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Bridging lenders warned of the risks of cutting costs

A law firm is warning bridging lenders of the dangers of procuring legal or surveying services on the basis of price alone, after it emerged many were compromising on due diligence to cut costs.

The alert comes following a study by Brightstone Law, in which it identified a trend where new lenders in the market were seeking to drive down fees by procuring professionals based simply on price.

The law firm said while this might work commercially, on a superficial level it could potentially be damaging to lenders further down the loan journey.

Indeed, it warned a law firm or surveyor employed simply on price might not have the right knowledge, skills and experiences to handle issues and complications which might arise in short-term loans.

And it raised concerns if one of these firms were asked to provide less than a comprehensive service, a so-called lite version, which was appropriately priced, it could end up being delivered by a less senior staff member.

Jonathan Newman, senior partner at Brightstone Law said: “For the first time in all my years of practice, too many to mention, my firm is turning away new custom. The reason is not lack of capacity. Far from it. The teams and practice continue to grow to meet demand.

“Many of these new lenders don’t have the benefit of past experience, or may have erased from their memories, the hard lessons taught in the last recession. These potential new clients appear to have a fixation on price and an appetite for the dilution of service requirements – professional services lite.”

Bridging market evolution
The bridging market – along with the accompanying legislation and regulation – has evolved over the past few years, which Brightstone Law said had led to the creation of more complex challenges.

Meanwhile, the responsibility of firms to deal with their own regulatory issues such as anti-money laundering, GDPR and cybercrime created additional layers of red tape.

This, said Brightstone Law, meant more sophisticated and reliable support was required – but this came at a cost.

Newman added: “In today’s market, these considerations should not outweigh a requirement for the right professional resource, to deliver the right professional job, comprehensively and thoroughly. I hear much about lenders and this risk curve – but those discussions centre on riskier lending, not on watered down, professional relationships.

“More now than ever before, lenders need the right professional partners to protect them, in a market where the pressure is to be flexible and commercial; where the classes of lending are trickier; and where levels of default and areas of dispute remain more common, than in the mainstream mortgage market.

“Lenders need to balance their appetite for greater distribution share, with minimising risk, not by indirectly and unconsciously increasing it.”

By Kate Saines

Source: Mortgage Finance Gazette

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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 lenders are positive about the future

ASTL found the majority (78%) of members expect their business turnover to grow, with two thirds (63%) expecting the same of the bridging finance sector as a whole. Members are also very positive about the prospects of providing short term finance to SME housebuilders, with 93% believing this is a growth area.

However, members are slightly less optimistic about the long-term future prospects of the UK economy, with positivity decreasing from 50% in December 2017 to 43% this month. Just over half (52%) of members are unsure, and 11% feel negatively about the economy. This is likely due to the protracted nature of the Brexit negotiations combined with the rise in inflation, which in turn is likely to lead to higher interest rates.

ASTL members are split about the direction of property prices, with 52% expecting slight growth and 48% expecting prices to fall. They are lukewarm about the potential impact of the Spring Statement, with 48% neutral and 19% negative.

ASTL CEO Benson Hersch said: “Whilst I remain cautious about future prospects for the UK in a very uncertain world, in which the economic climate can change overnight, members are confident that they will continue to prosper. The use of bridging as a financial tool, both for property transactions and for other business purposes is now well-established.”

Source: Mortgage Finance Gazette

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What makes for a great bridging lender?

Bridging finance is a specialist form of short-term lending designed to assist homeowners in securing their dream home, construct new builds and buy land.

As it grows in popularity, more and more brokers are interested in offering it to their customers. But bridging isn’t a simple product, so it’s crucial brokers do their homework before entering this new space.

Over the past few years, bridging loans have moved into the mainstream as a way for people to secure short-term lending to meet a range of everyday needs. However, it is still a specialist, complex product and any broker thinking of incorporating bridging into their portfolio should choose their preferred lender carefully. Here, I give an overview of bridging finance and four things to tick off when you choose who to work with.

Bridging finance

A bridging loan is a form of short-term finance that – as the name suggests – helps borrowers bridge the gap, typically between the sale of something and the purchase of a new thing, such as selling a house and buying a new one, although it is often used for other reasons, as explained below.

Usually, though, bridging finance is often centred around a time window or a deadline. Generally speaking, the customer needs to raise finance quickly so they do not miss out on something – a dream home, for example.

In the wake of the credit crunch, some mainstream banks tightened up their lending criteria, meaning many people found themselves unable to source lending finance from high street names. This gave rise to a number of alternative lenders who directly specialise in bridging.

What people use bridging finance for

• buying a new home before the sale of their current one
• building a house, moving into it and selling their old house (to pay the loan back)
• buying land and building property – either to move into or sell.

Benefits of a bridging loan

• Speed – taking a bridging loan to buy a new property prior to the sale of the current one can be much faster than arranging a mortgage
• Need – bridging loans offer fast access to cash, which is crucial when a payment deadline needs to be met
• Flexibility – bridging lenders often specialise in supporting people with impaired credit, short work histories etc.

What should you look for in a bridging lender?

Speed and precision

As mentioned above, a key bridging USP is that they offer the customer swift access to finance. This is essential if they are, for example, to pay for a house in a very short space of time. So look for a bridging lender with a track record in delivering cases quickly. However, it’s important to note that speed should not be conflated with rushing a case through. The key is to find a lender that can offer a quick turnaround, but doesn’t sacrifice on diligence.

Experience in the industry

As a short-term financing solution, bridging finance is a form of specialist lending. It’s important, then, to work with a lender that knows bridging like the back of their hand – look for lenders with some years of experience or who’ve secured awards for their bridging work. These lenders will know the ins and outs of the industry much more than a traditional lender or a new entrant. Expert underwriters are crucial too – these guys help drive the cases through.

Focus on transparency

In a volatile economic world, honesty holds strong currency. Bridging finance is more complex than, say, a personal loan, so seek out a lender with a strong transparency-first approach. This means being open and honest about fees and charges, yes, but also things like complaints policies, how they assess deals, whether they’re directly funded etc. Openness builds trust, which leads me nicely on to my next point.

Relationship focused

In my experience, some of the most successful bridging deals come off because the parties involved are used to working with each other. They know how each other operate, the kinds of processes they use and the approach they take. This familiarity often results in an excellent result for the customer. If you meet with a lender and can see yourselves working together for a long time, they might just be the one for you.

Source: Bridging and Commercial

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A number of bridging lenders may target business sales in two to five years, claims new report

A number of bridging lenders could be looking to sell up over the next two to five years, according to a new UK bridging market study.

The report ‘A View for 2018 and Beyond’ from the Ernst & Young (“EY”) Financial Services Corporate Finance team includes the results of a survey conducted with 11 key bridging market players.

It also highlights recent trends and provides a view on market trajectory.

“One of the reasons for producing this market study is that many bridging lenders are targeting a sale of the business in the next two to five years, although currently few are up for sale,” explained Jordan Blakesley, senior manager in the EY Financial Services Corporate Finance team.

“We wanted to use our insight to create a report for the market that helped businesses shape their strategic direction.”

The survey showed that many respondents expected the number of players in the bridging market to decrease over the next few years due to competition forcing some players without unique selling propositions to exit the market, larger existing players organically growing and diversifying into other markets and smaller lenders being acquired by larger ones.

Stuart Mogg, director in the EY Financial Services Corporate Finance team, explained to B&C that while consolidation meant fewer players, they would be “highly profitable” with improved funding terms and potential for greater product innovation.

Stuart added: “There has been a good funding market for the bridging sector over the last couple of years, which has supported the growth of the larger players.

“As a result, we are starting to see a polarisation of the market and it has become clear that smaller players need to do something strategic to compete and achieve greater scale.”

Speaking to B&C, Rob Jupp, CEO of Brightstar said: “EY are seen as the most prolific deal makers in the UK speciality finance sector and any predictions that they make in this sector are generally spot on.

“Short-term lenders have attracted interest from a broad church of investors for quite a while now and I would expect to see the ‘best in class’ generating the environment that will allow for a number of significant capital events in the months and years ahead.”

The research indicated the strategic routes available for lenders within the markets that they were aiming to grow.

These included selling, merging, expanding overseas, buying a broker, exiting the market and expanding product ranges.

According to survey responses, the US market appealed to many bridging lenders if they were to consider international expansion due to there being capacity to grow quickly. The report stated that most lenders discounted Europe because of more customer-friendly legal systems and language barriers.

The study also explained numerous debt and equity funding options and how a lender would need to prepare for such a transaction.

The EY bridging market study can be viewed online.

Source: Bridging and Commercial