Taking a closer look at how bridging finance can provide a fast, flexible solution to the funding needs of property professionals
Landlords affected by recent tax changes are increasingly looking to diversify away from ‘vanilla’ buy-to-let into higher-yielding options such as HMOs, student accommodation or commercial/semi-commercial properties.
However, to make this step, such professionals are often hampered by the inability to access finance in a way that lets them capitalise on opportunities when they arise.
This has seen an increase in the number of firms offering specialist lending, such as bridging finance, as a way of enabling professionals to seize the opportunities available.
Despite this, it is still a relatively unknown element in some parts of the property market.
So what is bridging and how can it help professionals?
What is a bridging loan?
A bridging loan is a short-term loan (typically less than 18 months) secured against property.
It is usually used by the borrower as a temporary financing solution, whilst transitioning to another financial arrangement or prior to selling the property.
For the lion’s share of professionals the most well known use of such finance is the raising of extra funds to buy a new property, whilst the sale of another property is being completed.
However, bridging finance is increasingly being used for alternative purposes.
These purposes include buying at auction, refurbishment and development and the raising of short-term capital for business use.
Auction finance 10%
Business finance 11%
Re-bridging (extending to another bridging product) 16%
Mortgage delays 19%
Other reasons 9%
Source: Bridging Trends by MT Finance
The benefits of bridging
The benefits of using bridging finance are numerous but the clearest of all is the fact that a borrower, typically, benefits from the fact that there are no early repayment penalties and rather just a single repayment at maturity of the loan.
With its faster execution, a bridging loan can be completed within two weeks, which also allows borrowers to capitalise on opportunities as they present themselves.
Additionally, with this form of finance there are monthly interest payments as it is typically rolled up over term.
And with underwriters in the sector focused on the property, borrower and the exit (repayment plan) as opposed to tick box criteria, bridging finance dovetails neatly with entrepreneurial property professionals.
It’s all about the exit
For those hoping to achieve the best deals in the bridging sector, the exit or repayment option, is of paramount importance.
Due to their focus on property and the one-off repayment nature of bridging loans, lenders expect any borrower to have a clarity of exit.
Typical exit routes include, but aren’t limited to: the sale of property, securing a long-term financial arrangement (a residential mortgage, buy-to-let mortgage or development finance) or the redemption of the loan with operating cash (for businesses).
Historically there has been a reticence from some borrowers to use bridging finance due to its perceived high price.
Indeed, in the past this assumption wasn’t without merit.
However, with demand for bridging increasing along with the number of lenders who are active in the sector, pricing has been driven down.
The average monthly interest rates on bridging loans has fallen year-on-year and the market is now priced at an all-time low.
According to data by Bridging Trends, the average monthly interest rate in 2018 was 0.81%, down from 0.83% in 2017 and 0.85% in 2016.
Source: Bridging Trends by MT Finance
A growing market
As a flexible product, bridging finance is rapidly establishing itself as a flexible solution to a range of common, and uncommon, property challenges.
Demand for fast, flexible finance is on the up and is quickly becoming a key part of property professionals’ ‘finance toolbox’.
Nothing illustrates that more than the figures from the Association of Short-Term Lenders; the Association found that gross bridging lending was in excess of £4bn and provided considerable support to the UK property market.
PropertyWire caught up with Anthony Bodenstein, CEO at Whitehall Capital, to get the lender’s take on the market.
How does bridging finance help property investors achieve their goals?
Bridge loans are applied to residential or commercial purchases enabling swift execution of property deals or to take advantage of short-term opportunities in order to secure long-term financing.
Bridge loans are typically paid back when the property is either sold, refinanced with a traditional lender, improved or completed, or undergoes a specific change that allows for a subsequent round of mortgage financing.
Banks have withdrawn, halted or reduced their exposure to the property sector as Basel III and other regulatory requirements have made traditional loans more expensive and harder to obtain.
Our work allows developers or property investors to move quickly when completing the purchase of an asset as well as during the planning stage.
What makes Whitehall Capital different to other bridging lenders?
We are a specialist property lender offering short-term finance solutions to private and corporate borrowers across the UK. Whitehall’s talented team brings market knowledge and broad sectoral experience to every transaction.
Robust funding lines and a creative approach have enabled us to establish a reputation for meeting our clients’ needs on time, every time. We strive to find tailored solutions to help our clients realise their ambitions.
Our experienced team provides terms in 24 hours and aims to close within a week though we have the ability to close a loan within five business days. Being under the umbrella of an asset manager allows us to have direct access to funds whilst not being reliant on external sources of capital. This is a unique advantage as the majority of our peers have to look elsewhere for funds after giving the loan a green light whilst our capital is always readily available.
Therefore, we have a well-established reputation in the market for being able to complete the deals in a very quick and efficient way.
Furthermore, our team takes a pragmatic and flexible view when it comes to challenging situations and we tend to find a solution that will work for all parties involved. However, I’d like to point out that we are selective in the loans that we allocate and always take very little risk. Indeed, we have lent close to £200m over the last four years and have reported zero loss of capital or interest.
Where speed was once one of the big reasons to use bridging finance, lenders seem to be slowing down. How important is speed in your view?
We believe that speed is essential as developers and investors are often keen to complete or start the works as soon as possible.
Some of the bigger bridge lenders have increasingly started to act more and more like banks – both in the length of time it takes them to issue a loan and in terms of the complexity of their application process.
Whitehall prides itself on having a simple and efficient application process with a flat management structure, allowing quick turnaround times for new applications. We are amongst the best performing funds over the last 12 months.
What is your approach to underwriting deals?
Efficiency and speed lie at the heart of everything we do, therefore once again we have developed a simple and efficient process.
Once an enquiry comes in, we aim to provide an initial answer on the same day and follow up with a term sheet in the next 24 hours.
The team simultaneously starts the due diligence and know your customer (KYC) work on the borrower, as well as also starting to gather information on the property that will act as a security.
Whitehall’s analysts will write a paper on the project and arrange a site visit – once this is done, a senior underwriter will review the file and finally it will go to the investment committee. This can all be completed in 48 hours.
By this stage our solicitors have already contacted the borrower’s representatives to start the legal work on the loan.
With a housing deficit in the UK, how important is the role of specialist finance such as bridging finance?
Bridging finance has become a key source of funding for property developers. Bridge loans are applied to residential or commercial purchases, allowing for swift execution on property deals, or to take advantage of short-term opportunities in order to secure long-term financing.
In reality, some of the larger bridge lending companies have started to act more like banks and now take almost as long as traditional banks to complete on their loans.
Therefore, the benefits of working with specialised boutique firms like Whitehall Capital are now obvious.
As a lender, you also have a fund which is open to investors. How does that perform compared to other investment opportunities?
As an asset manager with access to all asset classes, including equities, bonds, property and other alternative investments, we strongly believe that no other asset class provides a better risk-adjusted return than our bridge finance fund, Whitehall Capital.
The investment in our bridge finance fund is low risk; we will lend a maximum of 70% of the value of the property and most of the time we will also have a personal guarantee, which provides a steady double-digit return of around 10%.
This compares very favourably to other asset classes. Yields on GPB bonds are around 3% or 4% and to achieve these rates some risk and exposure to volatility is necessary. Meanwhile, equity markets have been even more volatile over the last few years.
As all our loans have a maximum tenor of 12 months, they are exposed to marginal duration risk. By investing in the fund, the investor will be exposed to a diversified portfolio of loans, thereby further reducing risk.
The fund is designed to generate returns irrespective of market conditions through opportunistic financing and expert asset management of residential and commercial real estate.
We have recently lowered the minimum entry to the fund to £50,000 enabling access to smaller investors.
What does the next 12 months hold for the UK property market?
It is beyond doubt that ‘Brexit’ represents one of the most significant unknown variables today for which all businesses are trying to prepare.
There are, though, other noteworthy developments to consider when looking ahead this year and gauging the directions, options and opportunities in the bridging finance and property investment markets.
Market resilience is evident in a number of factors – the consumer price index remains at a steady level (2.1% in December 2018, down from 2.3% in November 2018), and the Bank of England has kept the interest rate at 0.75%.
As RICS has reported, Brexit has caused a slowdown in the housing market, with more homeowners waiting to see what happens in the coming months and thereby staying in their current home rather than moving at the present time. It’s expected we’ll see a reduction in property transactions rather than a decrease in values.