The size of the average mortgage is also growing at a fraction of the rate seen by bridging loans which provided funding of £1.57 billion in 2012, according to the latest West One Bridging Index.
‘The high street is growing at a fiftieth the rate of the bridging industry because high street finance has developed a chasm between investors and borrowers. Half a decade of households paying down debt has done nothing to stimulate lending to new borrowers through our broken banking system,’ said Duncan Kreeger, chairman of West One Loans.
Looking to the future he doesn’t see a likelihood of change. ‘Traditional lenders keep watering down and then throwing out their over optimistic predictions. High street finance is looking less and less like the future. Contrast that to explosive growth of alternative sources of funding like bridging,’ he added.
On a quarterly basis, gross mortgage lending grew by 0.5%, according to the Council of Mortgage Lenders. Meanwhile, gross bridging lending has expanded by 10% since the third quarter of 2012, when this stood at £399 million. Gross bridging in the final quarter was £439 million, some 49% more than the equivalent period in 2011.
Kreeger believes that bridging will smash the £2 billion mark by the end of the year at an absolute minimum. Loan sizes are also increasing, up by 14% to over £450,000 in the fourth quarter of 2012.
‘As it matures, the bridging industry is taking on bigger and bigger projects. This is because high street banks are keeping their criteria so tight they’re effectively ruling out any ventures that could be classed as development. That would have left thousands of prime investment opportunities high and dry if it wasn’t for alternative finance. Bridging loans are decided on a case by case basis. Especially for peer to peer bridgers, it’s the real value of security that matters, not just the purchase price or an automated valuation,’ explained Kreeger.
The index also shows that commercial loans are growing as a proportion of all bridging loans. Alongside the growth of the entire bridging industry, this has left commercial bridging 99% larger than in the fourth quarter of 2011.
Loan to value ratios across the bridging industry have continued to fall. The average first charge LTV in the fourth quarter of 2012 was 44.7%, down from an average of 48.6% in the previous quarter. LTVs are also down year on year, some 1% lower than the average LTV in the third quarter of 2011 which stood at 45.7%.
‘Falling LTVs mean the bridging industry is providing investors with even less risk on their capital. This comes despite the industry funding ever larger projects. Lower LTVs also reflect evolving sources of demand. Many credit worthy borrowers with plenty of equity are making use of the bridging industry, rather than traditional sources of funding,’ said Kreeger.
The average rate on a bridging loan saw a slight uptick at the end of 2012, increasing to 1.35% in the fourth quarter from 1.31% in the previous quarter. On an annual basis rates have fallen to 1.35% in the final quarter compared to 1.42% in the fourth quarter of 2011. Last year saw an average interest rate of 1.37%, compared to 1.42% in 2011.
‘Bridging keeps getting more competitive and that’s leading to marginally lower rates. Investors can be comfortable that excellent returns go hand in hand with lower risk, lower LTVs and a more mature industry. An inflation beating return is now so rare for mainstream investors that many are starting to think beyond the tired twosome of equities and bonds,’ said Mark Abrahams, chief executive officer of West One Loans.
Returns for investors in the bridging industry remain around eight times those available from traditional ten year government bonds. This is typical of the comparison with other asset classes. ‘Bond markets are set to give diminishing returns in 2013. Most investors and professional fund managers expect fixed income investments to be supplanted this year. Some are looking to equities instead. But even the fabled equity markets may have had their run for the time being. Dividends will probably flat line at best in 2013 with weak consumer spending in the UK and a world economy still looking extremely fragile,’ he pointed out.
‘With these factors in mind, the strong monthly return offered by the bridging industry looks very attractive. Investment in a real, dynamic project rather than a more obscure instrument is increasingly popular. Such imagination is infinitely more practical for the UK economy. Investors who can think outside the box and help drag the UK out of recession are already seeing the value of that involvement. Independent thinking is in desperate demand and that’s why peer to peer lenders are leading the charge,’ he added.