UNPRECEDENTED GROWTH IN 2011 DRIVES VALUE OF BRIDGING INDUSTRY TO £911M
- High street lenders unable to cater for surge in buy-to-let demand
- Gross lending 110% higher in 2011 than 2010
- Volume of loans increased 62% year-on-year
- Average rate falls to 1.41%; average LTV hits high of 47%
2011 saw gross lending in bridging finance surge to £911mn, according to the latest West One Bridging Index. The increase exceeds the projections made by the last index in autumn 2011, which predicted gross lending would reach £806mn in 2011.
The research from West One Loans, the largest privately funded bridging lender in theUK, reveals demand from buy-to-let investors is driving the rapid expansion of the bridging industry. More investors are turn to bridging as a means to finance their projects, largely due to the inability of mainstream mortgage lenders to cope with high demand for buy-to-let finance.
Gross lending in 2011 was 110% higher than 2010 and in December was more than two and a half times higher year-on-year. The volume of loans advanced was 62% higher last year than in 2010, thanks to an increase in the number of property investors using bridging loans to finance their projects. Net lending increased 76% in the same period.
The average loan size was 28% higher in 2011 than 2010, indicating investors are taking on yet bigger projects. However, the average size of a loan fell from £322,000 in August to £266,000 in December, reflecting the traditional winter slow-down.
Buy-to-let is the horse pulling the cart, and it’s driving bridging forward at a rate of knots. The first time buyer mortgage famine means a feast for property investors. Rents are high, property prices are deflated, and that has created a vibrant rental market that investors are piling into.
“Despite banks increasing the number of buy-to-let mortgages, they have been unable to keep pace with the proliferation in demand. Buy-to-let lending is still very low by historic standards. In 2011 there were only 124,000 buy-to-let loans, compared to 346,000 in 2007. As a result more landlords are using bridging loans to finance the development of properties they can’t get mortgages on. Demand for bridging loans is sky high, and will continue to push towards the stratosphere in 2012.”
Analysis from West One Loans reveals the market has shifted markedly towards residential finance and away from commercial lending, and demonstrates the increasing demand from buy-to-let investors for bridging loans. In 2011 84% of all loans by volume were to residential property investors, compared to just 70% in 2009.
Duncan Kreeger explained: “Residential property is much easier to refinance than its commercial counterpart. It gives investors a clear and easy exit strategy, because strong demand for rented property from the vast pool of frustrated first time buyers means they can be confident of refinancing easily once the properties is ready to rent. In comparison, the commercial market is saturated because of a chronic oversupply. This makes rental voids a real concern, and can leave investors stranded with no easy way of escape.”
LTVs have risen steadily since the beginning of 2010, reflecting the increasingly large loans sought by borrowers, and the strong credit performance of loan portfolios. In 2011 the average 1st charge LTV (weighted by value) was 47%, up from 44% in 2010. By quarter, LTVs were at their highest in Q4 2011, reaching a high of 50%.
Duncan Kreeger commented: “The fact more investors are turning to bridging – particularly buy-to-let landlords – is closely linked to rising LTVs. This is encouraging more investors to turn to bridging, where high LTV loans are more accessible than on the high street.”
The high demand for ambitious projects will keep loan sizes high, which in turn will help support LTVs in 2012. This is in stark contrast to the mainstream mortgage market, where LTVs are beginning to fall after a brief resurgence. We expect LTVs to remain high throughout 2012.”
Low interest rates are also making bridging loans more attractive for buy-to-let investors. The average interest rate on a bridging loan declined year-on-year to 1.41% per month by the end of 2011, down from 1.64% a year ago.
The comparison of average interest rates in bridging and the returns from traditional gilt-edge government securities (see above graph), highlights the higher yields bridging offers investors in comparison to conventional investments
Duncan Kreeger said: “Traditional asset classes are yielding paltry returns compared to their heady days of the mid-2000s. The best returns for investors are to be found in alternative asset classes like bridging - which makes the market an attractive proposition to those who finance our loans. As an investment, bridging is a safe haven compared to the choppy waters of the stock and bond markets. Yields are declining in line with market trends, although they’re not falling as quickly as in traditional investments. This is increasing the value of property investments for the borrowers and is driving up the average amount they want to borrow.”