Stronger permitted development rights and tough energy efficiency standards should help to stoke demand for bridging finance
The revelation in the Spring Statement that the government has spectacularly failed to keep its promises where housing is concerned should probably not have been a great surprise. But to announce that it had failed to build a single starter home to date should have left the people responsible hanging their heads in shame.
Once upon a time, this may have been the grounds for a ministerial resignation, but in these days of single-focus politics, it is just one more non-event. It seems that until Brexit is sorted, there really is little or no focus on anything else. That said, the chancellor did announce a number of tweaks to permitted development rights and energy performance measures that will affect property investors and developers, and may well further increase the demand for bridging loans.
Fortunately, the UK is full of entrepreneurs and where the government has failed, there are many individuals and small companies who are stepping in, either to build small-scale developments or to refurbish or change the use of existing properties to help provide the accommodation that our country is crying out for.
It is certainly for this latter group of people that bridging finance is providing a bedrock to enable them to carry out the work they need before either selling or refinancing on to longer-term mortgages.
It is for these people that the chancellor’s announcements in the Spring Statement will be most welcome, with proposed changes to permitted development rights to allow an upwards extension of some existing buildings to create new homes.
Permitted development rights were originally introduced in 2015 to enable developers to convert offices and commercial property into residential sites, with minimal planning permission required. Now, the proposed extension to the scheme will not only enable certain residential and commercial properties to be extended upwards, but will allow commercial buildings to be demolished and replaced with residential units. Any significant property refurbishment is likely to drive the demand for bridging finance as the most practical and cost-effective way of modifying a property over a six- or 12-month period.
The need for bridging finance is also likely to increase with the announcement of the Future Homes Standard. While this is initially aimed at ensuring all new build homes are energy-efficient, it is in reality very closely linked to the energy efficiency measures aimed at landlords that were brought in last April.
Since this time, we have already seen an uplift in the number of property investors needing bridging finance in order to upgrade their rental properties to reach the minimum ‘E’ rating on an Energy Performance Certificate. This is either when they have just bought a property they intend to rent out or prior to tenancy renewals.
The need to achieve a minimum ‘E’ rating will be extended to all existing tenancies from 1 April 2020. This means landlords have just one year to upgrade their properties to the required standards. Those planning ahead may well be looking for finance to carry out this work in the next few months. If the work results in an uplift in the property value, it makes sense for the investor to use a bridging loan to carry out the work and then refinance on to a longer-term loan. If the work has then increased the property value, they may well either be able to borrow more on the long-term mortgage or benefit from a lower rate of interest and therefore reduce the LTV.
It is not beyond the realms of imagination to suggest that these rules will be further tightened over the next few years so what we are seeing here becomes just the start of energy efficiency improvements.
Landlords and investors are easy targets for the government where this is concerned. It would be almost impossible to bring the same rules in for homeowners. The EPC packs when selling a property highlight the differences in energy efficiency between properties, however, and so may well also drive the need for more home improvements. It is conceivable that a bridging loan will increasingly be used for these property improvements, prior to the loan being cleared by the sale of the property.
Be it to create more homes or to raise the standards of new or existing stock, it is the case that bridging finance is increasingly the tool that is used to support this.
Jonathan Sealey is chief executive at Hope Capital