The property market, as Mortgage Strategy readers know well, is in a deep rut of low single-digit price growth. Very low. The latest house price data from Nationwide showed annual price growth of just 0.6 per cent in May – the sixth month in a row it has come in at under 1 per cent.
Against such a bleak backdrop of low growth and transaction levels, you would expect the bridging finance sector to be feeling the pinch, too. But nothing could be further from the truth. As ever, bridging remains buoyant, reaffirming itself as an industry than can thrive in all market cycles.
Here at Octane, just as at many other specialist lenders (having had conversations with them at countless industry events), sales and risk teams are under a huge amount of pressure. Demand is strong for all loan categories, but some sub-sectors are proving particularly active.
Refurbishment bridges are a case in point. Whether light or heavy, the popularity of refurbs with portfolio landlords has soared during 2019 to date. The reasons for this, in our experience at least, are twofold.
On the one hand, the brutal tax regime landlords now find themselves operating in means they have to manufacture value, and one way for them to do this is to reinvent their portfolios. There is, consequently, a lot of change of use – or heavy refurb – activity in the market at the moment, with houses converted into multiple units and bigger houses, once planning permission is secured, transformed into houses in multiple occupation.
HMOs offer particularly strong yields and so, in the current environment – with margins under pressure – it is no surprise lenders are seeing more finance requests for HMO conversions.
The other reason why the bridging sector is seeing a lot of refurb activity at present is the game-changing growth of the private rented sector. To cut a long story short, PRS has upped the bar in the rental market significantly and is putting massive pressure on professional portfolio landlords to up their own games.
It is a huge threat and one that is coming at scale. I read a piece of research by Knight Frank a month or so back that was forecasting that no less than £75bn of investment would be committed to the UK PRS sector by 2025. Even if the real amount proves to be just half of that, it’s a jaw-dropping estimate and should make it very clear to landlords precisely how big the threat from PRS is.
The result? To remain attractive alongside the escalating number of lifestyle PRS developments, which are increasingly favoured by millennial tenants, landlords are having to inject a lot more panache into their properties. Refitting and modernisation are therefore also vital, hence the surge in demand for light refurb bridges.
The long and the short of it is that people who have resigned themselves to renting for life because of affordability problems are no longer prepared to accept shabby or average accommodation, and refurbs are landlords’ way of staying in the game and adding some all-important gloss to their units.
All in all, the bridging finance industry halfway through 2019 is in a decent position. Yes, a lot of business from amateur landlords is now missing, but that has been more than made up for by professional landlords who are doubling down through acquisitions while prices are low, and through refurb activity – lots of it.
And even with a no-deal Brexit looking much more likely, I do not expect the market to lose momentum, as with chaos comes opportunity – and if there’s one thing not in doubt it is that the kind of investors using bridging finance thrive on opportunity.
Matt Smith, director of risk, Octane Capital