The mainstream mortgage market is defined by products. Fixed or variable. One charge or two. One property as security only. Bridging however cannot be accused of the same thing – while historically it was a short-term facility secured against one property to enable the purchase of another, over the past few years short-term lenders have been flexible and quick to respond to client demands and the way they have changed. With regulation now dictating that customers are given a solution that fits their needs rather than a product that providers wish to sell, the short-term market is beginning to tailor solutions to fit what clients want.
Rather than respond to a client who comes into the office purporting to want a bridge, a development loan or a buy-to-let – brokers now have the wherewithal to provide bespoke solutions that cater to clients’ actual needs rather than what they perceive they want.
As little as six years ago the bridging market was filled with fairly homogenous lenders offering finance at rates between 2% and 2.5% a month. Residential bridging was the golden goose and very few were interested in commercial deals.
Bank funding into the sector had all but dried up and the flood of money now on offer had yet to begin. Today the market is very different: challenger banks and building societies have entered the fray, private equity, hedge funds and high net worth investor money is fighting to get out the door and bank funding is back.
With most in the industry agreeing that the traditional short-term market has a limit, competition for the best deals has forced rates down and lenders to diversify. It is beginning to feel as though the market is on the cusp of a watershed: no longer a cottage industry, short-term funding backed by property and other assets is not just burgeoning, it is filling the void of funding available to SMEs, developers and investors.
“The concept of bridging was understood by the wider public as a means to purchase a property before selling your existing one and to those involved in bridging, as an asset-based lend,” explains Lucy Hodge, director of Vantage Finance.
“But bridging loans have strayed into other areas with the most notable being refurbishment and development. Lenders have found ways to make bridging more than a straightforward bridge and have created hybrid products such as bridge-to-let, development bridging, light to heavy refurb products and everything in between. The pricing gap has also closed significantly making the option of bridging far less expensive and well worth considering when you combine that with the flexibility it can offer.”
Innovation and diversification
The number of lenders that have entered the sector in recent years is considerable and it is this which has driven innovation. “These days, as any lender will tell you, there’s not a huge amount of elbow room and so for lenders to look into new areas was inevitable,” explains Mark Posniak, managing director at Dragonfly Property Finance. “At Dragonfly, we have never thought of ourselves as a bridging finance provider anyway, as that’s simply not reflective of what we do. We’re a specialist property lender or, more broadly, an alternative finance provider. So for us broadening our proposition was always part of our roadmap.”
What are the areas benefiting from traditional bridging lenders’ forays into other niches – increasingly dubbed “specialist finance” solutions?
“Clearly we have seen a lot of innovation in recent years but I think one thing that is often overlooked is how lenders have started to settle down into specific areas,” explains Darius Shekarrizi, senior relationship manager at First 4 Bridging. “For example, some will favour a certain geography, others will prefer such and such an asset as a security, others will have grown a development or buy-to-let bias. This increased delineation has really benefited brokers and master brokers as it means we immediately know which lenders will have an appetite for a certain loan and which won’t – there’s a lot more clarity and certainty.”
While there remains a perception is that bridging loans are often taken out by individuals looking to move house or as a temporary measure when buying a property at auction, data supplied by Aldermore from Q1 2015 shows that almost seven out of every 10 bridging loans were unregulated, indicating a high proportion are being used in a commercial context.
“As the market continues to evolve and grow, the catch-all category of ‘bridging lending’ is likely to need to become more nuanced in order to accommodate the increasingly bespoke products now on offer, as well as differentiate between lenders according to the emphasis they place on different aspects of process and service provided,” explains Charles Haresnape, group managing director, mortgages at Aldermore. “Aldermore offers a bridge-to-term product which allows customers to secure short-term finance while making preparations for an exit onto a more sustainable mortgage product for example.”
Amicus is one lender that has made diversification central to its strategy. “There are opportunities across a diverse range of product propositions as can be seen by the growth of the Amicus Group proposition with our partnership with Norton Folgate and the launch last year of Amicus Commercial,” says Keith Aldridge, managing director at the lender. “Under these brands we have extended the group influence to embrace asset leasing, vehicle finance, asset finance and small business finance across a much broader range of funding needs. We have a long-term strategy that will see a combined approach to supporting a broader range of brokers who wish to diversify their proposition and who with our support will be able to see the opportunities that these other markets can bring.”
Among the proliferation of “products” ranging from light and heavy refurb, bridge-to-let, lease extensions, capital release and auction finance is an increasing appetite to lend against developments starting from the ground up. “Development finance is currently the area to watch,” says Shekarrizi. “It will be interesting to see if, from April onwards, we see some money that would otherwise have gone into buy-to-let starts finding its way into smaller development opportunities.”
Currently there are only a few lenders doing development in a meaningful way at volume.
“Not many bridging lenders offer true development finance in the sense that lending is drawn against cost and monitored through a quantity surveyor process, and many will not do ground up development which is seen to be the biggest risk,” says Hodge. “Those who have strayed into the heavy end of development have employed resource with the relevant skill set and knowledge, and it is knowledge of building and development not just lending that is key for any lender in that space.
“Clients have benefited from more choice and the ability to fund what they may otherwise not have been able to. This naturally has created more opportunity for the broker community who can effectively market and sell these products to their client banks.”
Posniak agrees and reveals that this is the area Dragonfly is focused on growing this year. “For us, right now, development finance offers a major growth opportunity. Structural issues within the market, namely the extreme lack of properties being built, have really seen investor demand strengthen in this market. With landbanking still a significant problem among the major developers, it’s the small and medium-sized developers who have the appetite to build. Clearly, we’re there to accommodate them and are able to provide end-to-end solutions, comprising both bridging and development finance.”
Last year Amicus appointed an in-house quantity surveyor to provide more streamlined service in this sector specifically. “Like many lenders our development business has increased significantly in the last six months and we believe it is not coincidental that such growth has come since we established a specialist field development team including the appointed of an internal QS,” says Aldridge.
“The team has a wealth of knowledge that has certainly made the process much smoother and from the feedback we have had from our developer partners, something that they have certainly welcomed.”
Commercial developments is another area brokers agree has significant potential this year. “Commercial remains a massively untapped sector and I would expect it to go from strength to strength, at least at the lower end of the market, given the recent stamp duty changes announced in the Budget,” predicts Posniak. “The 3% surcharge on buy-to-let is also likely to see more money be redirected into commercial. It’s a sector that I expect to grow substantially in the medium-term, and clearly we’ll be there to accommodate the demand.”
Shekarrizi agrees. “Permitted development rights on office-to-residential being made permanent could have a pretty significant impact on the market,” he says. “We could start to see a lot of activity in this corner of the market in 2016 and beyond. Although the stamp duty payable on commercial property has risen for higher end properties, this is still a market with a lot of potential.”
So far so good but there is still room for improvement argues Chris Fairfax, managing director at Positive Lending.
“The market does still need to see increased flexibility from lenders in areas such as lending to offshore limited companies, lending on houses in multiple occupation and on student lets and lending to applicants aged over 80,” he says. “I would also like to see a reduction in the assessment of bank statements and income – particularly at low LTVs where sale of property is the exit strategy.”
Broker says no
Given the speed of change in the specialist market there are those who are concerned that not all brokers have an adequate understanding of how each type of finance can be used in tandem to complete a deal. If a short-term or complex deal opportunity comes across their desks, it can be a case of “broker says no” when in fact there are options out there.
“In general I think understanding of multiple funding sources is poor,” says Fairfax. “Packagers and commercial brokers are most likely to understand multiple funding sources such as second, bridging, asset finance and invoice finance because they tend to be larger and have multiple specialist departments.”
But just because a broker hasn’t done complex deals before isn’t an excuse. “Brokers should be aware of all the options, otherwise how are they going to be able to advise their customers of the best finance route to follow?” questions Hersch. “Understanding that there are options available and that the traditional route isn’t the only route is a key driver when it comes to ensuring best advice.”
Specialist distributors are increasingly taking care of this knowledge gap – Sesame and PMS announced just last month that they had appointed a panel of specialists to aid their members when trying to help clients solve more complex needs, broadening access to second charge mortgages, residential and buy-to-let packagers, commercial mortgages and bridging loans via Promise Solutions, 3mc, AToM, CFB UK, Enterprise Finance, Mortgages for Business, Positive Lending, TBMC and Vantage Finance.
“We have seen a steady rise in demand for specialist lending solutions as firms look to cater for an increasingly diverse range of customer needs,” explains Jane Benjamin, head of lender relationships at Sesame Bankhall Group. “Until now advisers have had to work across a wide range of different providers in order to access the products they need for their customers. The specialist lending panel we have launched will provide an all-encompassing solution for advisers and their customers.”
Sesame is not the only business to recognise the need for specialist finance: in the past 12 months Crystal Mortgages has rebranded to Crystal Specialist Finance and refocused its business across bridging, commercial, second charges and development funding; both LendInvest and Brightstar Financial have opened a specialist development finance division specifically focused on helping brokers secure complex funding for deals most short-term lenders have been reluctant to take; and Vantage Finance went on a hiring spree to meet growing demand in the specialist sectors.
Aldermore meanwhile is set to hold a session entirely dedicated to educating brokers about the growing spectrum of products on offer in specialist finance in April at Mortgage Business Expo.
The latest figures from West One Loans claim that gross annual bridging lending tipped through the £3.5bn barrier in 2015 equating to £13.9m worth of transactions each working day in 2015.
And, claims the lender, the so-called bridging sector is now expanding significantly faster than the mainstream mortgage market, which only grew 8% in the whole of last. Despite the growth, the bridging sector is still only worth approximately 1.5% of the traditional mortgage sector which was valued at £220bn in 2015, meaning plenty of scope for further expansion.
Ultimately those who have been in the industry the longest say the explosion of new lenders, products and offerings in what can now only really be described as specialist finance has to result in consolidation. To an extent this process has already begun with lenders such as Amicus acquiring asset finance business Norton Folgate as part of its own strategy to diversify away from pure bridging.
“There is a need for consolidation as many of the changes have been costly for lenders which have needed to spend money on IT systems among other things,” explains Hersch.
“Some changes have been driven by regulation, particularly with regard to presentation of offers, affordability checks, etc. The voluminous statistical reporting requirements, however, have imposed a burden on smaller firms with less sophisticated MI systems.”
Hodge agrees: “I think the specialist finance market will continue to evolve and flourish with time, and we will see some consolidation as well as lenders entering new markets giving them a wider spectrum of products under one roof.”
Gary Clark, senior business development manager at LendInvest, says it will come down to a simple reality. “The lenders that only offer bridging loans will struggle as the market moves forward,” he says. “Conversely the lenders that move towards longer-term products and some development finance are likely to be the ones that gain any scalability and future growth. Such diversification will enable lenders to offer more competitive rates on their traditional bridging products than those who stick solely to bridging as their business.”