The shockwaves from the Leave result reverberated around the world’s stock markets and foreign exchanges. Several large commercial property investment funds saw temporary suspensions amid the turbulence. The subsequent political earthquake is still sending tremors through Westminster and the City, even as Theresa May settles into Number 10.
And yet this is different from the fall-out of the Lehman Brothers collapse and the freeze in the business world through the end of 2008. Markets have rallied and even Sterling has shown some resilience as political and economic stability returns.
Though concerns of an immediate housing market slowdown persist, organisations such as the Council of Mortgage Lenders are more cautious in their expectations of a downside. And as the dust settles from the immediate aftermath of the Brexit vote, in specialist property lending there’s a sense that business is still going on.
At West One, we remain open for business. We are still applying the same underwriting standards as we were before June 24th, including loan-to-value tests and rigorous assessment of exit strategies necessary for prudent bridging lending.
And we’re still seeing a healthy flow of good quality deals as a result. We’re seeing continuation of monthly lending levels in the region of £40m – within the last week we completed a £6.7m deal with a client, secured on three properties.
Our view then, is that business is being done and the bridging market continues to move forward. That’s not to say there hasn’t been any turbulence. Some brokers we do business with have seen deals cancelled, but others have seen new deals being generated as a result of disruption of conventional property finance.
On balance then, while we might anticipate less powerful growth in the coming weeks than we have reported through our West One Bridging Index, there is still plenty of good quality business to be done.
The fundamentals of the property market provide solid grounds for optimism: there aren’t enough homes to meet demand and low (and possibly lower) interest rates make borrowing cheap. On top of that, the weak pound is making the UK more attractive to foreign property investors looking for bargains.
For bridging finance specifically, there are fundamentals of needs to consider. There are borrowers in circumstances that still need fast or flexible property finance. Small property developers can make a profit converting uninhabitable properties to be sale ready – even in a softer residential market – but a high street mortgage isn’t appropriate; home-buyers may be seeing more broken property chains in this disrupted market, which bridging can help solve.
For example, on 13th July, we were at our partner Barnet Ross’s property auction. With a lively auction room, 87 per cent of lots were sold. Properties of all kinds were still selling at or even well above estimates: £321,000 vs £150,000 reserve for an Essex residential property or £2.32m vs. £1.25m reserve on a Luton commercial deal.
With fast bridging finance a powerful tool for auction buying, given the typical 28-day completion timescales, there are clearly opportunities for bridging lenders. It’s this direct connection to the real market, in addition to our internal deal data, that gives us confidence in the future.
Nevertheless, deal flow alone isn’t enough. It needs to be good quality. With some price softness anticipated in central London commercial property and the wider residential housing market, managing LTV is key to prudent lending. The West One book has LTVs at around 60 per cent, which gives sufficient headroom for borrowers to manage a lower valuation than expected and still repay the loan.
This is why we are continuing to apply the same underwriting standards. Further, we continue to make careful assessment of exit strategies – how the loan is expected to be repaid. The experience of our team, who are property people as much as lenders, means we’re able to assess the practicality and reliability of a borrower’s exit strategy. It’s this combination that ensures the quality of deals done. With diversified funding from partners committed to the long-term, we expect to continue this ‘as is’ approach going forward.
Looking to the longer-term, and considering the sustainability of business in the bridging sector as a whole, taking a little heat out of the property market may well do some good. When the property market is hot, some lenders get tempted to cash in and take undue risks, like lending at higher LTVs on the assumption of price rises.
Some businesses will stop lending as they reap the whirlwind of excessive lending over the last 12 months – or because their funding models aren’t sufficiently robust. Brokers and mortgage introducers should consider this carefully when placing business.
However seismic the decision to leave the EU has been, what’s becoming clear to us at West One is that this is a very different post-shock world than 2008. The bridging market has been far more resilient and continues to be much more active than it was then, and the fundamentals support continued opportunities. Well-capitalised and disciplined lenders are well placed to thrive during this post-Brexit uncertainty.
Danny Waters is chief executive of West One Loans and Enra Group