West One’s findings demonstrate how rapidly the bridging industry has expanded to fill the gap left by traditional high-street lenders as they have retreated from the mortgage market since the credit crunch began.
The volume of loans advanced has risen 26% year on year (to the end of August) as an increasing number of property investors have turned to the sector to finance their projects. Gross lending rose 46% in the same period.
Given the short-term nature of bridging finance – the average loan term was just under 8 months in 2010 – net lending can be rather volatile as loans constantly redeem and are constantly granted.
While the market is still relatively small, a few big loans redeeming or being granted can make a big difference to net lending so the index aims to assess the longer-term trend rather than one quarter’s numbers. Net lending has expanded 53% since the beginning of 2010.
Duncan Kreeger, Chairman of West One Loans, said:
“The buy-to-let market is extremely strong at the moment, with rents rising rapidly as tenants compete for homes. To meet this demand, landlords often need to refurbish or convert properties for the rental market, but do not qualify for buy-to-let finance until there is a full rental valuation.
"Bridging enables them to finance this development period. As a result, by the end of this year, we expect the market to top £800 million pounds for the first time.”
Evidence for the demand from landlords is clear from the increasing shift in the market towards residential bridging finance and away from commercial. In 2009, 70% of loans were granted to the residential sector.
"Last year, this had risen to more than three quarters. So far in 2011, 82% of bridging loans by volume are to residential property investors.
Duncan Kreeger explained:
“Having a clear exit strategy is the most important consideration when taking out bridging finance. Residential property has a wider range of refinancing options than commercial property.
"The strong demand for accommodation means investors can be confident they can refinance easily when they are ready to rent.
"Commercial property is harder to value for bridging purposes and the market is relatively oversupplied at present, making rental voids more likely and therefore exit more difficult.”
The average size of a loan expanded to £322,000 in August, up 28% year on year as property investors tackled larger, more ambitious projects and took advantage of falling interest rates.
The average interest rate on a bridging loan declined to 1.35% per month in August, down from 1.54% a year ago. This reflects the general decline in market interest rates.
Duncan Kreeger commented:
“It is very hard to find any investments yielding a real return at present, so the bridging market is very attractive to those who finance the loans we make to our borrowers.
"In line with market trends, yields are declining, increasing the value of property investment projects for the borrowers. This is driving up the average amount they are looking to borrow.”
In line with the increasing size of the average loan, LTVs are also trending upwards. In August, the average LTV (weighted by value) was 48.4%, up from 42.5% a year ago.
Duncan Kreeger concluded:
“Demand from property investors, combined with the strong credit performance of loan portfolio mean LTVs have been able to expand over the last year, but they still remain extremely comfortable.
"The industry is in excellent shape to provide good returns to those providing the finance and affordable, well covered loans to those completing their property projects.”
