Bridging loans in the UK set new lending record

Gross bridging lending in the UK totalled £2 billion in the 12 months to the beginning of January, up 3.3% from the annual figure in November 2013, and setting a lending record for the industry.

This brings annual growth in gross bridging lending to 27%, up from £1.57 billion in gross bridging lending in 2012. If lending continues at this rate for a year, gross lending in the next 12 months would be £2.51 billion per year.

‘Economic progress feels more solid by the week, and it’s branching out across every area of business. By securing vital projects against property, firms and individuals stand to make the most from a year of great opportunity,’ said Duncan Kreeger of West One Loans.

‘Bridging has grown up from the industry it once was, and it’s still evolving in 2014. Lenders are expanding and opening their doors to different types of borrower. An economy on the move needs rapid finance that can really get projects started and short term secured lending is moving to fill that gap,’ he explained.

The most significant factor powering the expansion of gross lending is growth in the number of deals agreed. Industry loan volumes during the two months ending 01 January increased by 10.8% compared to the previous two month period. This brings loan volumes for the whole of 2013 to levels one third or 33% higher than the preceding 12 months.

Meanwhile, the average value of a bridging loan was largely static. The average loan is now worth £459,000, representing a slight drop of 1.4% from the two months ending 01 November 2013.

On an annual basis, loans in 2013 were larger than the previous 12 months, in line with the long term trend. For the last 12 months as a whole, loans averaged £430,000, or 5.2% more than the average loan in 2012.

‘Just a few years ago the average bridging loan was worth half what it is now.  Since then, the biggest transformation has been a growing interest from bigger property developers, professional investors and small businesses looking for more significant funds,’ said Kreeger.

‘The last few months have seen growth focused on volumes as enquiries are coming in thick and fast. But the long term trend in terms of loan sizes is also moving upwards. Multi million pound deals aren’t uncommon anymore, and as 2014 unfolds, even the most ambitious ideas are becoming ever more possible,’ he pointed out.

Loan to value ratios across the bridging industry have risen by almost one percentage point in recent months. In the two months to 01 January the average LTV was 48.1%, or 0.9 percentage points higher than LTVs of 47.2% in the previous two month period to 01 November.

On an annual basis loan to value ratios are still lower than previous highs. The average LTV across all 12 months of 2013 was 46.4%, down from 48.0% in 2012.

According to Kreeger proper underwriting and a safety first approach have always been cornerstones of the best bridging lenders. Higher LTVs are completely consistent with that principle, but as properties grow in value more gearing is not always necessary.

‘There is certainly space to lend at higher loan ratios this year, and the industry definitely has capacity to fund bigger loans where needed. Just as business and investment opportunities are opening up, the property market is putting the pedal to the floor. Alongside rates that look set to stay low for some time, slightly higher LTVs could mean more projects will have access to the finance they deserve,’ he said.

As a whole, 2013 witnessed the lowest interest rates on record for the bridging industry, averaging just 1.19% across the entire year. This compares to 1.37% in 2012 and an average interest rate of 1.55% in 2010, the first year of the West One Bridging Index.

On bimonthly basis, rates have also fallen to a record low. In the final two months of 2013, bridging loans cost on average 1.11% per month, down from 1.22% in the two months ending 01 November.
By comparison with other asset classes, potential returns for those funding bridging loans remain several times the total return of mainstream investment classes. Monthly product rates currently stand at 4.5 times those of 10 year government bonds, with a monthly spread of 0.87 percentage points.

‘Nearly seven years on from the financial crisis, markets are still shaking with volatility. Equities of all kinds are far too risky to form a large portion of most investors’ portfolios, and most fixed income products are set for years of trauma as central banks begin to wind up artificial bond buying programmes like quantitative easing,’  said Mark Abrahams, chief executive officer of West One Loans.

‘As mainstream lenders already feel the first withdrawal symptoms from artificial stimulus and special measures, money from normal investors will be more in demand in 2014. And from a lending perspective, that will also be a serious advantage for privately funded lenders,’ he added.