Given that the bridging market has only been a mainstream product for less than a decade, I have started to wonder whether this funding appetite is a temporary or permanent phenomenon. If the latter, that is a great thing for our industry. If it is the former, this is not so good.

At Funding 365, we have seen the recent increased funding appetite manifest itself in a number of different ways. First, and most obviously, is the regularity that we are approached by funds, family offices and high-net-worth individuals asking whether they can provide funding to us. This simply did not happen with this regularity (to anyone) even three years ago. Fund-raising efforts for specialist lenders were a hard-fought battle of continual diligence meetings and power point presentations.

The second most obvious sign of increased funding levels for the industry comes from the price war that we have seen this year. While it is easy to highlight the price reductions of prime bridging rates from around 0.65% to closer to 0.45%, these are not in fact the price reductions I am alluding to. The rate reductions on prime bridging is more due to the new ability of some bridging participants to use their newly acquired banking licences to access borrower deposit funding rates. The price war that I am talking about is in the development financing space. We have seen rates in this space fall from the region of 20% per annum down to single-digit return figures.

•   Funding Circle to stop property development lending
•   Together slashes rates across bridging range
•   West One cuts bridging rates

For those development lenders who have seen a downturn in house prices and a withdrawal of funding liquidity from the lending market, the returns currently on offer must seem remarkably skinny for the risks being taken. Bear in mind, at the current time, lenders are being pushed to provide between 70-90% of a development’s total costs. Again, any lender who has seen a housing-market downturn will tell you of the considerable risks involved in development funding in that environment. When house prices fall to a point where the build cost of a development makes it no longer financially viable, examples are rife where builders strip everything of value out of the development, massively compounding the loss severity for the lender.

This mismatch between risk and return therefore got me thinking about whether the low returns on offer to funding providers are a function of a high level of liquidity in the system, or a fundamental downwards adjustment of return expectations from investors. This is an important question to know the answer to. If lower return demands are simply a function of high liquidity, then this is a temporary phenomenon which will go away. A downwards adjustment of return expectations from investors generally is a more widespread function which is suggestive of a longer term and more sustainable level of funding support.

At Funding 365, we keep a close eye on the commercial property auctions to ensure we know the returns that are being required by long-term property investors. This helps us keep a gauge on whether low investor return requirements are being driven by high levels of liquidity, or investor risk appetite. At present, you can see commercial properties being sold with high-quality tenants and offering high single-digit, and maybe, low double-digit returns (depending on property location) to purchasers. This begs the question, why lend to a developer to build a property – taking all of the associated risks into consideration – when you can simply purchase a property and obtain the same (or perhaps greater) return?

The only sensible answer to this question is that the investors participating in the bridging and development market are looking for a short-term, deposit-style funding arrangement rather than a long-term investment opportunity. If this is truly what is driving investors to provide funding to bridging and development lenders, then this is surely only going to be a short-term phenomenon. With inflation rearing its head on both sides of the Atlantic – as well as the increases in interest rates that we have seen in the US – it seems clear that liquidity will start to drain from the system over the next 12 to 24 months.

If this is the case, then bridging lenders who have set up a business model assuming that aggressive, cheap and plentiful funding is a permanent fixture may be in for a shock.