The data provided by the ASTL is a representation of the group’s membership of 42 lenders — which consist of unregulated and regulated providers — and, while definitions of applications can differ between companies, the analysis offers a snapshot into trends within the bridging market as a whole.
According to the data, the number of bridging applications converted into deal completions has fallen from 16% in Q2 2022 to 14.10% in Q2 2023, following a high of 17.7% in Q3 2022.
Vic Jannels, CEO at the ASTL, gave his take on the data: “[While there are] lots of inquiries and a sensible amount of applications, getting through to completions is less exciting perhaps than it was a year ago — and that's to be expected.
“Interest rates and lenders’ affordability assessments are higher so, on the one hand, you can get a DIP, but when the due diligence is undertaken, this can have effect on a lender’s continued interest in accepting,” said Vic.
While there are conflicting opinions and experiences of conversion rates within the bridging market, lenders such as ASTL member Century Capital agree that conversion rates have slumped.
Luke Navin, head of lending at Century Capital, commented: “The continued drying up of credit from high-street banks exacerbated by the continuation of interest rate rises has pushed a greater volume of loan applications into the short-term space, often of a credit quality which previously would have been reserved for the likes of the high-street and private banks.
“This means we’re seeing a greater number of applications than ever, while simultaneously we as a lender are able to be more discerning regarding which applications we choose to progress, while still maintaining steady to increasing lending volumes — this is leading to an overall drop in application-to-completion conversion rates as a percentage.”
Rob Roscoe, CEO at Colenko, echoed this outlook, with the conversion rate looking even more deflated from his viewpoint: “Over the past six to 12 months, we have seen the percentage of applications that fail to convert increase 30-40% from the usual levels.
“The majority of cases that fail to progress falter due to a ‘down valuation’ — this is most pronounced in refurb loan cases which accounted for 45% of our down valuations.”
Rob stated that the issue tended to relate to lower residual values as a result of the higher cost of works, materials, and finance that valuers use in their models.
“Exit is also a regular problem; for investment properties, brokers are struggling to provide evidence of an exit onto a BTL facility, given the affordability restrictions.”
Rob gave his predictions on how lower conversions could impact the bridging market: “We’re likely to see lower volumes in the next year, although a decline in purchase transactions and project finance will be partially offset by refinance and rescue transactions.
“Spreads have already narrowed in regulated and ‘vanilla’ bridging, and some lenders will withdraw from the market as the relative appeal of bridging diminishes.”
A drop in the conversion rate could also be caused by lenders being more stringent when underwriting loans — especially during a tough environment.
“It is evident that our conversion rates have remained largely unchanged over the past year,” said Matthew Dilks, bridging and commercial specialist at Clever lending, “however . . . the process of securing deals has become more challenging.
“This shift can be attributed to lenders imposing stricter criteria, increasing interest rates, property prices decreasing, and a heightened level of caution among surveyors.”
James Bloom, director at Alternative Bridging, added: “The market is active, but certainly challenging; rising interest rates and inflation, and political and macro-economic issues all lead to uncertainty and a certain amount of nervousness in the property and lending markets.
“Now is the time for the well-established, truly specialist lenders to come to the fore and do the deals that can be done; there is no doubt that a combination of lenders tightening their criteria and a softer market will lead to lower conversion rates, albeit there are plenty of deals to be done.”
James added that this was a time to be slightly choosier over the type of deals being funded, and therefore it is “inevitable” the conversion rate may be slightly supressed.
“The remedy is as interest rates and inflation stabilise further, it will bring more confidence into the market and allow conversion rates to normalise.”
However, not everyone agrees with the ASTL data.
Some industry professionals have not only seen an uptake in their own numbers, but also recognised particular trends that are driving conversion rates up.
Jonathan Samuels, CEO at Octane Capital said: “It is assumed that, at the start of the year, down valuations would have negatively impacted the volume of deals going through but, as borrowers’ expectations have moved more in line with the reality of property prices, I’d expect that to be less of a contributing factor.”
Lorenzo Satchell, sales director at Hampshire Trust Bank (HTB), highlighted that not only had HTB made significant gains in its own conversion rates, but that the market was also ripe for such healthy trends.
“This gives us a clear indication that clients and investors are capitalising on opportunities in the current climate, particularly from sales by amateur landlords either exiting the market or offloading certain properties,” he added.
Adam Butler, head of sales at Avamore Capital — an ASTL member — also has a different opinion from the statistics and sees the market moving in the opposite direction: “During 2023, we have definitely seen bridging enquiries increase throughout the year but, more importantly, we have seen their conversion rates increase as well.
“Moreover, the conversion of initial enquiries to heads of terms has more than doubled in H2 compared to H1, with one-in-four indicative terms now proceeding to heads of terms.
“With the development space continuing to be tricky for many, lenders are having to look at their bridging offering and make changes or improvements to help the ever-growing bridging market.
“This increased need for bridging has given the market a fantastic opportunity to assess what is currently available and innovate to help plug gaps.
“The most obvious is the rising cost of borrowing on long-term mortgages and the restrictions most lenders’ rental stress testing is causing to many, meaning they are unable to refinance their current debt.
“This means there is more need to take a bridge to plug the gap until long-term loans become more affordable.
“The second reason is that many developments are encountering delays throughout the process — whether due to delays in materials being delivered to the site, workforce restrictions, or even the weather — and these have eaten into many projected sale or refinance timeframes which mean many more clients require a development exit loan to follow their development loan.”
Leave a comment