There is a growing awareness of the versatility of short-term property finance among developers who are more confident of its effectiveness in meeting the funding requirements for a wide range of projects.
When you consider the housing targets the Government must meet to address the shortage of supply across the UK and the important role short-term finance plays in bringing more housing to the market more quickly, the future looks bright for lenders like Signature Private Finance.
Bridging crosses the divide
Bridging is becoming an increasingly valuable tool, once the preserve of those buying a new home, before their first was sold. Now it helps developers and property professionals react quickly to opportunities presented to them in a volatile property market.
Agreed for a shorter duration, bridging fits the bill perfectly in a number of situations, but in our experience three stand out as the main reasons cited on the loan application forms we receive:
Adding Value – where a developer does not expect to keep the property for very long, or intends to re-mortgage it quickly to take advantage of an increased value.
Time Constraint – because bridging can often be arranged in weeks or even days, rather than months like a mortgage. This speed of process allows developers to react quickly and snap up a bargain at an auction or close any deal where a quick response attracts a discount.
No Mortgage – bridging typically requires four walls and a roof, with the property not necessarily habitable at the time of purchase. The funds can be used to purchase the property and then refurbish it to the point where a long-term lender will agree a mortgage, which can be used to repay the bridging loan.
We often see all three reasons appear on a single application. A developer will often intend to buy a dilapidated house that has just been offered at auction, with the intention of quickly refurbishing the property before re-mortgaging or selling on for a profit.
No lending let-up
The bridging market shows no sign of slowing, with Q3 2018 illustrating a strong performance across the sector, reflected by the performance of the lending team at Signature Private Finance.
Total gross lending in Q3 was £213.35m up £15.4M on the previous quarter as developers recognise there is still good value to be purchased. Determined to add value to their purchases, by far the largest percentage of loans at 35%, were for refurbishment or development of properties.
Average completion was 46 days, a relatively long turnaround from our perspective and the average term length was 11 months. However, firms like ours are dragging the average down, completing deals within 10 days when borrowers have the same appetite and ambition we do.
The term length can cause developers a few headaches, with many attracted by the very low rates offered for 3 or 6-month bridging loans, like our own 0.45% per month for 3-months.
Refurbishment and conversion projects rarely run to plan, or indeed planned timescales, often over-running the date for loans to be repaid, which can put a borrower in default and incur penalties.
At Signature, our team members have personal experience of every aspect of property development and understand the issues that can arise, recommending a blended-rate solution when appropriate.
No borrower wants a loan for longer than necessary, so agreeing a blended rate, that combines rates for 3 and 6-months or longer, gives the developer a cost-effective solution, combined with enough time to finish the project.
Professional developers reflect the cost of any loan in their business plan for each property and the blended rate allows for the unexpected on site and offers sensible timescales for completion without penalty.
The Brexit effects
A no-deal Brexit could cause residential property prices to fall by as much as 35% over a three-year period, according to the Bank of England. This was merely a ‘view’ and not a prediction, but it is still ridiculous to claim a result that would be about twice as bad as the 2008 housing crash.
Many Signature clients are more optimistic and recognise that while Brexit may cause a short-lived fall in property values the market will inevitably bounce back, as it always has, even after 2008.
Whilst alternative lenders like us may see some developers or landlord clients reduce their activity because of market uncertainty, we expect more work from those that recognise the opportunity to buy properties whilst prices are slightly lower.
The uncertainty may cause the banks to cut their lending and the need to react quickly to opportunities presented, will see lenders like Signature, with an appetite to get deals done, flourish whether we Brexit or not.
The need for speed
Thanks to successive governments making it less and less attractive for property developers and landlords, with punitive stamp duty costs, a raft of tax hikes and other expenses, the buy-to-let market continues to consolidate.
We have seen many accidental landlords, people who more by accident than design ended up with one or two properties to rent out, exit the market. Typically, these properties have been snapped up by professional developers and landlords who have a business model built for the changes ahead.
For these property professionals, the banks have restricted their access to funds in recent years. And when available, it involves a slow, often tortuous process, driven by algorithms rather than the common sense of a lender who understands the property market and the ambition of the borrower.
And that is where alternative lenders like Signature fit in. We have access to funds and will look at any deal that fits our criteria, which is generally a property with four walls and a roof, often in need of refurbishment, that a developer wants to turn into much-needed housing stock.
But what property professionals want from a lender is the imagination to understand what the developer is planning, combined with the ability to get the deal done quickly.
The need for speed also extends to those deals that can’t be done too; if we can’t do it we’ll tell the potential borrower straight away and not keep them hanging on unnecessarily.
They also want great customer service that delivers them a deal quickly, keeps them informed at every stage and keeps the lawyers on track – it’s a winning formula that has shaped the service here at Signature and ensured our loan book grew 75.3% in 2018, compared to 2017.
Looking north and overseas
We recognise there is a weakening of property markets in the traditional hotspots, leaving little value for investors. Many of our developer and landlord clients are looking elsewhere, with regional markets in the Midlands and North attracting interest, to say nothing of the growing opportunities in Scotland.
It is important lenders like Signature support developers across the UK as they look to deliver the housing stock needed. There is no better indicator of the next city to attract the interest of the developers than the conversations to be heard at MIPIM 2019 in Cannes.
Each year it gathers the most influential personalities from all sectors of the international property industry, who come together for four days of networking and deal-making. For the first time we’ll be there.
We recognise we need to meet the people that will help our business take its next important steps as we transform our offering. So, whether you will be going or not, we would welcome the opportunity to talk short-term property finance and help you get a Signature on your next deal.