The West One Bridging Index shows a huge rebound in bridging lending since 2010’s post-crash slump of £700m, rising 500% to £3.5bn in 2015. It’s true that residential was historically bridging’s bread and butter, and today it remains significant at 55% of lending.
Consequently, the rebound in bridging has in some part followed the recovery in the residential housing market. In addition, buyers of unconventional properties or properties needing substantial renovation often require a short-term stop-gap before obtaining a full mortgage, so a bridging loan is the obvious choice.
However, what’s also clear is that brokers and lenders have become more creative in applying the advantages of bridging’s flexibility, to solve a broader range of customer challenges. This has driven a rapid expansion of commercial applications for bridging.
Most obviously, this applies to the auction market, as amateurs and professionals seek property investment opportunities. Out-and-out commercial property transactions are also involving bridging more often. And bridging is increasingly extending into small businesses using it as an alternative source of short-term business borrowing.
The significant increase in homes bought at auction has been a major contributor to bridging growth. The total value of properties sold at auction has risen by approximately £800m since 2013 and this trend looks to continue in future. The 28-day completion period for auction purchases is too short to get a high street mortgage, so bridging lenders continue to benefit.
In the commercial property market, bank lending remains constrained at about half its 2009 value – £135bn, according to MSCI. Bridging lenders stepped in to help rekindle this market, providing additional capital to purchase commercial property or complete construction. Short-term finance secured against commercial property now makes up about 45% of the market.
Commercial property prices have now risen 21% since their trough in 2013. With cuts to commercial stamp duty announced in this year’s Budget, coupled with reheated demand for office space in central locations, we anticipate significant growth in bridging loans for commercial property.
Small businesses provide the most interesting market development. After the credit crunch, we saw the government desperately trying to push liquidity into the big banks, to get credit moving again to SMEs. Regrettably, the banks used that money to shore-up their balance sheets, meaning little reached small businesses.
In desperation, entrepreneurs have looked elsewhere for funding and bridging lenders stepped in to give these firms the financing to invest behind growth – now making up around £620m of the £3.5bn bridging market.
Looking to the future, we believe that regulation will help make current growth sustainable and healthy. The introduction of the MCD means some bridging loans will now come under FCA supervision, and brokers who only provided regulated products will now be able to recommend bridging to their clients. It reinforces responsible lending practices.
With the new rules in place, the future looks bright for bridging, as lenders blaze a trail through new areas with an enhanced reputation.