What does the future hold for bridging?

On Friday, September 14, the newspapers trumpeted Mark Carney’s warning to the Cabinet the day before that UK house prices would fall by 35% over three years if there was a no-deal Brexit. Later, he sought to clarify this, saying that this is a worst-case scenario which also envisaged unemployment rising to 9.5% and interest rates jumping to 4%.

Whatever the reasons behind the warning, to say the least this was not helpful to a skittish property market, as evidenced by the Nationwide Price Index, which saw a monthly change of minus 0.5% in August, cancelling out most of the rise of 0.7% in July. It is very likely to dissuade buyers from purchasing property until the shape of Brexit becomes clearer. What one also needs to consider is that rising inflation will assist in keeping Sterling prices steady, even though they will be falling in real terms.

How will this affect the short-term property finance market?

Although the general situation is not like 2007-8, this is no time for complacency. Sub 2% interest rates look like being here for a long time, barring crises which may require higher rates to protect the Pound. Many long-term lenders are now offering high LTV loans at competitive rates, reducing the problem of the need for high deposits. Interest rate fixes give comfort to those who are able to meet monthly payments, but could be in difficulty if rates increase.

In a Sentiment Survey of members of the Association of Short Term Lenders in September, 34% said that the main impact on their business over the past decade was the continued reticence of the banking sector to lend where all the boxes weren’t ticked. The next highest issue was property prices (21%). Only 7% chose Brexit.

Looking forward to the next decade, the main issue, chosen by 28% of respondents, was Brexit, with property prices and knowledge of bridging becoming more widespread tied at 21% each. 18% of respondents are very positive about the future of the bridging sector and 75% are fairly positive. 7% are neutral and no-one is negative.

The short-term property lending sector is attracting new entries at an ever-increasing pace, as investors chase returns which are not easily available elsewhere. Existing firms are seeking to expand. Competition is affecting pricing, which sometimes is market-based, rather than risk-based. There is a shortage of good, experienced staff, with lenders tempting people away with sweet offers. There is a need for education – bigger firms are able to do this in-house, but smaller ones are often dependent on outside suppliers, which may not be attuned to the specific needs of short-term lending, especially in the importance of exit routes, which are possibly the most important factor in this sector.

The ASTL will next year be launching a series of seminars for members to cover various aspects. It already has regular seminars on fraud detection and prevention and has hosted meetings with intermediaries. Associate members have also provided seminars to cover subjects such as development funding.

No doubt there will be casualties in this sector, as there have been in past years. Property finance is not risk-free and lenders should be mindful of changes in the market. All I can do is to echo the words of Sergeant Phil Esterhaus, in the TV show Hill Street Blues (1981-1987). ... As he finished up his roll call for the day, he would bid his officers farewell with the advice—"Let's be careful out there."

 

Benson Hersch, CEO of the ASTL

A version of this article appeared in the October edition of Bridging Introducer