As the lockdown continues, many lenders and brokers will be wondering how the market will look when we are on the other side of Covid-19. Prior to the pandemic, many new lenders had set out on aggressive growth targets, with a more risk-taking approach.
Due to low returns for investors with traditional bank deposits, there was a surge of new lenders entering the bridging market for the first time, during 2018-2019. What is deeply concerning is that some of these new, less experienced lenders have in hindsight, books with significantly higher risk loans. As a result, countless lenders have been hit by the inability of their borrowers to pay interest, or redeem their loans.
Research from Cass Business School from City, University of London showed the absolute value of loans reported to be in default increased by 36% during 2019, concentrated in the retail and development sectors of the market.
Cass anticipates further loan write-offs and debt losses in the retail sector of £8 billion to £10 billion as the economic impact of Covid-19 exacerbates the crisis in the sector. The report added that £22 billion of outstanding commercial development loans face the risk of construction delays and defaults of construction contracts, with £15 billion of residential development loans facing losses due to lower unit prices. Cass also estimates that £43 billion of loans that are maturing in 2020/2021, will need to be refinanced by lenders.
The approach going forward will be much more caution. Loan-to-values will remain low and stricter due diligence processes are likely to be introduced. Inevitably, there will be reduced loan volumes and the borrower’s reputation, financial standing and ability to provide cross guarantees are going to become more important. Inevitably, less borrowers will pass the lenders’ due diligence requirements.
Many of the opportunist, risk-taking, smaller lenders will withdraw from the market and the remaining lenders will be more circumspect and introduce stricter criteria for new lending. The balance of negotiating power will shift even further from borrowers to lenders, because there will be less lenders with fewer products. The benefits to the lenders of being more cautious will result in less bad debts in the future.
Developers looking for finance will face increased challenges and they will need to put more equity in each project and provide additional security. No doubt this will affect the smaller developers proportionately more.
On the upside, the Coronavirus pandemic is creating significant cashflow requirements amongst small businesses, SMEs and investors across the UK. The Association of Short-Term Lenders (ASTL) expects brokers and lenders to see increased appetite from developers, portfolio landlords and business owners as the market returns, resulting in a spike in activity that helps the market to bounce back into recovery.
For the most part, excluding say, the hospitality and airline sectors, the economic fundamentals are still strong and there is every reason the expectation of the ASTL could prove true.
Agam Jain, Managing Director, Vector Capital