The bridging market has changed a lot over the past decade. No longer is the dominant model to have a number of private individuals funding short-term development projects, underwritten on a case by case basis and priced typically at between 1.5 and 2 per cent a month. A consistently low base rate, a drop in residential transactions and a tougher consumer mortgage market have all conspired to bring a marked increase in institutional funding to the bridging sector.
Following the worst of the crash, a number of new lenders with experience of residential regulated lending entered the short-term sector, backed by international private equity money and in search of the higher returns it offered. To a large extent, these entrants have contributed to cleaning the wilder edges of the market up. They have put pressure on pricing, to the benefit of borrowers, all but wiped out the worst of the in/out charges that were regularly slapped on deals and brought a more consistent approach to underwriting deals.
It has been well-timed and welcome, particularly given the increasing focus on the sector that occurred during the Mortgage Market Review which pulled a significant part of the bridging market into the regulator’s sphere of supervision. It would be hard to argue that the short-term market isn’t better off for all this.
But, as with most markets, there have been unintended consequences from these shifts.
While the market is arguably ‘more professional’ it is also far more restrictive than it used to be, and there are deals that are overlooked, not because they don’t represent a good risk but rather, they lie outside the often strict constraints placed on money by third party funders. Quite rightly, funders deploying capital at scale will place certain covenants on that money – often requiring lenders to adhere to a restrictive set of criteria that relate to both borrower and security. Partly this is a function of money moving from a regulated market to an unregulated market and bringing with it the conventions of the former.
But bridging is by nature very different from long-term mortgage lending. The borrower’s status is not in contention in the short-term sector in the same way it is in residential lending. In bridging, security is everything. Yet the appearance of institutional funding has moved even experienced underwriters away from this approach. While on residential regulated deals borrower status is critical, not least for their own protection, credit profiling has made its way across the market to unregulated deals as well. In certain circumstances, this might be a sensible approach. In others, it is most definitely stopping good deals from being done.
No-one is arguing for lax lending standards – the demise of several newer entrants that took inappropriate risks is testament to why that must be avoided. But there is scope for experienced lenders to revisit the basics of bridging, allowing them to use their judgement rather than a set of predetermined rules set by a funder in another country.