Cast your mind back 10 years to when bridging was a tiny niche market dominated by wealthy private individuals and a few lenders long since disappeared. Remember Cheval, Drawbridge or Tiuta?
Fast-forward to today and gross lending in the short-term sector has passed £3bn — more than triple its size in 2007.
This growth is phenomenal. According to ASTL figures, outstanding short-term lending balances total £3.5m. To put this into perspective, the latest estimates from UK Finance put gross buy-to-let lending for 2017 at £35bn. Short-term loans are now equivalent to 10 per cent of longer-term investment mortgage lending.
In 2007 — the year BTL lending hit its peak — gross BTL advances were £45.7bn. Bridging was estimated to be less than £1bn, exact figures back then being unavailable. The most common reason to use short-term finance, meanwhile, was the traditional bridge between buying a new primary residence and selling the old one.
While this type of bridging — today fully regulated — remains significant, short-term funding is now used regularly to buy at auction and fund both light and heavy refurbishment projects as well as to complete started developments. The exits for these deals are invariably sales to BTL investors.
However, even as the volume of BTL lending has fallen, bridging has grown. Why? The shift in dynamic shows us several things about the short-term market, not least how much more professional it has become.
Consider the number, size and credibility of today’s major lenders, many of which are publicly listed banks in the FTSE 250. Also look at the headline rates widely available. Time was that a sub-2 per cent monthly rate was something to shout about. Now rates can be found below 0.5 per cent.
This market is ripe for further investment
Lenders have become more professional, products more sophisticated (in their marketing, at least) and the sector is far more competitive. Previously, bridging had a reputation for blurring into some rather shady corners, but now it is considered mainstream and a highly reputable and valued source of development and investment funding. Networks have panels for their ARs to refer short-term business to — inconceivable 10 years ago.
There is perhaps another factor: where in the past increasing BTL lending fuelled growth of the PRS, now cash buyers are more prevalent. Similarly, the professionalisation of BTL has meant more landlords have lowered their blended LTVs, and cut debt ratios on individual properties. This, partly, accounts for lower BTL lending value, but also explains why bridging is now equivalent to a larger proportion of it. The short-term sector has established itself as a vital source of pre-BTL funding. Investors are using it to improve stock badly needed in the PRS, which is supporting values and helping to keep landlords’ debt ratios down.
Bridging has grown because it has adapted to the changing needs of borrowers. It has created a market where previously there was none. It is widely debated whether there is further growth potential. But we have proved the naysayers wrong before. Just as we have found new markets in the past — namely landlords — so we will do so again.
The next phase has already begun. Development appetite, fuelled largely by exorbitant house prices in London and the South-east and downward pressure on yield resulting from the reduced tax relief on BTL mortgage interest, has started spreading northwards. This market is ripe for further investment.
Lucy Hodge is managing director of Vantage Finance