UK bridging loan industry breaks £1 billion barrier
23-05-2012
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Its quarterly Bridging Index found gross lending in the twelve months from March 2011 to March 2012 rose sharply to reach £1.1 billion, 21 % higher than in the twelve month period from January 2011 to January 2012.
It said that the increase is being driven by a surge in lending to residential property investors. With funding costs soaring on the high street, banks and building societies are scaling back their lending to property investors and upping rates. With the high street unable to cater for demand, more investors have turned to bridging loans to fund their projects. Bridging lenders are plugging the funding gap left by high street lenders.
Gross lending in the first quarter of 2012 was £382 million, 95% higher than in the first quarter of 2011, and 30% higher than the previous quarter. If the pace of growth continues along its current trajectory, gross lending in 2012 will hit £1.5 billion, an increase of 68% from 2011.
The number of loans advanced in the first quarter of the fourth quarter of 2012 was 74% higher than during the same period last year, reflecting the increasing appetite for bridging loans over the past twelve months. The number of loans fell marginally by 8% between the fourth quarter of 2011 and the first quarter of 2012, in line with the traditional winter slow down.
The average loan size rose sharply from £342,000 in the first quarter of 2011 to £412,000 in the first quarter of 2012, an increase of over 20%. The firm said that this reflects the bigger projects being tackled by property investors.
‘A big funding gap has been created by the problems high street lenders are having with increasing 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,’ said Duncan Kreeger, chairman of West One 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,’ he explained.
‘Thankfully for property investors, bridging lenders are stepping in to fill the funding gap. Investors have become steadily more disillusioned with the restricted choice of finance on offer from banks and building societies. More of them 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,’ he added.
He also pointed out that it is 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, the bridging is growing at a rapid pace. Property investors see bridging loans as an increasingly legitimate option,’ he said.
Analysis by West One reveals the growth of the bridging industry is being driven by an increase in residential lending. With the high street unable to cater for the increasing demand for financing of residential property projects, more investors have turned to bridging lenders. In the first quarter of 2012, 86% of all loans were for residential properties, up from 84% in the fourth quarter of 2011, and up from just 70% back in the first quarter of 2009.
‘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,’ said Kreeger.
‘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 sky 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. There are some lenders, like West One, who can do great residential deals but also have the flexibility to cover a range of commercial deals,’ he added.
Falling interest rates have also contributed to the rapid growth of the bridging industry. Rates have fallen since the start of 2009 in line with market trends, and this has encouraged more investors to use bridging finance to fund their projects. The trend of declining rates continued in the first quarter of 2012, with the average rate falling from 1.41% in the fourth quarter of 2011 to 1.38%. The average rate also fell year on year. It was 1.52% in the first quarter of 2011.
Falling rates have increased the allure of bridging loans to property investors, according to Mark Abrahams, chief executive of officer of West One Loans. ‘They are increasing the value of property investments for the borrowers and driving up the average amount they want to borrow. This is in glaring contrast to the high street, where increased funding costs are forcing lenders to up their rates,’ he said.
‘Turmoil in the wholesale markets has pushed funding costs up by 40% 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,’ he explained.
Despite declining rates, returns for those investing in bridging are still healthier than in traditional ten year government bonds. This highlights the high yields bridging offers investors in comparison to conventional asset classes.
‘We’re seeing a seismic shift in the way people are investing. 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 that we’ve seen with other investments,’ he said.
‘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,’ he pointed out.
‘We’re also seeing a shift in the way bridging loans are funded. With high street banks floundering and scratching around for capital, peer to peer lending has become increasingly important to the way the bridging industry is funded. Investors can maximize their returns and manage risk better if they deal directly with the bridging lender they are investing in. Increasingly we’re seeing them cutting out the fund manager and dealing peer to peer,’ he added.
The company also found that loan to values (LTVs) have begun to flatten out after increasing steadily since the middle of 2010. The average first charge LTV in the first quarter of 2012 fell for the first time since the third quarter of 2010. It fell from 50.2% in the fourth quarter of last year to 49.3%
But despite the quarter on quarter fall, the average first charge LTV was still 2.3% higher than the average for 2011 which was 47%. The firm that that this reflects that property investors are tackling more ambitious projects than they were last year. It also reflects the strong credit performance of loan portfolios.
‘LTVs have risen in line with increasing loan sizes as investors look to take on bigger, more ambitious projects that they can’t get funding for via high street banks. With the rental sector so vibrant at the moment, there is an increased appetite for larger residential projects so investors can maximize the returns they get from high rental yields,’ said Kreeger.
‘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,’ he added
