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Using bridging for a development project is the most popular reason

Funding a development project is the most popular use for bridging finance, with one third of those taking it out for this reason in Q2, up 24% year-on-year, the latest result mtf Broker Sentiment Survey has found.

Property investors are increasingly turning to bridging finance to fund development projects and refurbishments, taking advantage of vast liquidity on offer to improve new or existing portfolio properties and maximise the value of their assets.

Refurbishment was the second most popular reason for getting a bridging loan at 27%, compared to 19% during the second quarter of 2017.

Gareth Lewis, commercial director at mtf, said: “With mainstream lenders implementing tougher affordability restrictions, it has been harder for investors to access funds and the feedback from our brokers suggests that more are turning to bridging finance as a result.

“In particular, investors are looking to add value to a property rather than purchase a property as a straight forward portfolio investment.

“This trend is evidently not just limited to light and decorative refurbishment, but also property conversion, extensions, reconfiguration and smaller scale ground up developments.

“We believe we will continue to see a substantial rise in the demand for development and refurbishment products throughout the rest of the year.”

Investors are opting for fast and flexible bridging loans to make improvements to properties and bolster yields against a backdrop of legislation that has made it tougher to buy new properties. At the same time mainstream banks continue to reign in lending.

Some 26% said buy-to-let lending restrictions was the biggest challenge facing UK finance brokers, while 24% said it was the government’s continued changes to buy-to-let legislation.

Due to these challenges, overall demand for bridging finance increased in Q2 with 38% of brokers noticing a rise in bridging loan volume, up from 30% in the first quarter of 2018.

The biggest demand for bridging loans in Q2 2018 came from the South East at 30%, followed by the Midlands at 19%.

Source: Mortgage Introducer

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Bridging lenders have rushed into development finance

Legal expert Jonathan Newman reckons some short-term lenders have rashly entered into development finance without having the necessary experience.

Newman (pictured), who is senior partner at Brightstone Law, has seen a rise in lenders over-valuing the gross-development-value of properties, which can affect whether they come to market.

He said: “Short-term lenders went into development finance in a hurry probably circa four or five years ago.

“It is quite a specialist area of lending. Sometimes lenders will freely admit that they didn’t necessarily have the experience to get the right technical knowhow in-house.

“Lenders are now beginning to see problems arise which they weren’t expecting mainly as a result of a lack of experience.”

Another issue Newman highlighted is lenders failing to think through the impact developments can have on neighbouring properties, which can lead to complaints.

Lenders can also lose out if the developer fails to use the funds correctly, meaning they commonly have to scrutinise development cases on more of an ongoing basis than with standard bridging.

In all Brightstone Law has seen a 150% increase in ‘problem’ development lending cases in the last 12 months.

Ashley Ilsen, who left development finance lender Regentsmead in January to launch a new one called Magnet Capital this year, thinks Newman is bang on the money.

He said: “In the last 18 months we started losing business to lenders that were over-leveraging in term of loan-to-value.

“That was due to a spill-over from the bridging industry because it got crowded; it forced lenders to go into areas with nothing to do with bridging.

“It’s got a different skillset in terms of underwriting and valuing – hence a lot of them aren’t getting the money back that they thought they would get.

“If you are lending at 65% GDV and you are rolling up fees and that valuation wasn’t what you thought it would be, your loan-to-value is significantly higher.”

Both Newman and Ilsen added that lenders have gotten themselves into even more difficulties owing to the declining nature of the property market in the past few years.

Buster Tolfree, who is commercial director of United Trust Bank, which has separate bridging and development finance divisions, agreed that there is a significant divide between the two.

He said: “Just because you’re good at bridging doesn’t mean you’re good at development and viva versa.

“If you go into development with a bridging mindset it does raise certain risks.”

Association of Short Term Lenders data shows there was £386.1m worth of bridging development lending in the first quarter of 2018, a 22% increase from the previous quarter.

Safeguards

Newman advises lenders to make sure they use experienced solicitors, specialist valuers and knowledgeable quantity surveyors to manage risk.

He added: “I think development lending is double the risk of any other lending. Not only is it the usual loan and security risk, but the ending is likely to be over a much longer-term.

“The risks are two-fold. Who are you lending to and do they have a track record for developing in the character of the development that you are lending?”

Ilsen says the key is having the necessary expertise in-house and understanding the developer.

He added: “A good lender should not rely on partnerships. Any development lender worth their salt will have the expertise in house – you shouldn’t rely on surveyors to tell you what’s going on.

“You need to understand who you are lending to, whether SMEs or builders. You need to understand the delays to building supplies, the way prices fluctuate and their ability to market their product when it’s finished.”

Tolfree added that United Trust Bank manages risk by assigning a business development director who has a close relationship with surveyors and builders to look after the project from start to finish.

Source: Mortgage Introducer

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Bridging development loans up 22% in Q1

In Q1 2018, there was a 22% increase in in bridging development loans since the previous quarter, with members of the ASTL lending £386.1m worth of development loans, of which £242.2m were categorised as bridging.

This further highlights the crucial role of the short-term lending market in supporting the property development sector in the UK.

Terry Pritchard, director at Charterhouse, said: “There’s a lot of development bridging finance at the moment and a lot of planning applications.

“We’re still a nation looking to build. I’ve seen lots of application for bridging, mostly for new build. There’s lots of business, however it’s not all good quality.”

Chris Dawe, sales director at brokerage LDNfinance, said: “This is certainly a trend that we have seen. This is mainly linked to the reduction in mainstream buy-to-let and standard property investments due to lender criteria and tax changes.

“This has prompted the clients looking to invest in property to move their focus towards alternative investment property propositions which may involve reconfiguration, refurbishment or renovation.”

Property development bridging loans are a method of obtaining short-term finance in order to either secure a property or refurbish with the intention of adding value.

These development loans exclude what is generally termed “light refurbishment”, such as the addition or renovation of bathrooms, kitchens and conservatories as these generally do not require planning permission or extensive structural changes.

Harry Hodell, senior originator at Fiduciam, said: “There is a evidenced shortage of housing throughout the UK, so increase in development bridging loans comes as no surprise to Fiduciam.

“The market demand for competitive short term funding options, remain high and although improving, funders providing competitive bridge development products are some way off meeting the demand out there.

“We expect this figure to continue growing as SME’s become more accustomed to using alternative financiers and aware of the wide range of bespoke lending available to them.”

Benson Hersch, chief executive of the ASTL, said: “The role of small and medium building firms are seen as crucial in helping solve the housing crisis but access to finance still remains their toughest barrier to overcome.

“Whilst SME building firms continue to be locked out of mainstream channels, they will increasingly rely on different sources of finance such as short-term funding solutions. These alternative forms of finance are providing a solution and allowing small developers to play their part in housing delivery.”

Source: Mortgage Introducer