The history of ‘Bridging Loans’ is an interesting journey. Once mainly the preserve of our High Street banks, for the good reason that they knew their developer customers, often already had some land as security and could act quickly.
Plus, let’s be honest, they were easy money for a bank if they knew what they were doing. The ‘noose tightened’ when they stopped doing ‘Open-Ended’ bridging and then, presumably after losses, they more or less pulled out of this market.
A whole spectrum of lenders stepped in to fill the gap and now there are a diverse group of lenders providing bridging loans to developers, ranging from traditional finance providers, challenger banks, peer to peer lenders and often wealthy property individuals investing surplus cash into Funds. It is a difficult market to navigate sometimes as all have their own funding structures and appetites for different types of transaction.
The market has seen significant growth although of course it is always tied to property activity (particularly auctions). A spike in lending volumes earlier this year, ahead of the Stamp Duty Land Tax (SDLT) changes, has raised its profile (and caused some concerns) but there is evidence that developers are now routinely making more use of bridging loans.
Once seen as ‘lending of last resort’ we are now seeing more enquiries from well-established developers seeking short term lending with an acceptance of the terms involved.
The reasons for this would seem to be:
- There is more variety and flexibility amongst lenders, which enables more complex problems to be solved with finance.
- Greater regulation in the industry has led to an improvement in reputation and professionalism amongst lenders, many of whom have recruited quality real estate lenders from banks that no longer needed them.
- Competition has forced pricing down – it is now possible to get bridging loans at interest rates of less than 0.6% per month, and to solve what could be an expensive problem, or to exploit a valuable opportunity, this is cost-effective.
- Developers face intense competition for good sites so need to move quickly. Purchasing with a bridging loan whilst development funding is sorted out makes sense.
- Development lenders rarely lend against land pre-planning. Often a developer is confident enough on planning but faces delays. A land loan from a bridging lender, pending a switch to a land loan in a development structure (leveraging the planning gain) is a means to an end.
- Development finance can be complex and time consuming to arrange and also involve conditions such as project monitoring procedures. For a short-term project where a developer needs to turn a property around quickly, with little fuss, then short-term lending can be the right solution.
The role of a broker in organising bridging loans is important. It is difficult to establish which lenders like certain types of case and who is good to work with.
Pricing is not always easy to gauge either unless you work closely with lenders – often the most competitively priced are the smallest and most nimble who are subject to liquidity constraints and might be inflexible when you need to vary or extend a deal.
Two roles for a broker – to know who the lenders are and to present the case in a way that makes it easier to get best terms and then manage through.