The UK bridging sector is in rude health, and confidence is high for 2022, according to a recent survey of brokers undertaken by Glenhawk, with 84% of respondents saying that they expect to write more bridging business in 2022 than in 2021. Reflecting the defensive appeal of real estate as an asset class and the favorable sectoral headwinds experienced last year, just 14% of brokers wrote less bridging business in 2021 than 2020.
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Despite 74% of brokers believing that Permitted Development will enable them to arrange more bridging cases, borrowers have been slow to embrace the 2021 changes to PD rights, reflecting a lack of understanding in the market as to the opportunity it presents. Nearly three quarters of brokers said that either less than 25% of their landlord clients (43%), or none (26%), have asked for them to arrange bridging finance relating to PD. Over half of respondents (54%) cited a lack of suitable properties as the main obstacle for this lack of demand, followed by fluctuating valuations and access to finance.
The survey also reveals that lenders are continuing to exercise caution, with 60% of brokers citing the placement of higher Loan to Value cases as their biggest challenge, followed by securing finance for foreign nationals (37%).
Nick Hilton, Glenhawk Managing Director, commented: “Building on what was a remarkably robust 2021, buoyed by changing consumer behaviour, supportive government stimulus and a low interest rate environment, expectations are high for 2022. These findings align with the exceptionally high levels of enquiries we have generated so far this year, with the market opportunity as Covid-19 fades into the distance set to grow considerably this year.
“At the same time, there remain challenges, noticeably the continued need for lenders to simplify and increase transparency for the borrower process, whilst more highly leveraged schemes will remain out of favour, especially if recent global events take on a more urgent focus. Furthermore, despite the welcome changes to Permitted Development last year and optimism about its potential, huge swathes of the market remain unaware of the opportunity, so there is a signficant education piece to be undertaken in the coming months.”
Other findings include:
There is significant capacity amongst brokers for more business, with just 14% saying that they had turned away more bridging cases in the last 12 months compared with 57% who could place more
For borrowers and brokers new to the market, how interest is calculated / repayment terms is the most confusing area (49%), followed by the legal process (39%) and the application process (32%).
The findings resulted from a series of webinars hosted for brokers by Glenhawk, the fast-growing UK challenger lender, in February 2022.
Applications for bridging loans soared in the third quarter of the year rising more steeply than completions, new figures revealed.
Data released today by the Association of Short-Term Lenders (ASTL) showed bridging loan applications increased by 17% when compared to the same quarter last year.
Indeed, year-on-year annual applications hit nearly £23 billion and completions remained at more than £4 billion.
However, it also revealed the value of completions in Quarter Three (Q3) dipped by 2% on the same period last year, to nearly £940 million. Year-on-year completions went up by 1%.
At the end of the third quarter, bridging loan books totalled £4.3bn, a reduction of 6% compared to last quarter, but an increase of more than 5% on the same period last year.
Applications for loans increased even more steeply than completions, with what the ASTL described as a ‘staggering’ record £6.1 billion figure for Q3 2019
Benson Hersch, CEO of the ASTL, described the data as ‘another strong set of results’ for the bridging sector attributing the rise in applications to either intermediaries approaching more lenders, or to new lenders getting their part of the pie.
“Whatever the reason,” he added, “there is no doubt that the sector is in rude health and estimates of total loans written for the year in excess of £6 billion seem to be on the money.
“Year-on-year figures from the data survey show annual completions by members currently at more than £4bn, and they are on an upward curve. Back in September 2012, total lending was £885 million, with the billion mark being reached at the end of the following quarter.”
These quarterly figures will be the last set Hersch will preside over as CEO of the ASTL, having announced his departure, which will be effective in the new year.
He added: “It gives me a great sense of pleasure and achievement to leave the industry in such a strong position.
“It is not, however, the time for complacency. The wider political and economic environment remains uncertain and the challenge for the industry now is to continue this level of activity whilst maintaining high standards of underwriting and customer focus.”
The ongoing uncertainty around the UK’s scheduled departure from the EU has epitomised an environment in which we have had to learn to expect the unexpected, which is not an ideal situation for lenders or advisers.
As we approached the end of last year, in the short-term lending market we were greeted with the news that Amicus Finance had entered administration, which, combined with the environment of uncertainty, has led to questions in some quarters about the future health of the sector.
With this in mind, it is useful to take a step back from the noise, to review the role the market has played in the past and to take an objective view of current challenges.
Evolution of sector
When the 2008 credit crisis hit the UK property market it was important for alternative finance to fill the gap left by the mainstream mortgage sector, and short-term lending became more significant for customers as it provided the flexibility they needed to achieve their objectives.
The Association of Short Term Lenders was set up in March 2008, initially with 19 members, with the dual objectives of protecting the reputation of the sector and providing a voice for lenders involved in bridging and secured lending for terms of between six months and two years.
The role of the ASTL has been to promote responsible lending, transparency and professionalism in the bridging finance sector, with members subscribing to our code of conduct, membership rules and value charter.
And we have achieved a lot over the past decade, growing our membership to more than 60 and developing an increasing influence with various bodies including the Financial Conduct Authority, the National Association of Commercial Finance Brokers, Association of Bridging Finance Professionals and HM Treasury.
The lending landscape has also changed significantly over this decade. More institutions have spotted the opportunity and new lenders have entered the market, increasing the options available for borrowers.
Competition is important for any market. Not only does it provide customer choice, but a larger number of players can raise awareness of the product and stimulate demand.
We have certainly seen new entrants into the bridging sector helping to spread the message about short-term lending as a flexible funding solution and there has been increased understanding about uses for bridging among intermediaries and consumers.
Those consumers have also benefited from another consequence of increased competition, with greater availability and lower pricing. But these benefits for consumers also provide a challenge to lenders.
A report by EY into the bridging market found that three key trends have emerged as a result of increased competition, with lenders experiencing margin compression, stretching to higher loan-to-value ratios and introducing more flexible product terms and features.
It is important for any lender to manage these risk factors, but amidst an environment of high competition and some significant economic challenges, it is important for bridging lenders to be cognisant about balancing their appetite for market share with taking on excessive risk. Failure to appropriately manage this risk can lead to casualties, as we have seen.
There are undoubted economic challenges ahead. The OECD’s stable forecast for the UK is based on the assumption that there is a smooth exit from the EU – and this is looking increasingly unlikely.
The OECD says failure to come to a withdrawal agreement with the EU is by far the greatest risk in the short term, suggesting that a no-deal scenario could subtract more than 2 per cent from real GDP over two years, and elsewhere, media speculation makes the OECD outlook appear decidedly positive, with the papers full of gloomy predictions.
Brexit is not the only risk ahead. There are many indications the global economy has passed its peak in the cycle and there have been signs of volatility in markets across the world.
It is also widely expected that there will be a property price crash in Australia, with recent data from CoreLogic confirming house prices have fallen the most in a single quarter since 2008.
History tells us the world can be a small place when it comes to economic contagion, and if banks suffer losses in Australia, they may become more risk averse in other regions.
In addition, we do not know the impact the UK’s growing mountain of debt will have during a downturn.
The country’s total debt is projected to reach £6.7tn by 2023, with households accounting for £2.6tn of that, a larger share than both the government and non-financial companies, according to analysis byPWC.
There are certainly challenges, but there remains opportunity among the danger, and perhaps reason for cautious optimism about the sector.
The unemployment rate is historically low and real average earnings have risen. These are strong economic foundations and, if the Brexit situation is resolved without inflicting significant damage to the economy, there is potential for a bounce-back.
The OECD says Brexit-related uncertainties have held back economic growth since the referendum in 2016 and so any positive outcome from negotiations could lead to stronger than anticipated results.
The key for short-term lenders is to proceed with care. Companies need to invest in people to ensure the threat of skills shortage is mitigated and to have confidence in the decisions employees make.
They also need to invest in technology to help deliver this peace of mind, so that skilled people have reliable data to work with, and information-gathering needs to be improved.
This is why it is so important that, as an industry, we are able to put aside commercial differences and come together to share expertise and best practice.
Increased competition among bridging lenders can grow our market and increase opportunity for everyone, but it also comes with risks, particularly in such an uncertain environment.
By working together we can help to identify those risks and agree a shared approach to mitigate them.
Developing this approach of mutually beneficial co-operation will be a key focus for the ASTL in 2019.
With a cautious approach and the ability to share and adapt, we believe the bridging sector will emerge from the uncertainty with greater resilience and more opportunity.
By Benson Hersch, chief executive of the Association of Short Term Lenders
Gross annual bridging lending broke £5bn by the end of 2017, the West One Bridging Index found.
ASTL members lent over £1bn in the quarter during which the Bank of England implemented the 0.25% rise in their base rate.
Payam Azadi, director at Niche Advice, said: “I’m surprised. That figure is quite large and I didn’t expect it but it makes sense why so many lenders are looking to get involved in bridging.”
Alan Dring, consultant at Hope Capital, agreed and added the results were very encouraging.
He said: “I was surprised. You’ve got to be encouraged because that’s the way contributors to the data are seeing the market.
“The data in the bridging sector is often questionable. Its showing the trend is upwards and that has got to reinforce the fact the market is continuing to be vibrant.
“Hope had its best first quarter this year so it’s reflected upon ASTL members I think. It’s just a good indidcator that people’s confidence remains in the sector. There’s more solicitors trying to get into bridging and people trying to acquire the specialisms to generate a lot in this market.”
However Benson Hersch, chief executive of the Association of Short Term Lenders (ASTL), thought the huge figure wasn’t unexpected.
He said: “The figure of £5bn for bridging lending does not surprise me. Indeed, the total may well be more, given that there are lenders which operate ‘under the radar’ as it were. The bridging sector grows from strength to strength and, barring unexpected setbacks, 2018 should be even better.”
The higher volume of smaller-sized transactions that characterised the latter part of 2017 has continued through to the end of the year, as property investors look regionally for their returns.
Higher volumes of smaller transaction sizes have persisted throughout the second half of 2017. Average loan sizes remained between £600,000 and £800,000 in the quarter and confirming a longer-run average trending to below £800,000.
Transaction volumes continue to be strong, however, resulting in total lending surging in Q4 2017.
Marie Grundy, sales director of West One, said: “In 2017, bridging has turned out to be a ray of sunshine in the property finance world, with a series of record performances throughout the year.
“The industry shrugged off the headwinds buffeting other parts of the industry, to deliver a final lending total of £5bn for the year. At West One, our short-term lending grew with similar strength to a book of around £450m and record volumes of transactions in the year.
“What’s perhaps most encouraging is to see a breakthrough in the diversity of that growth, with more and more opportunities being found regionally.
“Where I am, in the North West of England, places like Greater Manchester and Merseyside are increasingly vibrant cities that are benefitting from urban regeneration and moves away from London, like the BBC made a few years ago.
“That means that these, along with Birmingham and the East Midlands that are extended commutes from London, are attractive places to live. Opportunistic investors looking for better returns are finding them here, and bridging is well placed to help them capitalise on those.
“Looking ahead, we remain confident in further growth of the bridging market not only through further regional expansion, but also as SME developers seek small project funding for housebuilding, to meet the government’s new home targets.
“With many finding it hard to get funding for projects under £1m, or to finance property acquisition whilst planning permission is being obtained, bridging is well-placed to support them.”
Greater buoyancy in property markets outside London and the South East are offering property investors better rental yields and some opportunities for capital appreciation despite the capital city offering neither.
Danny Waters, chief executive of Enra Group, said: “The bridging sector has performed excellently in 2017, despite the backdrop of concern around the progress of Brexit negotiations, sluggish economic indicators and interest rate rises.
“Whilst a few lenders have notably taken 2017 as the time to exit bridging, we are generally seeing more competition in the sector, which both drives innovation and keeps pricing attractive for customers.
“That continuing adaptation to conditions and to borrowers’ needs has been a key strength for the sector in the decade since the financial crisis.”
Despite the doom and gloom predictions following the Brexit referendum, the UK economy has demonstrated its resilience by continuing to attract private investment across both alternative and traditional sectors.
The bridging sector has benefited from this strong performance – gross annual lending totalled £4.6bn in Q3 2017, and more than half of brokers are positive about the outlook for the sector in 2018.
By offering investors the chance to overcome mortgage delays and potential gazumping, the bridging market remains an important source of finance for those seeking to take advantage of property investment in a market abound with opportunities.
The rise in bridging activities comes amid figures released by UK Finance in January 2018, which showed that 36,115 mortgages were approved in December 2017, the weakest level since April 2013.
The data led Samuel Tombs, chief UK economist at Pantheon Macroeconomics, to remark how traditional home loans were “falling off a cliff”. Against this significant trend, the steady rise in bridging loan volumes can be expected to continue.
Looking beyond industry statistics, there are two other factors that will determine how the bridging market will perform in 2018. The first is investor confidence – namely, their confidence and willingness to invest capital in UK-based assets.
The second is the underlying performance of the property industry, measured through the volume of transactions, house price growth and the level of market demand across both the country’s commercial and residential markets.
A high-performance property market supported by a confident investor community will likely have a positive effect for bridging providers. Industry figures suggest 2018 will be a year full of opportunities for the bridging sector, projecting its appeal to both investors and borrowers.
An investor survey among more than 2,000 UK adults by Market Financial Solutions (MFS) at the beginning of the year revealed that 77% of investors are not concerned by the long-term impact of Brexit of their investment strategy, while 63% consider property a safe and secure asset in the current market.
What’s more, with average UK house prices still creeping up and the volume of commercial property investment likely to exceed £50bn this year, the determining factors are clearly in favour for bridging.
Outside of London, cities such as Manchester, Liverpool, Leeds and Birmingham are offering fantastic opportunities; bridging ensures buyers are able to act quickly on their property investment intentions, allowing them to avoid stringent lending regulations imposed by high street institutions.
The bridging sector continued its recent growth with a 10% uplift last year as the regulated market continued to approach parity with the unregulated side.
According to the Bridging Trends report, bridging loan volume rose to £534.1m in 2017, up from £482.6m in 2016 and £432.5m in 2015.
The second and third quarters of the year were the strongest – with £150.7m completed in Q2 the highest overall.
Regulated activity rose to 46% of the market, up from 44% in 2016 and 36.6% in 2015, with regulated activity outperforming unregulated loans for the first time in Q1.
Average loan-to-value (LTV) levels dropped to 46.6% in 2017, down from 49% in 2016, while average monthly interest rates remained consistent throughout the year at 0.83%, down from 0.85% in 2016 and 0.91% in 2015.
Demand for bridging loans for refurbishments and auction purchases rose, although mortgage delays were again the most popular reason at 29% of all lending down from 34% of activity.
The data is collected from bridging lender MTF and brokers Brightstar Financial, Enness, Positive Lending and SPF Short Term Finance (SPF), to offer a general snapshot of the UK bridging finance industry as a whole.
The trend towards bridging for financing property refurbishment drew particular attention.
Enness Commercial senior broker Chris Whitney (pictured) noted that this was a popular route to avoid hefty stamp duty costs and stagnation in the London property market.
“Many more clients have been buying cheaper or outdated properties and using second charge bridging finance to update them before refinancing onto a residential product,” he said.
“Likewise, we’ve seen numerous clients look to raise money against their properties who do not want to refinance altogether. As such, they’re using regulated bridges as second charges against their property, in order to keep their attractive first charge mortgage while securing the extra funds they need.”
Brightstar director of short term lending and development Kit Thompson echoed this, adding: “Our business has seen a large increase in bridging for property refurbishment, with an increase in Permitted Development Right (PDR) schemes and change of use projects.
“Almost all of our non-regulated bridging loans here at Brightstar involved some element of refurbishment, whether just light refurbs or those projects involving change of use and planning consent.”
Thompson noted, however, that regulated bridging deals Brightstar conducted rarely involved refurbishment.
Trends to watch
MTF director Joshua Elash added the data showed bridging finance was increasingly a mainstream financial solution.
“It is interesting to note what appears to be a direct correlation between the data reported and the macro-economic and regulatory changes which have impacted upon the market.
“We have, for example, in this annual reporting cycle, seen regulated bridging finance lending outstrip unregulated bridging finance for the first time. This follows on from the implementation of the mortgage credit directive and the consequential introduction of a new class of regulated consumer buy to let lending.
“Equally we are interested to note that again for the first time since reporting began, refurbishment to existing investment property was the most popular reason for borrowing during Q2 of last year.
“As we look ahead to the year 2018 we are interested to see how these two trends in particular pan out,” he added.
The latest data from bridging trends certainly made for interesting reading.
Mortgage delays were cited as the most popular reason for obtaining a bridging loan in Q3 this year, while average LTVs reached 49.6% during Q3 this year.
This was up from 45.4% on the previous quarter, suggesting that investor confidence in the market is stable and on a steady upward trajectory.
The fact that the average completion time on a bridging loan application in Q3 increased by four days isn’t surprising.
The summer holiday period is typically a busy time for annual leave requests and resource levels dropped as a result.
Perhaps some lenders need to think about streaming completion processes further in order to really make the most of the opportunities in the market.
Luckily, bridging finance is built on the very foundations of flexibility and speed.
Although mortgage delays have returned as the main reason for obtaining bridging finance, refurbishment follows closely behind, highlighting how it is still a key area of demand, as more people realise the opportunity that it offers.
Since the change in planning legislation a few years ago, the purposes for a refurbishment are extensive, and bridging can be the flexible solution that enables it to happen.
We have also seen an increase in applications involving renovation and refurbishment and this trend is likely to continue in 2018.
These industry figures also illustrate how a one size fits all approach and offering is a thing of the past.
Bespoke and flexible financing is the future, particularly during times of uncertainty, so it is crucial that we as an industry are fully prepared with diverse financing options.
Market moves are continuing to present the bridging market with opportunities and we must continue to capitalise on these going forwards.
The fact that the drop which followed the referendum quickly recovered highlights the market’s resilience and reiterates how it is well placed to take advantage of any future economic fluctuations due to its adaptable nature and diverse offering.
The sector has seen a five-fold growth in lending since 2011, and the low interest rate environment means an increasing number of borrowers will turn to alternative funding options.
Well-funded players in the market, particularly principal lenders who are able to cater for complex cases and can provide quick turnarounds, will ultimately thrive.
The UK’s bridging sector continued its healthy growth of 2017 with another strong quarter’s performance, yielding a new high of £4.7bn in the year to Q3, West One’s Bridging Index showed.
The latest edition of the quarterly report revealed that gross annualised lending increased from £4.3bn in June to exceed 2016’s pre-EU Referendum high of £4.4bn.
The bridging sector has recovered from the slump in the Q3 of 2016 that followed the referendum result.
Marie Grundy, sales director of West One, said: “2017 has proven to be a strong year for bridging finance, with a clear return to form after the post-Referendum turbulence this time last year.
“Seeing further robust new business performance in a quarter that includes the typically-quieter summer holiday period is very encouraging.
“The wider property and property finance markets have flattened against continued political uncertainty due to slow progress negotiating Brexit, and the prospect of interest base rate rises finally arriving.
“This new market high therefore reflects the underlying strength of bridging.
She added: “We believe there is still that slack in the market and expect that the bridging market will continue to this pattern of solid growth, despite some slowing in the housing market.
“With pockets of growth outside London and the South East, we anticipate seeing more of that growth regionally.”
Trends in the bridging market
The emergent trend in the first half of 2017 of smaller transaction sizes has continued through Q3.
Average loan sizes dipped under £600,000 compared to averages in excess of £900,000 at the same time last year.
There were less large transactions coming to market, reflecting the relatively depressed market for high-end properties with values over £1m, especially in London.
s performance figures from different sources pointed to more upbeat property markets in some regional hotspots such as the East Midlands or Greater Manchester, it seems property investors are focusing on deals in those regions, with typically smaller ticket sizes.
The regional picture
Between actual residential property and property finance data, and forward-looking expectations data, varying patterns emerge.
Nationwide and RICS found the wider South East of England has also become more subdued in price growth, with a markedly negative outlook.
But UK Finance’s regional mortgage data showed mortgage lending in the London region at 10% more than that of Q3 2016.
Data for house prices identify both East and West Midlands as hotspots for annual price growth, alongside the South West, where supply is highly constrained.
The wider South East region is still showing growth, albeit at a slowing rate.
Savills research identified Midlands locations like Birmingham City, Leicester-Nottingham and Northampton and pockets in Scotland like central Glasgow and the Galashiels area of Edinburgh commuter hinterland.
With central Manchester also shining a light for the North West of England, this indicates the opportunities that investors are starting to exploit, where they know the local market.
Taking forward-looking sentiment data into account, other regions came to the fore, suggesting further scope for agile investors to grasp emerging opportunities.
September’s RICS residential market survey of members pointed to likely buoyancy in the North West, Scotland and Wales, with positive Q3 sentiment across a range of measures from price expectations to new enquiries and listings. This suggested positive market conditions will continue in the East Midlands and South West.
Bridging interest rates
Interest rates in Q3 recovered slightly from Q2’s low of 0.96%, returning to just above 1% per month.
With Bank of England base rate changes widely expected for some months ahead of the 2nd November 0.25% announcement, it is likely that the market had already begun to factor this shift in.
The report predicted a further rise in bridging rates during Q4.
Danny Waters, chief executive of Enra Group, said: “The bridging sector has performed well during Q3, despite the backdrop of concern around the progress of Brexit negotiations, and economic indicators pointing to both a slower economy and to the interest rate rise that ultimately came in November.
“Whatever happens next, the industry must continue to adapt to conditions, and provide the diverse and flexible funding options that property professionals need, so they can take advantage of the changing, regional landscape that we are seeing develop.”