Like so many parts of the property lending sector, bridging finance has had a rocky ride over the last year or so. Primarily the foundation of auction finance and development investments, it has ground to a halt.
While buy to lets and residential sales meet record highs, the prospects of developing a new renovation project, or snagging a bargain at auction have diminished, with the vast majority of projects on hold.
However, as we head into February, there are clear signs that the industry is gearing up for recovery - and in a dramatic way!
If you're looking for competitive bridging finance for any size or nature of investment, get in touch with Revolution Brokers for an assessment of the most attractive deals emerging onto the market.
The Impact of the Pandemic on Bridging Loan Finance
With nationwide lockdowns, auction rooms have been closed for most of the months since March 2020.
As we've seen elsewhere, auctioneers have leveraged digital technology to offer remote auctions - although the same accessibility and scope for investors hasn't quite been the same.
Developments went much the same way. Though construction projects in progress could continue with some limitations, the need to implement robust safety protocols means that bridge finance demand dipped.
In early 2020, Financial Reporter anticipated that the year would be full of growth - but with hindsight, that wasn't to be.
- The political environment in 2019 had already contributed to a 4.5% drop in transactions, reducing bridging finance levels to £732.7 million.
- Second charge bridging loans made up around 20% of the overall market, an increase of 17% in the previous two calendar years.
- 18% of bridging finance applications related to breaks in property sales chains, and 23% related to property investments.
These figures highlight the issue; most bridging loans are used as a more flexible, less rigorous form of secured lending, ideal for fast property purchases or where traditional mortgages aren't possible.
As auction sales fell, investments decreased, and lenders' appetite to accept higher-risk second charges dropped off a cliff, so too did the bridging loan sector.
We've reported before about how lending risk exposure has adapted to the Coronavirus pandemic. Much as many mortgage lenders placed stricter caps on LTVs, removed riskier products from the market, and introduced more intensive eligibility checks to mitigate their exposure, so too did short-term lenders look to safeguard their prospects and minimise lending products available during 2020.
Anticipating Demand for Development Finance in the Months Ahead
All these considerations aside, housing is always going to be a vital part of the UK infrastructure.
Affordable housing is in high demand. The rental market is booming. While the looming Stamp Duty holiday expiry date might pour a little cold water on the current property investment pace, there is little doubt that investing in bricks and mortar is a reliable strategy for long-term returns.
Development volumes are expected to return to pre-pandemic levels by quarter three of 2021, with growth in:
- Construction - as developers and contractors look to make up for the lost time and re-start or begin development builds that lockdown had stifled.
- Investment - property prices are likely to stabilise, and with housing shortages remaining at high levels, investors have a clearer road map to select profitable options.
- Sales - with furlough schemes coming to an end, businesses due to reopen and the workforce returning to full pay, the backlog of house moves, new-build purchases and transactions is likely to grow later in the year.
With so much of the economy in limbo since early 2020, there is pent up demand, not just for investment, but also for consumers who are keen to get back to 'normality' and pick up where they left things so many months ago.
Housing needs are also evolving. We've spoken about the demand for more rural homes, commuter belt properties and fresher air with droves of city centre residents still considering moving to more spacious properties.
As working from home looks set to be a long-term scenario, what once was an unenviable commute is now a viable option, with so many professionals expected to continue working primarily from their homes.
Therefore, with factors such as low-interest rates adding fuel to the fire, it seems likely that the need for new developments and the prospects for renovations and auction purchases to add more housing stock to the rental market will continue to grow.
David & Goliath - Why Niche Lenders Have a Unique Lending Opportunity
We still have a way to go before effective vaccination programmes allow the existing lockdown restrictions to be lifted - but there is light at the end of the tunnel.
It seems very likely that smaller specialist bridging financiers have a unique opportunity to grasp hold of the gap in the landing framework and pick up clients who would have gravitated towards the larger, better-known lenders, before the pandemic.
- Increasing demand from housebuilders and developers will be an opportunity for smaller, more niche lenders as larger banks continue to adopt risk-averse strategies.
- More significant lenders have introduced new, stricter eligibility criteria, or stopped offering lending to new applicants, paving the way for specialist lenders to enter the market.
- Smaller lenders are often more flexible, quicker to move, and more innovative in the lending options they can provide.
There remains a challenge for SME builders, who have widely reported losses or steep drops in forecasts due to the COVID-19 pandemic - but with government initiatives, we expect construction to return to prior production levels in earnest.
While the most prominent house-building firms tend to dominate the headlines, we shouldn't lose sight of SME builders' value in helping the UK meet housing demand.
Around 345,000 additional new homes are required, every year, to meet current shortage levels. Smaller developers are more likely to offer apprenticeships, take on more diverse developments, and support regional property demands.
As we move forward, we expect bridging finance volumes to escalate quickly, as soon as development projects and property auctions return to the sector's mainstream.
When they do, it will be interesting to see how the bigger lenders compete to try and reestablish their position as the go-to option for fast track bridging finance.
For help with evaluating the bridge lending products currently available, contact Revolution Brokers.
Our whole-of-market, independent team are experts in the world of development finance and auction loans and are here to help you find the ideal lending products with a stress-free application process.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.