James Lightbody, Head of Real Estate Debt at Westbrooke UK, discusses the evolving landscape of the UK real estate debt market in an interview with Alec Hogg. He compares the UK’s conservative lending environment to South Africa’s bank-dominated market, explaining how rising interest rates and political changes have created new opportunities for specialised lenders like Westbrooke. Lightbody highlights the firm’s focus on income-producing assets and its adaptable risk philosophy, giving it a competitive edge. South African investors seeking offshore exposure to UK real estate can access Westbrook’s funds through local investment advisors for attractive, low-risk returns.
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Highlights from the interview
In this interview, James Lightbody, Head of Real Estate Debt at Westbrooke in the UK, discusses the evolving landscape of real estate debt markets, particularly in the UK, and how Westbrooke’s approach stands out. Lightbody, a South African with experience in real estate finance, highlights the differences between the South African and UK markets. Major banks like RMB and Investec dominate the lending landscape in South Africa, offering flexible financing solutions. In contrast, the UK’s banking system is more conservative, with high street banks providing low-risk lending, leaving a gap filled by debt funds like Westbrooke.
Lightbody explains that the UK market has undergone significant changes, particularly with the rise in interest rates from 0% to 5% over the last two years. This shift has created volatility, and Lightbody credits Westbrook’s success to its adaptable risk philosophy, which differs from the more rigid, cookie-cutter approach common in the UK.
He also discusses how the UK’s political shifts and fiscal policies impact the real estate market, especially with rising costs and inflation. However, Westbrooke’s strategy of focusing on income-producing assets and stress-testing loans has successfully helped the firm navigate these challenges.
For South African investors seeking offshore exposure, Lightbody notes that Westbrooke offers real estate debt funds that are accessible through investment advisors in South Africa. The interview underscores the growing opportunities in real estate debt markets, particularly for those looking to diversify into UK assets.
Edited transcript of the interview
Alec Hogg (00:06.734):
This interview is brought to you by Westbrooke.
Alec Hogg (00:17.624):
When you look outside the borders, most of the attention in South Africa has been on the United States with the recent election, but there was an equally important election that took place in the United Kingdom. And we know many South Africans looking for offshore exposure or some kind of currency hedge have been investing in the UK, particularly in debt instruments offered by Westbrooke. James Lightbody is Westbrook’s head of real estate debt in the UK. You’re a relatively recent arrival there, James. How long have you been in Britain?
James Lightbody (00:55.933):
So it adds up to almost five years now. It’s been a few years.
Alec Hogg (01:02.028):
Prior to that, I know you worked for RMB. You have a CFA and a business science degree from UCT. Have you been focusing on real estate?
James Lightbody (01:15.045):
Yes, that’s right. When I was at RMB, I was on the real estate team, which is quite relevant when you look at the big changes in the UK markets. That experience was key, but the structure of the markets in South Africa is also one where the banks dominate. They provide all the flexibility. In contrast, it’s not quite the same in the UK. You know, arguably, you get much better training at South African banks than you would in UK banks.
Alec Hogg (01:43.096):
So help us understand how it is different.
James Lightbody (01:46.737):
Well, I guess the main differences are twofold. One is that the market structure in South Africa is one where the big banks—RMB, Investec, Standard Bank—tend to dominate lending, providing flexible solutions across the capital structure. So, they’ll do senior debt, mezzanine debt, and full solutions for their clients. However, when you come to the UK, the result is much like that of the US. The high street banks, as they call them—big banks like Barclays, etc.—tend to do very low-risk, low LTV (loan-to-value) lending, largely due to the financial crisis, and they have very hard restrictions on them. So, the gap has been filled by debt funds in the UK like ourselves, which raise money from outside the banking system and then provide loans. That’s kind of the main difference, number one.
The second biggest difference is that rates were 0% in the UK for 12 years, rapidly increasing to 5% around two years ago. So, the market structure developed around zero interest rates and very low volatility, which greatly impacted the market. South Africa, on the other hand, didn’t have zero rates. Rates went up and down throughout that period, so the market developed differently.
Alec Hogg (03:15.778):
And it does open up an investment opportunity in the UK that’s absent in South Africa. As you’ve said, you’ve got all these new players coming into a market that, in our country, is dominated by the banks. But for a private citizen or investor, you can get a slice of it.
James Lightbody (03:32.413):
Yeah, I think that’s exactly right. And I think this is particularly relevant now. One point to note is that the market is more competitive because the UK has capital flows from all over. When rates were zero, rents tended to tick up at a very low inflation rate. Building cost inflation was almost zero. You had a very stable market with almost no price volatility—they just tended to rise.
So, all the lending was built on that assumption. And to talk to your point of opportunity, when rates went up very quickly, the lending market wasn’t adapted to that. They weren’t used to that environment and didn’t have the capital to deal with it. So, if you’re like Westbrook, we focused on adapting to that new paradigm. Our entire risk philosophy—which our South African heritage may bias—is built on assuming volatility is not zero and that prices will change.
You can’t take a cookie-cutter approach to risk. You have to assess every loan with a detailed framework. And that’s how we’ve managed to gain a competitive advantage in the UK.
Alec Hogg (04:42.722):
The UK itself, and I mentioned this in a conversation with someone the other day, also had seismic shifts on the political side. Everyone’s looking at what happened with Donald Trump in the US, and sure, we’re seeing that in investment markets as they readjust. But with the Labour Party’s landslide victory and now a budget that high-net-worth individuals are not exactly thrilled about, there’s a different approach in the UK. How’s that affecting your business?
James Lightbody (05:17.747):
Yeah, so there are a couple of direct impacts from the budget, but mostly it’s indirect. I’ll get to the direct impacts in a moment. If you look at the actual individual asset classes, like operating real estate—which includes sectors like hospitality, hotels, and pubs—they can be impacted by increases in the cost to employ people and other factors. But they’ve mostly said they’ll pass those costs back onto consumers.
So, the real indirect question is whether this will lead to more inflation. Will increased government spending lead to more inflation and higher interest rates for longer? The real impact on the real estate market, which is very tied to interest rates, can be seen in the yields on UK bonds—those have gone up, illustrating that they expect rates to stay higher for longer.
The broader impact is that, to the point I raised on volatility, you can’t assume zero rates and zero volatility anymore and apply a cookie-cutter approach to lending. You’ll get unstuck in that world. So, we focus on the Westbrook philosophy of understanding risk. We’re more adapted to things like rates going up or down. We stress-test every single loan assumption we make. So, cookie-cutter lending is on the way out, and specialized lending is on the rise.
Alec Hogg (07:01.334):
And how would that affect those who’ve invested with you?
James Lightbody (07:05.949):
Yeah, so again, if you were investing in a fund using a cookie-cutter approach, you’d struggle to adapt to the new world. But in our portfolio, we made a big shift a couple of years ago to focus more on income-based lending—lending on assets that produce income. The reason for this shift is that when rates were zero, the banks dominated the market because values rarely went down. Interest rates were zero, and the interest cover ratios were very high.
That all changed when rates started rising. Some impacts, like higher rents and inflation, were positive for asset values. However, other impacts, like higher interest rates, were bad for values. So, you needed to assess the impact and not take a cookie-cutter approach.
We moved to income-based lending because, in the new market with shifting values, it was a gap in the market. Previously, this wasn’t needed. And now, it is. This focus on income-based lending is more akin to how South African banks focus on income-producing assets. We’ve moved in the same direction because we think it’s a lower risk. There’s inherently more liquidity because buyers and sellers can look at cash flows and say, “Okay, I’ll price that differently, but I’ll certainly buy it.”
So, that focus has been a big trend for us. The changes have created big opportunities, and we’ve been focusing on them. We’ve also had some older loans where we backed partners into those loans, and they’ve been extremely proactive in making sure the borrowers put more equity into those loans or adjusted to the new paradigm rather than just sitting back and doing nothing. It’s a combination of being proactive with existing loans and adapting to the new environment, which aligns with how Westbrook operates and our risk philosophy of backing the right people and the right assets, as well as understanding the cash flows of every asset we lend.
Alec Hogg (09:09.57):
Yeah, being nimble. It’s interesting to hear that your South African heritage has played to your advantage in a country that hasn’t been that turbulent but does appear to be heading into that situation now.
James Lightbody (09:26.963):
Well, yeah, I guess it’s all relative in a way. South Africa had, as I said, rates that went up and down. Values went up and down. So, it wasn’t like you grew up learning that the normal environment was one where nothing changed. In the UK, though, people were used to zero interest rates for 12 years. The lenders there got used to the fact that nothing changed very much. So, the shock of going from 0% to 5% has been a gigantic shift for them. A lot of lenders haven’t been able to adapt.
Coming from South Africa, where values and cash flows change, we were inherently more adaptable than the UK market, which was blessed with zero interest rates for so long.
Alec Hogg (10:04.843):
Very interesting. So, where would they find out more about the opportunity for people here in South Africa to get offshore exposure, particularly into your real estate debt?
James Lightbody (10:17.763):
We’re a regulated manager in the UK. We manage funds that are available to South African investors. They can reach out to us directly, or we have a few partners in South Africa, such as investment advisors, who can help guide people through the process.
Alec Hogg (10:36.748):
James Lightbody, head of real estate debt at Westbrooke. Thank you for joining us.
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