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Bridgingwatch: While base rate remains low, bridging returns are opposite

While the base rate remains low (for how long is anyone’s guess), the returns bridging loan investors are getting are the polar opposite  

Waters

To start on an evergreen subject, when exactly are interest rates finally going to rise?

In the absence of any definitive response from governor Mark Carney and his colleagues at the Bank of England, who seem to change their minds with every dataset, what do people in the short-term finance industry think?

A survey by the short-term lender United Trust Bank, published earlier this month, says 51 per cent of bridging loan brokers believe the base rate will stay at its current level until at least mid-2015. One in 10 brokers believe that rates will not rise until 2016 or later.

With the recent Office for National Statistics announcement that wage growth is stagnating at 0.6 per cent, the slowest since records began in 2001, I would not be surprised if the number of short-term brokers predicting rates will remain static until 2016 or beyond rises even further when United carries out its next survey.

With inflation at 1.9 per cent and wage growth falling (now halved to 1.25 per cent for 2014), the squeeze on household budgets is still very real. The bizarre thing is the jobless level is plummeting, which all amounts to a veritable enigma for Threadneedle Street. More jobs does not guarantee more take-home pay.

Alongside the employment conundrum, add the fact that there is still a hell of a lot of debt in the economy, and Carney is at least correct to say we are now approaching the most dangerous stage of the recovery.

While the base rate remains low, the rates of return investors in bridging loans are getting are the polar opposite. According to research published recently by lender West One Loans, investors in short-term secured loans enjoyed an annual return of 10.5 per cent over the 12 months to July.

Those who invested £500,000 in bridging loans on 1 July 2013 would now be sitting on £552,000, which is not a bad return at all. And there is stability, too. The West One Loans research showed bridging loan investments had a standard deviation of just 0.03 per cent over the three months to 1 July. In short, investing in bridging is a predictable rather than volatile form of investment. (For investors, decent returns and low volatility are the Holy Grail.)

Now it is understandable that most of the news in the bridging world surrounds the products and deals – the rates, the size of a loan, the reason it was taken out, the speed of turnaround. But far less attention is paid to the investors that provide the funding lines.

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Maybe the sector as a whole needs to better broadcast the exceptional rates that bridging can deliver as an investment. After all, stronger and more diverse funding lines make for stronger lenders, which makes for a healthier sector.

But maybe the investors in short-term want to keep the sector a relative secret?

In other news, I see Omni Capital completed a £48m bridging loan to fund the acquisition of a site in Chelsea Harbour. That is a colossal loan and shows the financial strength of some of today’s bridging lenders. Hats off to them for that.

At the same time, it is important to remember the bridging loans that keep the heart of the sector ticking are the long tail of smaller ones: the property owner who wants to buy before they sell, the landlord buying at auction and so on. We never hear about these deals because they happen every day and in the tens or hundreds of thousands, not the tens of millions. But it is these deals, which lenders and brokers work on every day, that make the sector what it is.

Finally, I would like to ask if any of you have had a holiday or decent break this summer? I do not know about you but we have been flat out at Enterprise Towers. Part of me would have quite liked to have seen a summer lull so I could put my feet up.

Actually, ignore that, the busier it is, the better – and I am sure most of you would agree.

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