One sector of short-term finance is growing: Make sure you’re ready for it
By Nick Jones -
The short-term finance market is extremely diverse, supporting everyone from homebuyers in a collapsed chain to developers purchasing multi-million pound apartment blocks, and everything in between.
But in 2020, we’ve seen one sub-sector growing faster than the others, and it’s set to continue into 2021.
Against a challenging backdrop, investors have moved into the development sector because it still offers the potential of profits, alongside arguably fewer risks than the commercial sector over the next 12 months.
A recent Mintel report, into bridging and short-term finance trends found that development finance has overtaken commercial this year in terms of volumes of lending, as the commercial sector has grappled with significant challenges.
Residential development has been further boosted by the Stamp Duty holiday, minimising the costs of purchases and boosting potential profits for investors. The time-limited nature of the tax break is perfectly suited to short-term lenders who can move quickly.
The withdrawal of most refurbishment buy-to-let mortgages this year has pushed landlords towards short-term finance, if they are buying a property that requires some work. While some lenders have returned to this market in recent weeks, the choice of products remains limited.
According to the Mintel study, refurbishments will be the most common use of bridging loans by the end of 2020.
Get ready for growth
2021 is going to be challenging, so it makes sense for intermediaries to capitalise on areas of growth.
Mortgage lenders are likely to remain risk averse for the foreseeable future, which means more borrowers will be excluded from traditional funding solutions. Plus the commercial sector is expected to take longer to bounce back from the challenges of 2020.
By adapting to ensure you’re able to help all your potential clients, and diversifying into sectors you are less familiar with, you can help to future-proof your business.
But where do you start?
Research the market
If you want to capitalise on the growth of the development finance sector you need to ensure you know the products, the providers and the clients.
This means doing your research and some due diligence, so you partner with those firms that you trust your clients with.
With so many lenders operating in development finance, from large well-known names to many smaller operations, it’s a disparate sector, but there’s lots of support for brokers.
Look for lenders that are members of the Association of Short Term Lenders, as they adhere to a code of conduct. Speak to other intermediaries to find out who they recommend and call up lenders directly if you are interested in operating in this market. They should be happy to answer any questions and talk you through their proposition.
Of course, many development finance applications go through third-party distributors. If you aren’t confident, it’s a good option to ensure you don’t lose the client and you give them access to specialists in the market.
At Roma we are able to support intermediaries directly as well as forging relationships with many of the specialist distributors and packagers.
Know your clients
You probably have many potential development clients already on your books.
Typical clients are property developers, smaller homebuilders, or anyone who invests in property on an individual or a limited company basis, but homeowners also use these products to borrow against their own home to fund projects.
The borrower may already own the property, or they may need the funds to buy it and improve it. Lenders don’t use standardised terminology, so you might find that the line between a ‘bridging loan for refurbishment’ and a ‘development finance loan’ is moveable, with lenders drawing the line at different levels of work.
Projects range from home refurbishments, small-scale extensions and barn or loft conversions to conversions of a large property into separate units.
What they all require is a loan to improve a property to increase its value.
At Roma Finance, we’ve seen the sector grow this year and we expect it to dominate the market next year too.
Position your business and boost your knowledge now to ensure you’re confident to help development clients find the right funding solutions for their needs.
Nick Jones is commercial director of Roma Finance, an independent lender offering short term bridging loans on residential, commercial and industrial properties throughout England, Scotland and Wales.