Gross annual bridging lending increased to £4.4bn in July following the Brexit vote, with a 3.3% rise in lending since June, according to the latest West One Bridging Index.
The short-term lending market jumped 12.5% through March and April, with last minute purchases ahead of the early April deadline for Stamp Duty. West One said deals that wouldn’t complete on conventional buy-to-let mortgages needed bridging finance to complete, before later refinancing. After this spike in demand, lending returned to a steadier rate of growth over the subsequent three months.
While the residential market appears to be relatively unaffected by Brexit, the commercial market has slowed. In July, there were 1.7% fewer commercial property transactions compared with the same month last year. This represents the first year-on-year drop since April 2013.
At the same time, there has been a dip in commercial demand for short-term finance as part of funding commercial developments. West One said this has somewhat offset the positive residential sector’s contribution, tempering overall growth in the short-term lending sector to 3.3% in July.
Stephen Wasserman, managing director of West One Loans, said: “Once the initial surprise of the Referendum subsided, bridging lenders got back to business. While some deals did fall through at the end of June, plenty of new opportunities have appeared. With funding from traditional lenders drying up, the short-term finance sector has stepped up to plug the financing gap. Small businesses have also sought additional finance over the last few months to tide over the slowdown after the referendum. As the economy shook off any Brexit worries, bringing lending has increased.
“As fears of a new recession fade and confidence returns to the housing market, growth in the short-term finance sector will likely accelerate as residential transactions pick up pace. Clearly, with Brexit negations still to take place, uncertainty does still linger. However, the UK’s exit won’t take place for a few years, so demand for short-term finance remains strong, even if longer-term lenders may be struggling.”
The size of the typical bridging loan fell to £798,000 from £883,000 in May, aa 9.6%. The average loan to value ratio has also fallen by one percentage point since the referendum.
Wasserman added: “After the referendum, lenders who kept a tight hold on the reigns during the first half of the year were able to weather the economic storm relatively unscathed. Those who remained committed to responsible lending were well prepared for the economic turbulence. However, others with more aggressive lending policies are now having to retrench in the face of liquidity challenges. While the leave vote may have surprised many, it was not unforeseeable. Robust underwriting standards, low loan-to-value ratios and rigorous assessment of exit strategies have enabled short-term lenders who prepared for both Referendum outcomes to thrive despite financial headwinds. This preparation involved securing high quality deals through prudent practices, which allowed some lenders to expand even in these lean months, while still remaining protected against future uncertainty.
In a separate move, it’s interesting to note that the Financial Conduct Authority have called for feedback on their initial peer-to-peer lending and equity crowdsourcing regulations of 2014. It remains to be seen what the consultation will deliver, but increased scrutiny of alternative lenders, many of whom participate in bridging finance, can only be healthy for the reputation and sustainability of the short-term lending market.”