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Bridging growth offers a different route map to funds

Our recent West One Bridging Index has provided a ray of light in a lending market plagued by increased funding costs and fear of events in the eurozone.

Gross lending in Q1 was 95% higher than Q1 2011, and rates continued falling to hit a low of 1.38%.

The growth spurt in the bridging sector is being driven by high demand from residential property investors. Many are being either turned away by the high street, or can’t find an appropriate form of finance for their projects.

More are turning to bridging lenders for help, particularly those who need to finance short-term development projects.

It could be the start of a long-term shift in the way property investors choose to finance their projects. Their healthy appetite for bridging loans has pushed gross lending above £1bn for the first time. And the growth shows no sign of falling away.

The contrast with the main mortgage market couldn’t be sharper. Lenders’ funding costs have risen by 40% since February.

In the Bank of England’s Q2 credit conditions survey, lenders reported a quarter-on-quarter drop in mortgage credit for the first time since Q2 2010.

They have made it crystal clear they can’t cater for strong underlying demand for mortgages.

The recovery we saw in lending to high LTV borrowers last autumn has fizzled out with a whimper.

It could be the start of a long-term shift in the way property investors choose to finance their projects

The pain isn’t just confined to first-time buyers: investors have been hit hard, too.

Buy-to-let demand has gone through the roof, but not all buy-to-let landlords can be catered for by the high street.

In 2011 there were only 124,000 buy-to-let loans, compared to 346,000 in 2007.

Lenders’ struggles have created a gap between supply and demand, which alternative lenders are helping to fill. Bridging lenders will have to mop up the excess demand the high street can’t cater for.

More quantitative easing, which looks likely in the coming months, won’t be enough to ease banks’ funding worries.

Investors are increasingly reluctant to finance high street banks because of fear of their exposure to Europe’s sovereign debt problems. This is pushing up lenders’ funding costs and restricting their capacity to lend.

By contrast, bridging lenders who are funded and use alternative models are not hostage to the same problems as high street lenders.

With investors losing confidence and banks short on capital, we’re seeing a potentially seminal shift in the way bridging lenders are funded.

Increasingly, investors cut out high street banks and fund managers and deal directly with the lender.

West One Loans was a pioneer of an alternative finance model and deals with investors directly using an FSA authorised unregulated collective investment scheme.

We’ve built up a club of around 160 private investors. Crucially, our investors trust us. No investor has ever lost capital. And they know they never need to commit that capital until a loan is ready to fund.

Unlike orthodox funding models that depend on mainstream banks, our model allows us to constantly fund new deals. With traditional models blighted by the economic problems, we can expect to see more lenders produce alternative funding models.

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