Recession holds promise plus problems for bridging

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You would have had better luck finding loo paper on UK shelves in March 2020 than to now locate someone arguing the UK will escape recession. But recessions are not universally bad news for bridging.

A quick run down of the economic outlook is, admittedly, bleak.

The Bank of England this month warned of a 15 month contraction from the end of 2022 – this, as Reuters points out, is worse than the outlook for other big European economies and the United States.

UK inflation, which hit 10.1% in July, an already astonishingly high figure, is, incredibly, predicted to almost double to 18.6% by early next year, according to analysts at investment bank Citi.

The increase is expected to be brought on by devastating rises in energy bills that will push the cost of living into the “stratosphere”, Citi warns. Wages are not keeping up, and consumer confidence has plummeted.

Nick Jones, sales director for bridging finance at lender West One Loans, is anticipating in 12 months’ time the landscape “is sadly going to get harder”.

But, he points out, bridging is by design often there to fill the gaps when things go wrong.

He says: “There will be opportunities for customers who are looking to expand their portfolios and make investments and we will be here to support them.”

The latest Bridging Trends Report, using data from 12 UK bridging loan brokers, found Q2 bridging lending up 14%. This follows an 8.5% increase in the first three months of the year.

Stephen Watts, bridging and development finance specialist at Brightstar told the Bridging Trends report, “bridging finance is being increasingly sought to enable buyers to put themselves ahead of their competition”, as housing demand continues to outstrip supply.

In both quarters the most common reason for taking out a bridging loan was to buy an investment property. But in close second place was to plug a funding gap caused by a chain break, where something has fallen through and is jeopardising the other purchases.

One reason for chain breaks is buyers dialling down their offer at the last minute – with finances becoming increasingly overstretched, that expensive property purchase may start to look uncomfortably too big.

This could trigger higher demand for bridging loans from those who can complete as chains collapse.

While remaining tight-lipped about where it could plug gaps, West One Loans has made horizon scanning a feature of its business model, Jones says – “this is a day-to-day process for us” –  and the lender is “always looking at ways that we can find opportunities and support our brokers and their clients”.

“Lenders are likely to be looking for new opportunities in the property market,” Jones says.

A team of in-house experts and surveyors at West One “regularly monitor” for any signs of change.

Change is not always positive, however, as Paul Goodman, in his capacity as chair of the National Association of Commercial Finance Brokers (NACFB), points out.

“With recession on the horizon, bridging lenders will be seeking greater assurance from borrowers that loan servicing will be maintained,” Goodman says.

Brokers will also be working with clients “not only to ensure any exit strategy is particularly robust”, but that contingency exit routes are also presented, “to demonstrate that the borrowers can repay even if circumstances deteriorate”, he adds.

Goodman also anticipates bridging brokers will be advising clients to work with bridging lenders that “offer sensible valuations” to ensure that any required onward financing onto term loans can be achieved.

The July 2022 RICS UK Residential Survey results show a continued easing in sales market activity, with figures on demand and sales remaining in modestly negative territory over the month.

New buyer enquiries continue to decline at a steady pace. New instructions remain stagnant. Stock levels are still close to all-time lows. Yet, still, respondents to the RICS survey across all parts of the UK reported rising prices, even if the pace of growth appears more moderate than earlier in the year.

West One Loans’s Jones agrees with the NACFB that brokers should expect borrowers to be “unsettled”.

“They are going to be looking to their brokers for advice to help weather any potential storm,” says Jones, “this will mean now, more than ever, brokers need to be aware of and educated on the specialist products in the market to help their clients”.

He hopes lenders will react appropriately, manage risk, manage costs, and sensibly run a business in line with changing environments.

Jones adds: “As a sensible lender, we look at the future and any associated risks to ensure the business makes the right decision not just for now, but the years to come.”

The NACFB is currently running a series of regional events under the banner of Funding Future Growth, which addresses how brokers can help SMEs access the right types of finance even with recession on the horizon.

The series is supported by experts from the British Business Bank who provide regional insights and answer any questions brokers may have about the market and lending conditions.

At each event representatives from a select group of lenders – including bridging providers – are also on hand to explain how their products and criteria will meet the requirements of borrowers.

NACFB chair Goodman says: “It’s a great opportunity for our members to acquire a deeper understanding of how they can face the challenges that may lie ahead.”

Recession could lead to a rise in the take up of sales guarantees, he says, as these exit strategies can lower the risk profile of a project, “transforming the viability for both developers and lenders”.

Overall, he is positive about the next 12 months for bridging.

“The fact the UK is still in desperate need of more housing should ensure that the bridging market remains relatively buoyant even when taking into account the shortage of materials and labour,” says Goodman.

Brokers, he adds, will be “crucial” to ensuring that the funds are channelled to the right projects.

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