EY report

38% saw AVMs as least important capability before Coronavirus, claims new EY report



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Some 38% of bridging industry professionals selected the 'ability to use AVMs' as the least important capability needed to remain a successful bridging finance lender, according to a new report put together prior to the Covid-19 outbreak and consequent lockdown.

The latest UK Bridging Market Study by EY surveyed over 50 bridging lenders and brokers with a combined bridging loan book of £6.4bn, and annual brokerage volumes in excess of £500m.

This represented an increase on the circa 40 lenders and brokers who participated in last year’s report.

The survey — which was conducted between 15th January and 5th February 2020 — includes the opinions of market experts before the Covid-19 pandemic and associated uncertainty had an impact on the UK and wider economy.

While the short-term view of participants may have altered since the survey was concluded, it still provides useful insights into their long-term view of the market.

What we found the most interesting finding — considering how the market has dramatically changed since the report — was that 38% of respondents selected the ‘ability to use AVMs’, alongside 27% who chose the ‘ability to automate the underwriting process’ as the least important capability to remain a successful bridging finance lender.

Both of these categories scored highest as the least important abilities in 2019’s survey, too,  highlighting that there remained a strong opinion in the industry that automation was not key to strong performance.

However, this sentiment is likely to change as a result of the outbreak.

“The adoption of technology supports increased efficiency and incremental growth across all markets, and it is no different for bridging lenders,” commented Nick Parkhouse, partner at EY.

He explained that, while manual underwriting remained a “critical” feature of this type of lending, there was always opportunity to improve tech-enabled processes and the customer journey, such as digital KYC and onboarding, e-signing, or API links into third party verification tools.

“The issue with AVMs is that they tell you nothing around the general state of the inside of a property and, therefore, while in principle the valuation may be theoretically correct, there is a risk it could be out by some way.

“As a result, our view is unchanged in the short term that manual underwriting and physical valuations (including physical property visits by lenders) are critical components to remaining successful in the UK bridging market.

“We expect, certainly for bridging, AVM to remain the exception in the medium term, for example where the LTV is low, or where the property is being rented and in an area where property liquidity is high.” 

Nick stated that the ongoing Covid-19 pandemic had “demonstrated the importance of robust tech-enabled business continuity plans and shown how tightly aligned strong technology is to ensuring operations and communication between employees, clients and stakeholders are upheld, even in the face of mass home working.”

He believed that “very few” businesses were likely to have had such contingency plans in place for the majority of their workforce working from home, but it was “too soon to tell” how impacted they would be.

“Updating and advancing company technology will always be top of many firms’ agendas, but it is likely there will be a delay to any plans that might have been set out at the start of the year.

“In the long term, those who can find the budgets to invest further in technology enablement will stand themselves in good stead when we start to see signs of economic recovery.”

The report revealed a number of other interesting insights into the state of the bridging market:

  • 43% of respondents cited M&A as one of their key strategic options over the next 12 months, a significant increase on the 24% of respondents considering it in 2019’s report
  • 47% of respondents viewed the average monthly cost of origination to be between 1% and 1.5% during past 12 months, increasing from 32% of respondents who chose this option in last year’s survey. Some 32% cited the average monthly cost to be between 1.5% and 2%
  • A greater proportion of respondents whose main origination channel was ‘direct to customer’ chose average loan completion times of under 35 days than those whose main origination channel was broker-related
  • Some 8% of respondents cited ‘aggregator websites’ as one of their top two channels for loan originations, compared with 0% in 2019
  • Refurbishment’ was the most popular reason for borrowers to obtain a bridging loan with 52% picking this option, an uptick from 29% last year
  • According to the 2019 survey, over half of respondents believed foreclosures would rise during the year, however only 27% reported foreclosures to have actually increased over the past 12 months
  • 23% of respondents cited ‘funding flexibility’ as the most important capability when choosing a bridging lender — a new option for the survey
  • 32% chose ‘decline in property values’ as one of the top three challenges impacting their business in 2020, with 59% naming an ‘increase in defaults’ as one of the top three hurdles facing the market this year
  • 48% believed a ‘change in regulatory rules’ was one of the three biggest challenges impacting the bridging market in 2020, a surge from the 26% who picked this option in 2019

When B&C asked Nick why he thought the average monthly cost of origination had increased in the bridging market, he felt the surge in competition from lenders to originate high quality loans, alongside an increase in the complexity of loan purposes, were likely to have been the key driving factors, and “have shifted the bargaining power to brokers, which will have contributed to the rising cost of origination.”

“The short-term impact of Covid-19 has seen some lenders press pause on originating new loans, however, we expect activity to pick back up once the economy stabilises.”

Curiously, the report showed that bridging lenders whose main origination channel was direct to customers experienced quicker completion times than those that majored in introduced business.

“There could be many reasons for this,” said Nick, adding that it was largely influenced by whether the lenders were dealing with repeat or first-time borrowers.

“Another reason could be the removal of other parties from the process, allowing direct dialogue between the lender and the broker.”

You can view the full report, here.

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