‘10 Years Later’ - Bridging After the Credit Crunch
09.11.18
10 years on from the advent of the financial crisis, ‘Bridging Introducer’ magazine asked Colin Sanders - CEO of Tuscan Capital - for his views on the bridging market since then and what he thinks the future might hold.
Read on to discover his thoughts...
Bridging Introducer: What key events have taken place over the last 10 years in the bridging market?
Colin Sanders: The single most important event to impact the bridging sector in the past 10 years is the financial crisis - the ‘credit crunch’ - of 2008. It heralded a massive expansion of the sector with an influx of new lenders and new funding, both seeking fresh opportunities following the depression of the mainstream and specialist long-term mortgage markets.
Often bringing with them deep experience of lending via intermediary channels, these new lenders helped open the sector to brokers previously disinterested or poorly informed about short-term lending. It also led directly to product improvements - both in design and breadth of choice - together with substantial reductions in the cost of bridging finance.
With the high street banks and other institutional players largely absent for a number of years, new boutique lenders played a crucial role in helping fill the liquidity gap. The lifeline this offered SMEs, developers and property investors helped stabilise the UK’s economically-important real estate sector and to raise the profile of bridging in a way never previously seen.
The next big event on the horizon is Brexit. Whilst the final outcome remains uncertain, I believe it will provide a further boost to smaller-scale, nimble lenders able to focus on a domestic lending agenda as multi-product, cross-border institutional lenders find themselves distracted by unfolding events.
BI: How has the bridging market changed?
CS: Once a ‘shadowy’ product not well understood by many outside its narrow confines, I believe bridging has made the transition to become a reputable mainstream financing product.
There is now much greater awareness of bridging’s usefulness and flexibility as a funding tool, and the new post-2008 generation of lenders have brought with them crucial lessons hard-learnt during the financial crisis.
With large-scale lending platforms now commonplace within the sector, these positive developments have unquestionably helped improve both the practices within the sector and its overall reputation.
A further significant change is the way in which alternative funding models have been created. Previously heavily reliant on private funding, bridging now attracts a large proportion of its funding from sophisticated channels that include P2P platforms, capital markets, bonds and retail banking deposits.
Rather predictably, as bridging has expanded, and its profile successfully raised, regulatory scrutiny and intervention has followed. This is no bad thing so long as the relevant authorities understand that bridging is a bespoke product designed for a specialist audience. It is not the same as mainstream mortgage lending, and whilst some regulatory designs are fit for both sectors, a simplistic ‘copy and paste’ approach to regulation of short-term lending just won’t do.
It is here that our trade associations - the ASTL, NACFB etc - have a critical role to play by lobbying lawmakers and regulators to ensure this healthy, vibrant, wealth-creating sector is not suffocated by unnecessary rules or burdensome red-tape.
BI: What lessons have been learned from the past?
CS: The new generation of lenders has brought to bridging a greater and more sophisticated understanding of risk modelling. This has allowed the cost of bridging products to reduce, and LTVs to rise, without compromising prudence.
That said, I believe bridging lenders still need to take care to ensure that competitive tensions and a highly liquid market do not encourage them to take unnecessary lending risks or to allow margins to thin too far. A short-sighted approach is in no one’s interest and a sustainable, profitable industry must be our long-term goal.
BI: How has demand for business changed?
CS: Bridging provides an invaluable function in helping plug the funding gap left by the retreat of the mainstream providers. This has widened in recent years due to tighter regulatory controls and a change in risk attitude among the big banks and other traditional players. The impact on SMEs and entrepreneurs has been severe, but bridging lenders have stepped in to help, and continue to do so.
But it isn’t just about lenders. Intermediaries have played a vital role in helping bring the product to a wider audience and the sector now boasts the active involvement of professional brokers, advisers and packagers, all of whom are helping fuel demand while improving consumer awareness and understanding.
But more still needs to be done in this regard as surveys regularly show that a large section of our potential audience is still in the dark about alternative forms of funding in general and bridging in particular.
BI: How has the purposes used for bridging changed?
CS: Once perceived purely as a financial device for mending ‘broken property chains’, bridging is now widely used by real estate professionals, many of whom are frustrated by the lack of funding from their traditional providers.
Professional landlords, property investors and developers now commonly use bridge facilities as an alternative to equity or debt from mainstream lenders. Speed of decision and delivery have become attractive features of modern-day bridging for this audience. No longer prepared to put up with the glacial-slow ‘credit committee’ approach of many institutional lenders, they have turned instead to smaller specialist providers.
One consequence of this has been a blurring of the lines between the different forms of short-term lending. Many bridging providers now offer a lending palette comprising a range of options: from straightforward vanilla bridging to more complex heavy development funding and mezzanine finance. Brokers and their clients have never had greater choice.
BI: What impact has the growth of trade bodies such as the ASTL had?
CS: Having in place effective trade bodies is a key ingredient in the success of any serious business sector. They not only provide a platform for discussion and the sharing of views, but play an essential role in defining - and enforcing - agreed standards of behaviour and practice. In addition, a good trade body will collate, interpret and disseminate industry data and so serve as the ‘go-to’ source for reliable comment, opinion and facts.
In my view, the ASTL performs all these functions efficiently. Its existence and continuing evolution have helped enhance the reputation of bridging by bringing peer pressure to bear on lenders to operate to the ASTL code of conduct. It does, in addition, help create a collective sense of identity among lenders while providing a critical lobbying role to ensure our voice is heard where it matters most.
I should state for the record that while Tuscan Capital is not presently a member of the ASTL we have commenced the application process and hope to be accepted into the fold in the near future.
BI: How is the reputation and state of the market now compared to 10 years ago?
CS: Much better. In my experience, the average cost of a bridge loan is down by half: 9% per annum is now normal versus 18% per annum back in 2009. Also, facility fees and penal default rates are no longer justifiable, and these costs and practices have been equally reduced or eliminated altogether.
BI: What will the short-term and long-term future be like?
CS: Overall, my outlook is very positive over both the short- and long-term. I believe specialist bridging lenders are here to stay and have successfully carved out for themselves a permanent place in the market. This has as much to do with the flexible, dynamic attitude of the new generation of lenders, and their broker partners, as it has with the continuing funding absence of larger, more sclerotic mainstream providers.
That said, I believe it’s important to recognise that the bridging market is finite in size. It will never come close to rivalling the residential mortgage or buy-to-let markets. This fact alone will limit the number of participants it can support. Moreover, I continue to see some very aggressive growth plans that, ultimately, will disappoint some hedge funds and private equity players who are seeking substantial returns from their investments.
Inevitably, therefore, some of the more opportunistic and unrealistic new lender entrants, together with their associated funding, will disappear when other, more lucrative, asset-classes and investment opportunities present themselves.
Colin Sanders was speaking to ‘Bridging Introducer’ magazine. To read the full article, go to: https://www.mortgageintroducer.com/digital/bi/2018/august/html5/