The volume of annual gross bridging lending comfortably outflanks the amount of housing budget allocated by the Chancellor in the Autumn Statement, according to the latest West One Loans Bridging Index.
With yearly bridging transactions smashing through the £3bn mark to reach £3.2bn, they are 60% higher than the £2bn George Osborne recently doubled the housing budget to as part of his annual spending review.
Much of the funds apportioned by the Government are earmarked towards helping private developers build 400,000 new affordable homes to be built by the end of the decade, but the growing stature of the bridging market proves it can play just as significant a part in getting Britain building again.
This support can manifest itself in a number of ways, with short-term finance commonly used to both refurbish previously uninhabitable or unmortgageable properties and also to help developers secure plots of land before projects begin.
The bridging sector could also inadvertently benefit from the Government’s ongoing attacks on buy-to-let landlords. With the extra 3% Stamp Duty on investment properties announced in the Autumn Statement coming hard on the heels of the removal of mortgage interest relief for landlords, some buy-to-let investors may no longer wish to expand their portfolios.
With Government figures showing that more than four-fifths of the three million dwellings created in England between 1996 and 2013 were private homes to rent, it shows the extent to which larger developers have relied on investors. If this support is impacted by the recent raft of changes in the shape of buy-to-let investors no longer supporting big developers, there could well be more reliance on small developers – many of whom rely on bridging finance – to help meet housing targets.
Duncan Kreeger, director of West One Loans, says: “The housebuilding measures announced in the Autumn Statement will hopefully go some way towards making up the shortfall between the supply of homes in this country and the demand as the rate of construction in this country hasn’t kept pace with a rapidly rising population for some time now.
“But while it is encouraging to see the Government is aware of how pressing the housing supply shortage is and has increased the amount of funding as a result, this won’t solve the nation’s problems overnight. Building hundreds of thousands of homes won’t happen just a result of Governmental funding and other sources of finance will be necessary to help plug the gap. Bridging finance has been a valuable source of funding for development and refurbishment in the past few years and has a role to play in meeting these ambitious new targets.
“Given the attacks on landlords at the same time as the housebuilding measures were announced, the Government is potentially hindering the property market as much as it is helping. Buy-to-let has helped keep the housing market out of the doldrums in recent years and is a vital part of a sustainable system. If property investors don’t support new developments, the Government’s support on its own won’t be enough and bridging finance will become more valuable than ever.”
Trends in the Bridging Industry
Typical loan sizes have also adjusted slightly after a concerted period of increases, with a spate of smaller deals lowering the overall average. This average now stands at just over £700,000 for the two months to the end of October and £630,726 for the 12-month period.
Duncan Kreeger adds: “Over the past few years, typical loan sizes have grown and grown as the short-term finance sector has evolved from simply a tool for individuals to a valued source of finance for developers and businesses.
“But it has never forgotten its roots and smaller loans remain the bread and butter of a sector that prides itself on speed and convenience. To paraphrase the old tradesman mantra – no loan is too big or too small.”
Bridging Interest Rates
Despite intense competition among bridging lenders, average interest rates have held fairly steady throughout 2015, edging down slightly to 1.14% in the two months to the end of October. This is just below the 1.15% averaged over the 12 months to the beginning of November.
Investing in bridging remains an attractive proposition compared to many other alternative investments and currently enjoys a monthly return 0.96% higher than that available from investing in 10-year Government bonds.
This spread has narrowed over the past few years and was as wide as 1.5% at the beginning of 2009, but bridging still comfortably offers more lucrative returns for sophisticated investors.
Danny Waters, Chief Executive of Enterprise Finance, concludes: “From a broker’s perspective, 2015 has been another productive year for the short-term finance sector as demand for bridging loans continues to rise. Developers, businesses and individuals now view bridging as a trusted source of finance and know that where speed is an issue, the reliability of short-term finance can be the difference between a project getting off the ground or not.
"Intermediaries have been spoiled by some of the products and rates on offer this year, but headline rates aren’t the be-all and end-all and quality of service, speed and flexibility are all important considerations when deciding where to place a case.
“Investors have also fared well given some of the returns on offer this year. Given the ambitious housebuilding targets the Government has set for the coming years and the variety of ways that bridging finance can help satisfy this demand, there is every reason to expect the bridging sector to continue to perform strongly for the foreseeable future. Tighter regulation, improved standards and ongoing education of intermediaries has set the sector on a sustainable path of growth.”