The latest edition of the West One Loans Bridging Index calculates that gross annual bridging lending stayed flat, at approximately £5.6bn for the third quarter of 2019. Our estimates show that Q3 lending was down slightly against the previous quarter – as is expected during the quieter summer months – but that overall performance of the sector remains strong, as indicated by these annualised figures. With the property market still causing concern for many, average transaction sizes fell in the third quarter, indicating prudent decisions being made by both borrowers and lenders.
Trends in the bridging market
Peer-to-Peer business model
Peer-to-Peer (P2P) lenders have taken the majority of the headlines over the last quarter and beyond. With some high-profile lenders entering administration, and therefore leaving the market this year, there have been ripples through the sector.
Although the retail investor model is different to our own, it would be remiss of this Index not to acknowledge the potential impact on the wider bridging finance market.
The interest from the more mainstream media has been amplified by the fact the lenders were funded by retail consumers.
With thousands of investors potentially facing major losses, it’s understandable that it’s now under the spotlight. In September, the Financial Conduct Authority sent letters to peer-to-peer lenders (not just in the bridging sector) over poor practices, raising concerns that firms were exposing investors to undue risks.
It is important to note, however, that the lenders in question collapsed due to a rise in borrower defaults as a result of imprudent lending decisions.
This acts as a warning to the whole sector and demonstrates that those who cut corners or take unnecessary risks to chase volume and market share will eventually come unstuck.
The bridging sector has, however, shown strength and resilience as it has grown into the mature market that it is today. While negative press for any sector is never good – and there will be increased scrutiny over the investor side of P2P business models – it will not be enough to destabilise the market and impact the demand for bridging finance.
As demand increases, and supply falls through less lenders being on the market, this could have a positive impact on the pipelines of established and secure lenders.
We expect that the disruption to P2P lenders could prove positive for other lenders, such as West One, as P2P lenders must consider changes to their operating model following a policy statement issued by the FCA which is discussed below.
The Financial Conduct Authority (FCA) released a policy statement in June of this year focussing on peer-to-peer lenders and crowdfunding platforms. This positive step aims to address the mismatch of potentially unsophisticated retail investors placing their savings in products that they don’t understand, and will only improve the professionalism of the market, to the benefit of all.
Of course, consumer loans have been regulated since the Mortgage Market Review was implemented in 2014, and the FCA have so far preferred to keep this as the extent of their remit.
Bridging finance is a well-established market with key product features focusing on speed and flexibility, alongside pragmatic underwriting. Increasingly there is demand for regulated bridging products which is better served by established regulated lenders as opposed to unregulated niche lenders.
Property market analysis
In line with the general uncertainty undoubtedly caused by Brexit, the property market is grappling with a variety of both positive and negative factors. The fact the sector has remained relatively robust in the last quarter is testament to the strength and value we place on property in the UK.
Zoopla UK’s Cities House Price Index reported that residential properties are taking nearly a month longer to sell than they did in 2016.
While this statistic reveals a generally slower market, one of the knock-on effects is that developers are using bridging loans to repay their development finance funding to give them breathing space to find a buyer.
Additional insight from the research shows that vendors are accepting offers of 3.8% less than their initial asking price. This again suggests a negative trend in the property market, but in the microcosm of bridging finance, stimulates demand as developers hold out for their ideal sales price.
HMRC posted positive transaction numbers in Q3 for both residential and commercial properties – particularly during September, which showed over 100,000 seasonally adjusted transactions for the first time this year in the residential sector, and a 2019 high for non-residential transactions.
Mortgage approvals for house purchases remained stable, according to the Bank of England, with an expected increase from August into September (accounting for the usual summer slump) – and this in itself is a positive indicator as those approvals become completions in the coming months.
In Q3 of this year, the stock market value of the UK housebuilding sector increased by 10% or £3.4bn, according to analysis undertaken by Hardman & Co. Compare this to their calculation for the same period last year – a 27% (or £11.8bn) fall – and there is a clear positivity in the sector in the foreseeable future.
Bridging interest rate
Our analysis shows that interest rates continue to be stable, with the Q1 average of 0.89% the same as the average over the first half of the year. As such, rates continue to be competitive in the bridging sector.
Brexit continues to be the main driver around any future interest rate fluctuations. The Bank of England maintains that it expects base rate rises over the next three years – and an increase could cause greater caution in the property market.
Lenders are unlikely to experience any increase in the cost of funds, so bridging interest rates may remain unaffected by base rate changes in the short-to-medium term.
The sector is still attracting new entrants, potentially counteracting the lenders leaving the market, so the effect of competition may also be minimal in the short term.
Danny Waters said:
“The bridging sector continues to perform well, even with a drop in lending against the previous quarter due to the summer months. We’ve talked about it a lot in recent issues of the Index, but increasingly sophisticated borrowers turning to bridging finance remains a key feature of this year and is how it is performing so well despite the extended Brexit negotiations limiting the property market this year.
“Regarding the elephant in the room that is the P2P business model, I was interested to see the policy statement from the FCA in June that talked about introducing more explicit requirements around governance and controls, and also that an ‘appropriateness assessment’ to evaluate an investor’s knowledge and experience of P2P investments be undertaken. This is a step in the right direction and mirrors our model, albeit with elected professional investors.”