and maybe 120 units to support the local private rented sector market,” says Mr Stockwell.
In January, Gatehouse sold its first fund in January, a 918-home single-rental family portfolio to Goldman Sachs for £150m – the largest single family housing transaction in the UK.
“That was a real achievement for the bank to exit out of the first fund. And these funds have performed really, really well during the pandemic, we've got really strong occupancy rates of 98 per cent,” says Mr Stockwell.
In August, the bank closed a joint venture with TPG Real Estate Partners to construct 2,500 family rental homes across the north and the Midlands, tapping into Gatehouse’s expertise in the BTR market and its relationship with house builders.
The homes will be built over the next five years with a number of sites already selected in Birmingham, Manchester and Merseyside, with the bank typically picking areas with good schools, local amenities, public transport and local employment opportunities.
Average rents for the homes sit between £850 and £900 a month, “not that expensive” when compared to other UK areas, as the bank looks to support an underserved market.
“The rental market has grown significantly and by 2025, it's estimated that one in four homes in the UK will be in the private rented market," he says.
“[Our model] offers people flexibility. Not everyone wants to buy, they want to move with their roles. We are raising the standards in the private rented sector and setting an example to everyone else.”
Raising awareness of Islamic home finance
Gatehouse Bank first entered the UK's banking sector in 2007 when the world was still grappling with the global financial crisis and it now has three offices in England: London, Milton Keynes and Wilmslow. At the end of last year, the bank’s gross assets stood at £825 million, up 20 per cent on the year before, with total savings of £700 million, up 24 per cent on 2019 and a home finance portfolio of £546m, up 35 per cent.
Its aim was to help those struggling to secure finance to get onto the property ladder, something Mr Stockwell says is still important today.
“We certainly look at areas of the market that are underserved, such as the expat market, the international market and certain areas of the UK market,” he says.
“We look at ways that we can help people get on the housing ladder that may not have a lot of choice in the market."
While the bank does not make a distinction between its Muslim and non-Muslim clients, Mr Stockwell says it has a mixed range of customers.
Its UK home purchase plans, the equivalent of a mortgage in conventional banking, attract more Muslim clients, while its buy-to-let product attracts a mix of customers.
“We’ve worked really hard over the last two or three years to promote Sharia finance in the UK,” says Mr Stockwell,
With 70 to 75 per cent of the UK kind of mortgage market originating through brokers, rather than people directly approaching the bank, Mr Stockwell, says this puts the onus on the bank to raise awareness about the benefits of Sharia finance and “demystify it” with its broker partners.
“That worked really well so it is becoming more popular in the UK and people are understanding the benefits of it.”
To help them stay ahead of the competition, Mr Stockwell says the bank’s rates are competitive. It recently offered a new 95 per cent mortgage for first-time UK resident buyers looking to get on the property ladder, while overseas customers must still put down a 20 per cent deposit.
“We also offer the Sharia side, which is a fairly niche market in the UK, which people like as it's quite close to the ethical side of financing,” he says.
Under Islamic home finance, the customer pays the bank rent rather than interest, which is forbidden under Shariah law.
The rent is paid over a given period of years, like a conventional mortgage, until an agreed amount has been transferred to the bank. At this point, the tenant becomes the owner.
Offering home finance to the underserved expatriate market
While Gatehouse has a UK banking licence and only finances UK properties, with the bank’s shareholders based in Kuwait, its customer base is much broader.
Half of its home finance customers are located overseas with the majority of those located in the Gulf, particularly in Kuwait and the UAE.
“We’ve got that strong relationship with the Gulf and obviously being Sharia compliant as well, we understand those markets, so we do tend to find that a lot of our clients come from the Gulf region,” says Mr Stockwell.
“If you look at the UAE For example, we get a lot of expats from the UAE and also UAE nationals as well."
In the run-up to the pandemic, the number of customers from the Gulf region grew by more than 200 per cent between 2018 and 2019.
In 2020, however, growth in demand slowed with new finance to GCC customers falling by around 25 per cent on the previous year as the global pandemic led to lockdowns and travel restrictions.
“International travel obviously stopped and people couldn't come and look at properties,” says Mr Stockwell.
The bank temporarily reduced its loan to finance offering for new customers at the start of the crisis as it waited to see how the pandemic would affect the housing market.
“Like most lenders we were pretty unsure on the direction of travel in terms of the pricing and values of houses, given that we've never been through a pandemic before,” says Mr Stockwell.
“We couldn't do physical valuations on properties because the occupants might be a bit concerned about a valuer coming in with Covid.”
However, once the market opened up in July last year, valuations could resume and the bank felt comfortable offering higher finance to both UK and overseas customers.
Increased appetite for UK property from the Gulf
Since international travel reopened, the lender has noticed an increased appetite from overseas investors looking to buy in the UK at a mix of locations across the UK.
While the desire for more space and the work-from-home trend has encouraged many to relocate outside city centres, as international travel picks up, Mr Stockwell expects demand for London to increase.
“We're starting to see more people wanting a decision in principle from us, because they've got their eye on a property in London," he says.
Looking ahead, the bank wants to add to the 100 countries it accepts applications from and streamline its processes.
While expat customers returning to the UK currently cannot switch from an expat product with a higher rate of interest to a UK product, Mr Stockwell says that may change in the future, while one boon for customers is no early repayment charges apply because they are Islamic products.
So, with such a large customer base in the Gulf, would the bank ever consider setting up a branch there?
“Never say never,” says Mr Stockwell, adding that for now the focus is on building relationships with other banks based in the region.
“We have a relationship with Warba Bank in Kuwait, for example, where some of those clients want Sharia finance in the UK. That model seems to work quite well,” he says.
“But we’ve certainly got strong connections in the region, so who knows going forward?”