August 13, 2012
Bridging loans fall 5% in Q2 as rate of growth slows
The pace of growth in the bridging industry slowed in the second quarter as the spate of public holidays and tighter funding conditions combined to drag down lending, according to the latest West One Bridging Index.
The average loan size was 11% lower, falling from £412,000 in Q1 to £368,000 in Q2. Loan sizes have fallen steadily since March, when they reached a record high of £479,000. The fall is in line with the steady deterioration of the economy and tougher funding conditions for lenders with orthodox funding models. However, the fact the average loan size was 25% higher than in Q2 last year reflects the rapid rate of growth over the longer term. It also suggests property investors are using bridging loans to tackle larger, more ambitious projects than last year.
The number of loans granted in Q2 fell by 5% from Q1, but, like loan sizes, also increased significantly compared to Q2 of last year, with the volume of loans rising by 52% year-on-year. The decline in lending was largely caused by the bank holidays, which meant they were fewer working days available and fewer deals were completed. Early indications suggest activity in July is returning to the high levels seen earlier in the year.
Duncan Kreeger, chairman of West One Loans, explained: “It’s hardly surprising the pace of growth is slowing. Last year and the first quarter of this year were a golden spell for bridging. The rate of growth we saw over that period was never likely to be sustained over the long term. But that’s not to say the bridging market is running out of steam. Far from it. We believe it’s still someway off reaching its peak. The industry is maturing and entering the next phase of its evolution. It’s beginning to attract a more up market class of buy-to-let investor who, despite being credit worthy, often struggles to meet the increasingly tough lending criteria demanded by high-street banks.”
As a result of the drop in loan sizes and volumes over May and June, quarterly gross lending fell 9% from £382m in Q1 to £348m in Q2. However, lending in Q2 was 111% higher than the equivalent period in 2011. On a twelve month basis, lending rose 15% from £1.1 billion in the year up to March to £1.3 billion in the year up to June.Despite the slowing speed of growth on a quarterly basis, gross lending is set to touch £1.5 billion by the end of 2012 according to West One’s detailed half-year projections.
Duncan Kreeger commented: “What we’ve seen so far this year is not just more buy-to-let investors using bridging finance, but more credit-worthy investors turning to bridging. Even these wealthier investors are being priced out of high street finance by tough lending criteria and increasingly high deposit requirements. Increased demand from higher net-worth property investors is helping drive the bridging industry forward at a quick pace. As of June this year, there were only four buy-to-let mortgages at 85% LTV available on the high street, and the number of buy-to-let loans granted quarterly has fallen 6% since the turn of the year to just 32,300. Gross lending is down 8% since last autumn, and plenty of investors who would qualify for finance in a healthy market are being turned away by high street banks. It all stems from a sharp deterioration of credit and funding conditions in the late spring. The Bank of England’s latest survey of credit conditions revealed high street banks are being forced to scale back lending because of tightening credit conditions. It revealed buy-to-let lending will be hit, and borrowers needing LTVs will be hit the hardest. These increasing costs are gradually strangling them and they can’t suck in enough air to sustain lending at current levels. They are also worried about the storm clouds circling menacingly over the eurozone, so have focused on protecting their balance sheets over the last quarter rather than on sustaining lending to buy-to-let investors.
The decline in high street lending over the last couple of months has been great news for the bridging industry. Buy-to-let demand is still high, with six out of every ten landlords planning to expand their portfolios by the end of the year. The problem is high street banks can’t meet the appetite for buy-to-let property. The flood of demand is spilling over from the high street and into the laps of the bridging market.”
Increased demand from residential investors is reflected in the breakdown of lending between residential, commercial and mixed property. Residential lending accounted for 86% of total lending in Q2, the same as in Q1, but well above the average of 81% for 2011 and the 70% seen in 2009. With funding conditions tightening over the last few months, high street lenders have been forced to reduce the number of buy-to-let loans they grant. With credit becoming scarcer, LTV’s on buy-to-let loans have fallen over the last quarter. A number of lenders – most notably RBS Group and several Irish banks – have asked investors to finance their projects elsewhere as they look to reduce their exposure on property.
Duncan Kreeger explains: “Yields on residential buy-to-let property have broken through the 6% barrier over the last couple of months, so it’s little wonder residential property accounts for such a large slice of lending. The high residential to commercial ratio also reflects the greater risk posed by commercial property. Gross yields on commercial buy-to-let are higher than residential property at around 7.5%, but with those higher returns comes a much greater chance of extended void periods. These periods are a black hole for investor finances. With demand so high in the rental sector, investors who take on residential property are unlikely to have to suffer prolonged voids.”
Further analysis by West One Loans reveals LTVs have fallen in line with the drop in average loan sizes. The average first-charge LTV in Q2 was 48%, down from 51% in Q1. The year-on-year comparison was more favourable, with the average LTV in Q2 up two percentage points year-on-year. It was also marginally higher the average for 2011 (47.5%). The increase tallies with increasing loan sizes over a twelve month period, driven primarily by investors taking on larger projects.
Duncan Kreeger explains: “First-charge LTVs have come back down to earth after surging to well over 50% in the first quarter of 2012. Credit portfolios were particularly strong at the start of the year, which helped push LTVs upwards. The slight dip in LTVs since March reflects the more challenging credit conditions lenders have to contend with. The upside of lower LTVs is it makes loans less risky for those who fund them. Investors don’t want to see LTVs trending sharply upwards because it means more risk in the loan.”
Monthly interest rates have increased slightly, rising in line with broader market trends. After a long period of falling rates, dating back to early 2009, the average rate on a bridging loan rose to 1.43% in Q2 from 1.38% in Q1. The increase represents a rise of seven percentage points from Q2 last year, and was also marginally higher than the average for 2011 of 1.42%.
Mark Abrahams, CEO of West One Loans, explained: “Rates have increased since the first quarter of the year, but this is in line with wider market trends. Taken against last year as a whole, rates are actually broadly flat. That’s in sharp contrast to the high street, where rates increased over May and June. A whole raft of high-street lenders increased their SVRs in May, which lumped over a million owners with a combined bill of over £300 million. Although some lenders have tentatively started cutting rates, It tells you something when the best news high-street borrowers have to cheer is a marginal fall in rtes on 40% deposit mortgages. We certainly don’t think a marginal increase in rates has diminished the attraction of bridging loans in the eyes of property investors. And higher rates do mean slightly larger returns for the investors who fund the loans.”
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. The average monthly yield
Mark Abrahams commented: “Bridging is an up and coming alternative investment. The turmoil in the financial markets has rocked investor confidence in traditional investments. It is triggering erratic swings in the markets, which is forcing investors to pick individual corporate bonds instead of maintaining a diverse portfolio. The FTSE finished 2010 at 5899.90. In 2011, it fell 6%, after a sharp drop in the autumn when billions were wiped off shares and pension funds. Investors are finding it increasingly difficult to navigate their way through he turbulence in the stock markets. On top of that, sovereign bond yields are at record lows and commodities like gold are hostage to political and market instability. Plenty of investors have become disillusioned with traditional investments, and are switching to alternative investments like bridging because they provide consistently higher returns and give them more personal control over how their money is invested. The next couple of years could well be looked back on as a watershed period where people abandoned traditional investments in their droves and moved their portfolios to alternative assets classes. Privately funded lenders have a distinct advantage over their traditionally funded peers when credit conditions are tighter. Traditionally funded lenders, who use a collective fund and are dependent on high street credit, have to wait for loans to redeem before they can fund new ones. Alternative models, which cut out a reliance on high street banks and fund managers, tend to deal directly with the investor and cutout the fund manager. These investors look to constantly reinvest their money, which means the lender can fund deals more consistently.
In the future we expect to see fewer bridging lenders with a dependence on high street banks – who look chronically blighted with funding problems and balance sheet restructuring – and more using peer-to-peer or direct funding models.”