Pricing for low-LTV, residential bridging has reached inertia after a string of downward corrections last year. It is unlikely to fall further
The problem with predictions is that they tend to be full of optimism, particularly at the start of the year when company metrics reset and an opportunity exists to deliver record-breaking sales.
But it is crucial business leaders critically analyse projections with relevant data to offer a reasoned judgement. Thoughtless, unsupported market-making is annoying.
With this in mind, I offer you my thoughts on how the rest of this year might unfold within short-term lending.
I read recently that Masthaven sales director Richard Deacon expects certain bridging lenders to offer pricing from 0.2 per cent for low risk, vanilla, residential bridging loans.
Deacon is a very experienced industry veteran, so his comments would have been made from a position of knowledge. Perhaps Masthaven is due to shake-up the low loan-to-value residential market?
The truth is, I cannot see this happening without a serious threat introduced by a new lender. Excluding a couple of building societies, pricing for low LTV, residential bridging has reached inertia after a string of significant downward corrections last year. The outcome of this is that all lenders now offer virtually the same pricing for low LTV lending at circa 0.5 per cent per month.
If lenders were to offer rates at 2 per cent per annum, bridging would no longer represent specialist lending. The rate would not be reflective of the risk.
Given the short-term nature of loans, capital requirements, need for specialist operations for processing and limited market size, I would be very surprised if rates dropped significantly. I do expect small reductions as lenders compete for prime, low LTV loans, but reductions will be much smaller than seen last year.
Meanwhile, a recent poll from the National Landlords Association suggests 20 per cent are considering selling one or more rental properties in the next 12 months. The Council of Mortgage Lenders has also cut its forecast for buy-to-let lending from £38bn being lent in both 2017 and 2018 to £35bn in 2017 and £33bn in 2018.
Buy-to-let investors are avoiding direct property investment as a result of tax changes and loss of mortgage interest relief. Experienced investors seeking indirect opportunities may consider participation within short-term lending via a number of different platforms and this year should see a significant increase in capital to these platforms.
With no meaningful rise in market size, I expect peer-to-peer platforms will attract capital at lower interest resulting in lower rates to borrowers for mid to high tier risk. Other lenders will need to compete.
Prediction: Prime, low LTV bridging rates to fall slightly (maximum of 10 bps per month); mid-to-high LTV residential, semi-commercial, commercial to fall.
No reliable data exists for gross lending with short-term lending and bridging finance is unpredictable by nature. However, I expect residential property purchases to be lower than 2017 due to a slowdown in buy-to-let activity but capital raise activity to be higher due to a decrease in residential property liquidity. Multi-let purchase activity will increase.
I expect commercial and semi-commercial purchase activity to be higher in 2018, as investors seek higher yields if they are to invest directly in real estate.
Prediction: Small decrease in gross lending for residential bridging finance; increase in commercial and semi-commercial bridging activity.
Lenders and distribution
We are privy to a number of small lenders preparing to enter the market this year. Mostly funded by private sources, they will offer very little to improve on products, pricing or processes currently available. Each anticipates growing relatively modest loan books with a view to make high risk adjusted returns on equity.
We are not aware of any meaningful new entrant that will create a need for existing lenders to dramatically increase risk or change pricing.
I do not expect any lender to withdraw from the market in 2018 but I believe small, tier 3 risk lenders will struggle to originate this year, as tier 2 lenders increase risk profiles to accommodate tier 3 risk but with lower pricing. These tier 3 lenders will continue to trade but with reducing loan books or they might seek to further increase risk to maintain or grow lending.
Prediction: No major new entrant, smaller lenders will struggle to originate as larger lenders, with lower cost of funds, increase risk.
Should gross lending remain flat but more capital be available, I expect risk will increase. This will likely be manifest in tier 2 and 3 lenders increasing LTV for all property types.
Residential lending at 80 per cent is currently available but via a handful of lenders. It is quite possible lending at 80 per cent will become more available. I also expect higher LTV for semi-commercial and commercial lending. Currently, 75 per cent is the upper limited but it I expect 80 per cent will be introduced this year.
Bank lenders raising funds through retail deposits will seek to maintain current risk or possibly reduce for higher loans and where security is high value single asset.
Prediction: Overall market risk will increase for all property types but this will still be driven by perceived liquidity.
Lenders unable to compete on pricing might seek to reduce other fee lines to improve overall cost. This could be achieved through dual representation or increased use of drive-by and automated valuations.
Prediction: Increased use of AVMs and dual representation.
Chris Fairfax is managing director of Positive Lending