Pricing, risk and process are key to catching the eye of brokers.
It feels like a new bridging lender is launching every week. Most recently, City of London Group unveiled Property and Funding Solutions and I have had more than 20 other new players request to be added to our panel in the last six months.
We carry out due diligence on each but most are not accepted. Not due to credibility, funding and experience but because they do not offer anything of value when compared to the existing panel.
I am not expecting new entrants to challenge on “starting from” rate as we appreciate most are unable to compete with pricing as low as 0.43 per cent per month. However, we are not adding any privately funded lenders that want 1 per cent per month for 70 per cent loan-to-value gross. We could place this with more than 25 players.
We look to add new lenders for three reasons: pricing, risk and process. In some circumstances, a new lender will provide enhancements for all three but it is becoming increasingly difficult as pricing continues to fall.
Our most recent addition is one headed by the former boss of credit at a large bridging lender, recently turned bank, which offers excellent LTV pricing, a quick credit decision and efficient application process. Pricing is available from 0.65 per cent at 75 per cent LTV and both light and heavy refurbishment can be considered.
One risk area to have suffered in the last two years is prime central London, with available LTVs tending not to exceed 60 per cent.
Savills recently reported values in this sector had fallen 1.1 per cent on the previous quarter and 16.7 per cent compared with September 2014. Lenders are clearly applying caution until sustained recovery and increased liquidity returns.
One risk area to have suffered in the last two years is prime central London
That said, we have recently added a new lender, backed by a billionaire investor, which shares a different view: it is willing to advance up to 70 per cent on prime central London property, even for high-value single assets with no maximum value or price per square foot.
We were initially cautious about performance but, having completed a number of large transactions, we now have confidence in delivery.
Bridging borrowers have never had rates so good but lending below 75 per cent has seen a disproportionate reduction in interest rates compared with above this level.
This makes sense. Banks with low cost of funds are able to profit pricing at 0.43 per cent per month but most lenders are funded by private or institutional money and require a minimum rate of 0.65 per cent.
In most instances, the highest rate for tier 1 lenders (the likes of Precise and Shawbrook) is the lowest price for tier 2 or 3 lenders, and the point in which they cross is 70 to 75 per cent LTV, as this is where risk appetite for bank lending stops.
At this level, tier 2 lenders can currently compete on pricing for the risk; otherwise, they can only compete through speed, process or more flexible underwriting.
With this in mind, the last year has seen a handful of players emerge that cater for higher LTV lending – typically, 80 per cent LTV gross but sometimes even more.
Apex and Aspen lead in this space, with 80 per cent LTV rates starting from 1 per cent per month, refurbishment accepted and loan sizes up to £1m. This is a smart strategy. Both will be able to showcase themselves to a wider audience and hopefully convince more brokers to use them for lower risk business.
The middle market for risk is a precarious place to be for new entrants, unless they give serious thought to how they are going to provide some form of improvement to the market.
Low LTV prime bridging has been largely cornered and a number of established lenders now provide loans to 75 per cent.
New entrants should consider all active lenders and every aspect of risk, process and pricing to ensure the proposition adds value. Intermediaries have a huge amount of choice and it is increasingly hard to disrupt long standing relationships to win origination, unless brokers are given a good reason to do so.
Chris Fairfax is managing director of Positive Lending