The rapid expansion in bridging finance has led to projections that gross lending will reach £800 million for the first time in 2011, according to West One Loans’ new quarterly Bridging Finance Index.
The lender has revealed the volume of loans advanced has risen 26 per cent year on year (to the end of August) as more and more property investors turn to the sector to help finance their projects. Gross lending also rose 46 per cent in the same period.
The industry’s expansion is being attributed to bridging filling the gap left by traditional high-street lenders as they have displayed a reluctance to lend since the beginning of the credit crunch.
Bridging finance’s short-term nature means that net lending can be rather volatile as loans constantly redeem and are constantly granted. In 2010, the average loan term was just under eight months. While the market is still relatively small, a few big loans redeeming or being granted can make a big difference to net lending so the index aims to assess the longer-term trend rather than one quarter’s numbers. Net lending has expanded 53 per cent since the beginning of 2010.
Duncan Kreeger, Chairman of West One Loans, said: “The buy-to-let market is extremely strong at the moment, with rents rising rapidly as tenants compete for homes.
“To meet this demand, landlords often need to refurbish or convert properties for the rental market, but do not qualify for buy-to-let finance until there is a full rental valuation. Bridging enables them to finance this development period.
“As a result, by the end of this year, we expect the market to top £800 million pounds for the first time.”
Craig Scott, Director of Commercial1, suggested that: "Borrowers are turning to bridging finance because the funders have both the appetite and the funding lines to lend. There is still a current lack of liquidity within the mainstream banks and a lack of appetite to lend to both new and existing customers."
Matthew Anderson, Director at Fincorp, said: “The huge expansion in the market is occurring for a simple reason – the major lenders in the country are not interested in lending, but one area that IS open for business is the bridging market, which relies on alternative sources of finance. It is a combination of demand and supply which is seeing this increase.”
There has been an increasing move in the market towards residential bridging finance and away from commercial. In 2009, 70 per cent of loans were granted to the residential sector whereas so far in 2011, 82 per cent of bridging loans by volume are to residential property investors.
Duncan Kreeger explained: “Having a clear exit strategy is the most important consideration when taking out bridging finance. Residential property has a wider range of refinancing option than commercial property.
“The strong demand for accommodation means investors can be confident they can refinance easily when they are ready to rent. Commercial property is harder to value for bridging purposes and the market is relatively oversupplied at present, making rental voids more likely and therefore exit more difficult.”
Steven Nicholas, CEO at Tiuta, said, “Following the Lehman Brothers crash and property values falling, property buyers are recognising that there are opportunities to pick up assets at reduced values and are taking advantage of this, and funding from bridging lenders helps them do so.”
Mark Posniak, Head of Marketing and Operations at Dragonfly Finance, said, “A year ago LTVs were around 60 per cent, but now this is more like 70 per cent. There are also more deals being done in London and the South East and investors are taking opportunities as they see them, which all combine to make the bridging market more attractive to property investors.”
The average size of a loan expanded to £322,000 in August. This is an increase of 28 per cent year on year, thought to be due to property investors beginning to tackle larger, more ambitious projects. Investors have also taken advantage of falling interest rates. The average interest rate on a bridging loan declined to 1.35 per cent per month in August, down from 1.54 per cent a year ago, reflecting the general decline in market interest rates.
Duncan Kreeger commented: “It is very hard to find any investments yielding a real return at present, so the bridging market is very attractive to those who finance the loans we make to our borrowers. In line with market trends, yields are declining, increasing the value of property investment projects for the borrowers. This is driving up the average amount they are looking to borrow.”
Craig Scott added, “The profit margin and the speed with which investors can see their profit returns makes bridging a good proposition. The turnaround times can be extremely fast – a property investor may be using their money to refurbish a property and sell it on or may be putting the property into their portfolio as an investment vehicle. With first time buyers still struggling to get on the property ladder residential investments can still be a profitable business."
Mark Posniak stated, “There are good risk-adjusted returns for lenders, but lenders still need to be cautious when looking for the right investment.”
Andrew Bloom, Managing Director of Masthaven, explained, “Without a doubt it is better value to get a bridging loan than it has been for many years especially while there is still a shortage of finance from mainstream lenders. Many people now view bridging as a greater opportunity.”
LTVS are also increasing, in line with the increasing size of the average loan. In August, the average LTV (weighted by value) was 48.4 per cent, up from 42.5 per cent a year ago.
Craig Scott said, “Lenders’ risk appetite has increased because bridging lenders are working on property values that are current. Lots of bridging lenders don’t have a legacy of bad debt and property values that have fallen over the last few years like major mainstream banks so they are willing and have the appetite to lend at higer loan to values with water tight exit strategies in place."
Matthew Anderson suggested the increase in LTV rates are because of “greater competition. Some lenders will lend on higher LTVs than, perhaps, the market norm in order to try and entrap more business.”
Duncan Kreeger concluded: “Demand from property investors, combined with the strong credit performance of loan portfolio mean LTVs have been able to expand over the last year, but they still remain extremely comfortable. The industry is in excellent shape to provide good returns to those providing the finance and affordable, well covered loans to those completing their property projects.”
Leave a comment