Short-term lending opportunities are expected to persist, although some bridge finance providers are being forced to change strategies, writes Doug Morrison.
Bridging finance has been subject to huge volatility over the past six months as lenders in this specialist sector negotiate their way through a post-Brexit hangover in both the underlying real estate market and in sourcing their own lines of finance. The outlook for the coming year is, at best, uncertain.
According to the latest figures from the Association of Short Term Lenders, the value of bridging loans in the third quarter of 2016 was down 17.4 percent on the second quarter, and yet the total value of loans written by the association’s 37 members in the year ended 30 September was 15 percent up on the previous year.
Benson Hersch, the ASTL’s chief executive, describes “something of a rollercoaster ride” during which the value of loans written had alternately risen and then dropped during the four quarters to 30 September. Though the ASTL has yet to publish the full-year figure for 2016 from its universe of alternative lenders, Hersch indicates that it will be “well up on last year’s total of £2.4 billion loans written, but we are unlikely to make the £3 billion that many were predicting last year”.
As for 2017 and beyond, Hersch suggests any prediction is conditional on lingering uncertainty, not just about Brexit, but over interest rates, the Chinese economy and what a Trump presidency will bring to the global economy.
“On the basis that uncertainty will make mainstream institutions less eager to lend, I expect that bridging will continue to prosper,” he says.
“There may well be product changes, especially in the development finance area, as customers require longer terms than traditional bridging ones. Bridging lenders will rise to this and other challenges, whilst keeping a wary eye on property price trends and the availability of long-term products. There will be a slowdown in property price growth, especially in the buy-to-let area, as stamp duty and income tax issues continue to have an effect, but I don’t expect a major drop unless the economy turns sour. On balance, I’m cautiously optimistic.”
Hersch’s view reflects the measured approach to the market adopted by one of ASTL’s most prominent members, Fortwell Capital, the CPC Group-owned lender formerly known as Omni Capital. Early last year, Fortwell made a strategic shift away from pure bridging finance to focus more on providing stretched senior loans for development.
The group had felt the impact of a changing property market long before last June’s Brexit vote. Stamp duty surcharges were hitting its central London residential heartland as well as cuts to landlord tax relief. As important, says Colin Sanders, Fortwell’s chief executive, was an increasingly crowded market for both regulated and unregulated bridging.
“Because there were so many bridgers competing for deals we were finding ourselves being outpriced or not willing to take the risk that others were,” he says. “As a result of that heavy competition – in my view overheated competition – we were looking to find places where there was a gap in the market, where we could use the skills we have within Fortwell and CPC, and get comfortable with the risk in places that other bridgers maybe haven’t got the skills or the background to do.”
Sanders continues: “Many of the bridgers in the market have had challenges of their own in respect of their funding structure as a result of Brexit. Some of them have relied on capital markets or external investors, and many of those funding models have been challenged. In many cases the message has been: no further growth until 2017. And many bridgers relying on banking lines have found a similar sentiment: now is not the time to fill your boots with bridge loans in London and the South-East.”
West One Loans, the bridging specialist and Enterprise Finance subsidiary, has also expressed concerns over funding issues among its peer group. In a statement accompanying West One’s latest and otherwise bullish quarterly Bridging Finance Index in November, managing director Stephen Wasserman warned that following Brexit, some lenders “with more aggressive lending policies are now having to retrench in the face of liquidity challenges”.
While some struggle with finance, the bridging sector still presents opportunities for well-funded newcomers. Pluto Finance, the residential lender, has just launched its first bridging product after more than five years in business and £1 billion of development loans, mainly on schemes in the South-East.
Pluto has made its name as a stretched senior lender, and Justin Faiz, one of the firm’s partners, says the impetus behind the new move came from existing clients who had previously gone elsewhere to fulfil their bridging requirements. “There’s enough volume from our existing origination to get a medium-sized book,” he says. “We were turning down a bridge enquiry every couple of days just from our current network.”
Pluto is targeting a gross IRR of 13 percent on bridge loans ranging from £1 million to £10 million and, with some completions imminent, Faiz is expecting £100 million of volume in 2017. “That would be a good year for us,” he says. The firm will also seek new bridging clients “but in a measured way”.
The only no-go area for Pluto is the faltering prime central London property market, but, in all other respects, Faiz is optimistic. “The high street banks are lending a fraction of what they lent before 2008, and if you sum up the amount lent by private debt platforms like ourselves, it doesn’t come anywhere near plugging the gap.”
Like Pluto, Fortwell has written more than £1 billion of property loans since 2011 but clearly they have adopted divergent strategies, which perhaps reflects the wide range of sentiment towards bridge finance and short-term lending generally.
In fact, throughout 2015 Fortwell’s policy on bridging was based around “cherry picking new loans” and “managing our exposure down”. By 2016, Fortwell was active once again but mainly in stretched senior.
“We haven’t withdrawn bridge loans, we just write fewer of them,” says Sanders. However, he clearly sees playing to the group’s strengths in development as a more sustainable business plan in an uncertain economy. Fortwell’s bridge loans are typically about £3 million, based on 75 percent loan-to-value and 7.5-8 percent return targets over an average 6-9 month term. With stretched senior, Fortwell is comfortable going to 90 percent loan-to-cost but on the basis of achieving 12-13 percent returns, reflecting the fact that it is taking on development risk. As Sanders says, the development process itself is creating value, not just inflation and market forces.
And the group’s shift towards stretched senior has resulted in a surge in new business – reportedly £60 million of loan completions in the final quarter of 2016 and a further £100 million of completions lined up for early 2017.
“Since Brexit we’ve seen a real flurry of interest in the products we’re comfortable with, and the last quarter has been exceptionally busy. We’ve written some good business, and we’ve got a healthy pipeline coming into 2017,” adds Sanders. “We feel that we’re back on the map after 18 months of consciously being a bit-part player. I think that does say a lot on our view of the bridge market: not to say there isn’t business to be written because there clearly is – but it’s just with caution.”