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Mortgage View: Manufacturers make comeback

Recent trips north for the Ashes tests were melancholic experiences. You cannot pass through the West Midlands without being saddened by the malaise afflicting our man- ufacturing heartland.

Any factories that are not crumbling have been displaced by service industry behemoths. Yet, in the world of mortgages, something amazing is occurring – manufacturing is making a comeback.

Since the 1980s, the most vogue corp- orate buzzword has been distribution. But how often should this instead have been distress, deficit or demise? Insurance companies routinely acquired estate agencies or took equity positions in IFA businesses. Mortgage clubs and networks prol- iferated as a consequence but the likes of Bradford & Bingley were not alone in discovering that sacrificing profitability and simplicity in the name of distribution could be an expensively flawed concept.

I would vouch that only John Goodfellow at Skipton Building Society has genuinely created value from this strategy, as powerful stablemates Connells, HML and Pink Home Loans will testify. As such, last week’s announcement from Beacon that it is to enter the manufacturing fray represents what I believe will be the thin edge of a resurgent manufacturing-based wedge.

Let’s face it, distribution, or the management of it, is time and cost intensive. Let’s stop kidding ourselves that M-Day was the root of all overhead evils because operating margins for many distributors were heading south months before then. Consolidations will continue so long as up to half of distributors continue to function as clothes- less emperors at an operating profit level.

Manufacturing is going to be where it is at. Yes, you need a swathe of capital to get going but, as the still comparatively adolescent businesses at BMS, GMAC and Platform have demonstrated, barriers to entry are not onerous. TMW’s fast rise is also notable.

These lenders have classy management teams possessed of creative mindsets and, ironically, have historical connections with the distribution markets so vital in getting the lenders airborne in the first place.

Favourable economic conditions (especially for sub-prime product suites) coupled with the UK’s sophisticated mortgage environment means that North American, Asian or European investment into the UK offers eminently more dynamic returns than available in these continents’ hinterlands.

Two specific facets to manufacturing hold added seduction. First, there is the march of securitisation, which can crystallise gains swiftly, reduce risk and allow assets to be concisely valued and contained. Second – and here is the real lure of it all – a manufacturer’s principals can work exit or end-game scenarios far more assuredly than in distribution models, where owners’ plans can be easily manipulated or compromised by markets, people and circumstances outside their control.

Hamptons International was recently acquired by a Far Eastern conglomerate which itself is a debt manufacturer. I do not expect to see the UK business following the parental lead in the near future but, along with the likes of Savills and L&C, at some point a discussion will take place as to whether a nationally recognised broker brand should actually be making its own widgets rather than flogging somebody else’s.

Watch out for more industry distributors opening product factories of their own. The final conundrum will be whether there is enough demand to support supply.


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