News & Views

Is the bridging market due a shake out in 2014?

2014 will see lenders in the bridging market start to consolidate and could even see some lenders go to the wall, predicts Fincorp.

The claim from Fincorp director Matthew Anderson comes after intense competition in the short-term finance market has seen bridging rates drop dramatically and loan to values rise.

“Bridging has gone bananas in the past five years,” says Anderson. “There is still the core market which is good quality loans for development and refurbishment but the short-term market that has grown around that in recent years is feeling the pressure to get business in. And we think that it’s compromising the sector. There are those of us still putting robust underwriting and sensible pricing as first priority. There are others who are competing so hard they’re going to run themselves into the ground.”

Since the financial crisis took hold savings rates have been languishing, barely keeping up with inflation as interest rates have been kept on hold at 0.5%. Returns on offer to investors have been struggling with volatility in the stock markets ricocheting as unexpected event after unexpected event fuelled uncertainty.

With this backdrop, the property market in the UK has been remarkably resilient. House prices are recovering across the country and in London and the South East values are beyond previous highs.

Anderson says: “Short-term finance secured on property offers investors very attractive returns given the current environment. As a result the market has seen a flood of money being offered to bridging lenders and they in turn have taken that to the market. We’ve seen competition become increasingly fierce as a result and our sense is that some lenders are widening their credit appetite in order to get deals done.”

The fallout will be an “inevitable shake-out in bridging” suggests Fincorp. And the lender thinks that this will be driven by loose underwriting. It says it has already seen examples of other lenders doing bridging deals where multiple properties are “packaged” into one loan where the loan to value on part of the deal is low enough that it brings the average loan to value across the whole deal down to reassure investors.

“This is a dangerous game to play with investors’ money though,” warns Anderson. “We have been around for 25 years in this market and slicing and dicing deals like this is a hiding to nothing. It will come back to haunt them.”

He says the result will be that some lenders will go bust when poorly underwritten deals go south.

“The market is now very overcrowded with lenders seeking a slice of the returns on offer,” says Anderson. “And the problem is that some of the lenders who’ve joined the short-term finance sector since 2009 have only ever seen it going in one direction – up. There is no way we’re not going to see some of them come a cropper as a result and I think we may even see some pretty well known names fall by the wayside as early as next year.”

Lenders are from Mars, brokers are from Venus

By Matthew Anderson, director, Fincorp

We all knew lenders and brokers sat on different sides of the fence but I was interested to see the findings of a straw poll done last month by Brightstar Financial managing director and chairman of the Association of Bridging Professionals (AOBP), Rob Jupp.

He asked bridging brokers what was important to them when arranging a deal for a client and found they ranked in order: certainty of funds and decision, rates and product, procuration fee, service, relationship and speed.

When he asked bridging lenders the same thing the answers were practically upside down with them ranking in order of priority: service, speed, relationship, rates and product, certainty of decision and funds and procuration fee last.

Perhaps I’m naïve to have thought lenders would be a bit more on the same page as brokers. It’s not really very surprising that brokers rank procuration fees higher than lenders but what was surprising to me was that certainty was right at the top of a broker’s list.

At Fincorp we look at a deal, make a decision and then stick to it. It really is that simple. So hearing that a lender’s reliability is so important makes me think that there are lenders out there failing to follow through on a decision in principle.

Bridge finance is pretty straightforward when you’ve been doing it for 25 years as we have at Fincorp. You look at the security, the terms, the borrower and then if you’re happy, you lend the money. A lender’s ability to do that relies on two things though: experience and investor confidence.

It’s a cliché but it’s true: it’s easy to lend money and much harder to get it back. But if your investors have confidence in your ability to underwrite a deal and bring their money back because experience tells them you will, then as a lender you’re always in a position to say yes to the broker and borrower and mean it.

I suspect that brokers’ frustration is that there are too many lenders out there saying yes and meaning maybe, maybe not. Nothing makes a broker more annoyed than having promised their client the deal is done and then having to go back to them empty handed. It’s humiliating.

More often than not it’s not even the broker’s fault but it is him (or her) who ends up running the risk of looking unprofessional when the lender fails to deliver. Particularly in the bridging market where deals need to be turned around pretty quickly and a loan that falls through can really put the screws on a client.

I’ve often thought the bridging market rather a cosy one with certain brokers frequently using the same clutch of lenders and lenders having their “favourite” brokers – some even going so far as to reward certain brokers with override commissions for bringing them a target amount of business.

It is interesting then that lenders view that dynamic as “strength of relationship” when brokers may in fact view it as reassurance they won’t let their client down.

From a broker’s point of view it has to be a balancing act between trying a new lender out to get better terms or a different appetite for specific types of deal and not getting burnt by a lender that might just be too good to be true. There is a large degree of uncertainty when you’re dealing with someone you don’t know and the risk is that it’s the client who suffers if the lender doesn’t deliver.

There’s no silver bullet for brokers faced with this conundrum – in a sense every deal is different and for that reason it’s impossible to know if a lender will approve it in the first place until you’ve tried them. But there are things brokers can do to help improve that certainty.

Choosing a lender that has a steady and large pool of funding and investors will greatly increase the chances they won’t renege on a decision in principle because a particular investor who had said they’d lend the cash has since bought a Ferrari or a racehorse. And choosing a lender that gives brokers access to its directors and underwriters is also critical because a salesman isn’t actually where the buck stops.

In some ways lenders do come from Mars and brokers from Venus. We are both obviously doing a different job. But we also have one very important thing in common: the client. Lenders may say service when brokers say certainty but what we both mean is doing a good and reliable job for the borrower.