At the same time the number of bridging loans available has increased by 35% with bridging interest rates standing at 1.19%, the latest West One Bridging Index also shows.
When measured on a bi-monthly basis, annual growth contrasts with a slight seasonal drop. Gross bridging lending of £343 million in the last two months is down 18% compared to November and December, when gross lending totalled £419 million.
However, despite such seasonal factors, lending in the two month period from 01 January to 01 March 2014, is up 23% compared to just £280 million in the same two months in 2013.
‘Just as the UK economy has turned a corner, demand for the right type of finance is on an exciting new path. In the last few months the market for bridging loans has been dramatically busier than at the same point last year. Businesses need finance to invest and expand, and every element of the property industry is gaining momentum by the week,’ said Duncan Kreeger, director West One Loans.
‘In relative terms, the winter months are often the quietest time of the year for the property market. But this year bridging activity has been powering ahead regardless. And now the property market is showing the first signs of the usual spring bounce on top of all the energy that’s already in the system. So we are set for a formidable few months, and the best bridging lenders will be at the forefront, making the most of every opportunity,’ he added.
The index shows that a greater number of loans in terms of volume is the main factor behind annual growth in gross bridging lending. Loan volumes in the twelve months ending 1st March were 34% higher than in the previous 12 months.
Meanwhile, the average size of a bridging loan was largely unchanged, up 4.4% on an annual basis but down slightly by 3.3% in the last two months compared to the final two months of 2013. This leaves the value of the average bridging loan at £444,000 over the first two months of 2014.
‘Bigger deals are always exciting, and as property prices grow so will the size of loans. But the biggest factor behind the industry’s expansion is definitely the sheer volume of deals. That’s great for lenders and particularly good news for brokers. But it matters most to those property professionals and business people who depend on alternative finance to make their projects reality,’ explained Kreeger.
‘The most exciting aspect of the last six months is the spare capacity for bigger loans on top of all the latest expansion in volumes. So as confidence spreads through the economy and the property community reacts, this will be another source of significant growth for the amount of lending by value,’ he added.
Potential returns for investors funding bridging loans remain several times the total return of mainstream investment classes. Monthly product rates currently stand at 4.9 times those of 10 year government bonds, with a monthly spread of 0.90 percentage points.
‘Bridging is becoming ever more competitive in stark contrast to more traditional forms of finance. For example, standard variable rates in the mainstream mortgage market have been rising since April 2012, according to the Bank of England. But our analysis shows that bridging rates have fallen steadily over the last two years,’ said Mark Abrahams, chief executive officer of West One Loans.
‘Despite this competition, investors in bridging loans can still earn up to five times the monthly interest available elsewhere. And lower LTVs mean investors’ money is secured more safely than ever,’ he added.
Loan to value ratios in the bridging industry have fallen on both an annual basis and more recently on a bimonthly basis. In the two months to 01 March the average LTV was 45.2%, 2.9 percentage points lower than in the preceding two months when LTVs stood at 48.2%. On an annual basis, loan to value ratios have fallen by 0.8 percentage points, to 46.3% in the year to February 2014, compared to 47.1% in the year to February 2013.
‘As the economy heats up and the property market goes from strength to strength, demand for bridging loans keeps growing. Meanwhile, these same factors mean the security underpinning loans is becoming more valuable, forming a virtuous circle,’ said Kreeger.
‘Bridging has even further to go, and it’s clear the value of properties used as security will be less of a restraint as we move through 2014. Lower loan to value ratios mean the growth of the bridging industry is underpinned more solidly than ever before,’ he pointed out.
Rob Thomas, ex-Bank of England economist and author of the ‘What is the new normal – mortgage lending in 2014’ report, pointed out that there are clear differences between the mainstream mortgage market and the bridging market.
‘Interest rates for bridging finance have been falling while rates have recently been edging up in the mortgage market. Average LTVs have also been falling on bridging lending whilst for mainstream mortgages they have been rising, in part reflecting lenders’ willingness to return to lending at 95% under government schemes such as NewBuy and the Help to Buy guarantee scheme,’ he said.
