Bridging industry hits £1bn mark

Bridging industry hits £1bn mark


Gross lending in the bridging industry is forecast to reach £1.5 billion by the end of 2012, according to projections from West One Loans’ latest quarterly Bridging Index.

The lender found that gross lending in the period between March 2011 and March 2012 was 21 per cent higher than in the twelve month period to January 2012. Lending rose sharply during that period to hit £1.1 billion, an increase which, according to West One, results from a surge in lending to residential property investors. High street banks and building societies are reportedly scaling back their lending to property investors and increasing their rates, leaving bridging lenders to plug the gap left by more mainstream funders.

Duncan Kreeger, the Chairman of West One, said: “A big funding gap has been created by the problems high street lenders are having with increased funding costs, increasing capital requirements, and heavy exposure to toxic assets. As a result, the high street simply can’t cater for the high demand from property investors for residential loans.

“It has created a huge gap between supply and demand that could become even wider if the economy fails to recover with any conviction. Net mortgage lending will only be around £5 billion this year: The main market is still crippled, and if the Eurozone crisis worsens mortgage lending could enter a state of near-paralysis.

“Thankfully for property investors, bridging lenders are stepping in to fill the funding gap. More [investors] are turning their backs on the high street and choosing bridging finance as a short-term and practical way of financing their projects. This has pushed the growth of the bridging industry along at an accelerated pace.

“But it’s not just investors who can’t get finance on the high street that use bridging loans. We’ve seen plenty of evidence of investors using bridging loans even when they can access a buy-to-let mortgage on the high street. This may be just the start of a more pronounced shift in the way property investors choose to fund their projects.

“The figures back up that view: with gross lending set to reach over £1.5 billion by the end of this year, bridging is growing at a rapid pace. Property investors see bridging loans as an increasingly legitimate option.”

According to the lender, whilst only 70 per cent of bridging loans were for residential purposes in Q1 2009, in the first quarter of this year this figure had increased to 86 per cent.

Duncan explained, “More lenders are concentrating on residential deals to take advantage of the demand that the high street can’t cater for. Plenty of new lenders have piled into the sector to try and get in on the action. Competition is fierce as a result, and that is driving down rates and enticing more property investors to use bridging finance.

“But the shift is also to do with residential investments being much lower risk than commercial ones. It is much easier to refinance residential investments because demand for rented accommodation is shy high. So investors can be confident of avoiding extended void periods. That’s in stark contrast to commercial investments, where prolonged void periods are a constant concern – particularly when the economy is sluggish.”

Another contributory factor in the rise of bridging is falling interest rates. Rates have fallen since the start of 2009 in line with market trends (the average rate fell from 1.41 per cent in Q4 2011 to 1.38 per cent in Q1 2012), and this has encouraged more investors to use bridging finance to fund their projects.

Mark Abrahams, CEO of West One, commented: “Falling rates have increased the allure of bridging loans to property investors. They are increasing the value of property investments for the borrowers and driving up the average amount they want to borrow.”

He added, “Turmoil in the wholesale markets has pushed funding costs up by 40 per cent for the biggest UK lenders since the beginning of February. That’s why we have seen big banks and mutuals like RBS and Halifax hike up their rates. More will follow their lead. This is encouraging more property investors to abandon the high street and use bridging loans to finance their projects.

“Alternative investments like bridging are increasingly being seen as safe havens from the volatility of the stock market. Yields in bridging are decreasing marginally, but not with the same pace and unpredictability we’ve seen with other investments. Most traditional asset classes are yielding significantly lower returns than they were before the 2008 downturn. We’ve yet to see them recover with any conviction. This is encouraging more private investors to invest directly in alternative assets like bridging.”

West One also highlighted a rise in peer-to-peer funding and a flattening of LTVs after a steady increase since mid-2010.

Duncan said, “The Index quantifies just how well the bridging industry has been performing and gives it a greater air of respectability with the rest of the lending market.”

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