• Loan volumes up 6% quarter on quarter
• Average loan size rises 8% from Q2 to £398,000
• Business lending increasingly driving growth
• Rates fall marginally but LTVs tighten as investors become more cautious
The pace of growth in the bridging industry picked up in the third quarter, to match longer term trends and reverse a slowdown seen in Q2, according to the latest West One Bridging Index.
On the back of both larger loans and higher volumes, quarterly gross lending grew by 14% from £348m in Q2 to £399m in Q3. Lending in Q3 was 65% higher than the equivalent period in 2011. On a twelve month basis, lending rose 12% from £1.26 billion in the year up to June to £1.42 billion in the year up to September.
This follows a period of slower growth in Q2, and will mean gross lending in the bridging market will hit previous forecasts of £1.5 billion by the end of 2012.
Duncan Kreeger, chairman of West One Loans commented: “Pain for the big high street lenders has been gain for bridging lenders. The recovery in the main mortgage market has been nipped firmly in the bud by renewed uncertainty. Funding from the money markets has become 45% more expensive since February – and higher capital adequacy requirements mean more business will be coming the way of the bridging market. Mainstream lenders are also being squeezed by the lack of confidence the money markets still have in even some of the largest banks.
“The big banks are turning away borrowers who, in a normal market, would be credit worthy. Credit scoring is tight, and plenty of affordable mortgages are advertised as widely available, when in fact borrowers have to cross a high threshold to be able to access them.
“It’s great news that the industry is back on track to hit £1.5 billion gross lending by the end of 2012. After last quarter’s index, the prediction from the start of the year looked less likely, but this is reassuring news.”
The average loan size was 8% higher, rising to £398,000 in Q3 from £368,000 in Q2. This reverses what was previously a steady fall since March, although the average loan is still some way off March’s record figure of £479,000. The growth in average loan size, 33% higher than in Q3 last year, reflects the longer-term growth trend and comes as the outlook for the wider property market is improving.
The number of loans granted in Q3 grew by 6% from Q2, leaving loan volumes 18% higher than in Q3 last year. Several percentage points of the quarterly growth are attributable to the extra bank holidays which dampened activity in Q2.
Duncan Kreeger explained: “The industry is still filling a gap in mainstream funding, but expansion is slowing to a more sustainable pace. The huge acceleration in quarterly growth reflects a weak second quarter, when all the bank holidays and the Olympics temporarily put the brakes on activity. Last year growth was so explosive that it took lots of people, even in the industry, by surprise.
“A year on, and the bridging industry is maturing and becoming an established sector in its own right. The days when bridging was seen as a last resort for desperate borrowers are a distant memory. It has become an indispensable source of finance for society. It is attracting more credit-worthy borrowers, who now see it as a legitimate alternative to high street finance. Property developers rely on bridging lenders to fund projects that the high street won’t back in these straightened times. Without these developers, whole transaction chains stall and the housing market would fall deeper in to trouble.
“The bridging market has taken steps into the unknown this year, and taken them confidently. Professional standards have improved significantly. Brokers are suggesting lenders are less inclined to play fast and loose with rates and fees. And increased competition for business is driving down rates, all of which benefits borrowers and lends the industry a greater veneer of respectability.”
Increased demand for loans from business people is starting to impact the breakdown of lending between residential, commercial and mixed property. Residential lending accounted for 82% of total lending in Q3, representing a fall from 86% in Q2, but well above the average of 81% for 2011 and the 70% seen in 2009.
Duncan Kreeger explains: “Residential lending is still a major source of growth – particularly loans to buy-to-let investors. But the real story this quarter is a pick-up in business lending.
“General business lending has stalled badly under the coalition. We’ve seen all sorts of schemes implemented to try and boost the residential market, most recently cheaper access to funds, but little has been done to address secured lending to businesses. Just as they did in the residential buy-to-let market, bridging lenders have stepped in to fill the void.
“The entire short term finance industry is becoming more mature and more diverse, and is increasingly seen as a legitimate option for secured finance by borrowers who previously had to rely on the high street. As mainstream mortgage lending has sunken deeper into the mud, and the short term finance industry has begun to clean up its act, different types of borrowers are being attracted to bridging”
Over the quarter, LTVs have fallen – despite the increase in average loan sizes. The average first-charge LTV in Q3 was 46%, down from an average of 48% in Q2. This also leaves LTVs down in a year-on-year comparison, with the average LTV in Q3 1 percentage point lower than in Q3 2011.
The decrease reflects the continuing squeeze on LTVs in other types of financial product and comes despite much larger loans.
Duncan Kreeger explains: “Lower LTVs come despite larger average loans in Q3. These higher quality loans are the result of more credit-worthy borrowers, with more equity, who are using bridging loans in place of a traditional mortgage. They are tackling bigger projects – which explains the increase in loan sizes – but require lower LTVs than typical property investors.”
The average rate on a bridging loan fell to 1.31% in Q3 from 1.43% in Q2. This marks a return to a longer-term trend of falling rates that dates back to early 2009. The drop is a fall from Q3 last year when rates averaged 1.39%, and is also significantly lower than the average for 2011 of 1.42%.
Mark Abrahams, CEO of West One Loans, explained: “A more competitive bridging market means rates have started to fall again. While this may mean returns for investors are slightly lower on average, it reflects lower LTV ratios and a lower risk factor. Investors treat deals individually and they can always choose a higher interest loan with a marginally higher risk factor if they choose. Lower rates overall are to be expected with increased competition and a growing maturity in the industry.”
Despite the ongoing pattern of falling rates, returns for those investing in bridging remain many times healthier than traditional ten year government bonds. This is typical of the comparison with other asset classes.
Mark Abrahams commented: “Rates of return for investors are falling in line with market trends, but bridging still offers investors stronger returns than traditional investments, some of which look in terminal decline.
“Plenty of investors are moving their portfolios out of traditional investments and into alternative ones like bridging. Rather than being part of an anonymous fund, these give investors more control over their money. This is making bridging lenders like ours, based on a peer-to-peer funding model, particularly attractive at the moment.”
The Wriglesworth Consultancy 