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Bridging Watch: Due diligence will reap rewards in tough times

With both the property sector and the economy in retreat, extra due diligence on less experienced specialist lenders will be worth the effort

The UK economy is having a tough time. The latest data from the Office for National Statistics showed growth of just 0.3 per cent in the second quarter of the year. This followed a similarly underwhelming 0.2 per cent in Q1.

To add salt to the wound, the International Monetary Fund has downgraded its growth forecast following what it calls the UK’s “tepid performance” in 2017 and ongoing uncertainty around the full impact of Brexit.

Although this is not 2007/08 all over again, real cracks are starting to appear.

Unsurprisingly, clouds are forming over the property market. The major indices all show house prices falling slowly but steadily, with London values looking vulnerable. That Foxtons, over the summer, announced a 64 per cent fall in profits for the first six months of the year says all you need to know about the state of the property market in the capital.

The concern, too, is that stubbornly high inflation is making more likely the first rate rise in years. Such a rise would deliver a significant sentiment shock, even if – as most believe would happen – the interest rate upcycle was handled with kid gloves.

Testing environment

All in all, it is an increasingly testing economic env­ironment — not just for borrowers but for specialist lenders too.

In recent years the number of bridging lenders has rocketed as investors were drawn in by the potential for strong returns. The worry is that, to date, many lenders have known only a buoyant market — or one that was, at worst, benign. With both the property market and the economy in retreat, however, the rules of the game are about to change, and brokers need to be vigilant.

It could be time to do a bit more due diligence than normal; after all, we are entering a market that could catch out less experienced specialist lenders. Some simple questions now could prevent harder ones later.

For example, have the lenders you’re considering been through an economic bad patch before? If so, how did they operate in that climate and, more importantly perhaps, how did it impact their lending volumes? Was it ‘Business as usual,’ or ‘Head for the hills!’?

Also, how strong are lenders’ funding lines? Are the investors in it for the long haul or do they regard specialist lending as a short-term opportunity? If the latter, they may lose their appetite quickly if economic conditions and the property market deteriorate further, which could restrict lending volumes, see 50/50 decisions go against you, and result even in loans being called in.

Be sure, too, to question the lender about its historical default and loss rates; they reveal a lot. And how, deep down, do you rate a lender’s risk anyway? How confident are you in the lender’s credit team?

In the mad rush to gain market share and reduce rates — the dominant narrative of the bridging market in recent years — has risk been overlooked, not to mention priced inappropriately? And could this come back to bite lenders if the economy and the property market went from bad to worse?

It is by no means panic stations; but it could be worth taking a broader look at a specialist lender before introducing a client. You’ll have a good sense of whether that lender will ride out the market if things take a dive, or end up in deep water.

If in doubt, however, the short-term inconvenience that comes with a bit of extra due diligence could help avoid some longer-term pain.

Jonathan Samuels is chief executive at Octane Capital


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