What is happening to the size of the UK property bridging loans and development finance market

We believe that lending volumes for both property bridging loans and development finance have continued to grow throughout 2018. Indicators suggest that bridging loans totalled close to £5 billion and development finance is now running at about £8 billion per year. As an uncertain Brexit comes ever closer we expect many banks and other institutional lenders to reduce their exposure to what they regard as risker investments. This will mean that smaller developers and property traders will be forced to seek funding outside of traditional lenders. As about 85% of funding from bridging loan and development finance lenders goes to property professionals this will result in an increase in loans written by these participants.

Over the last three to four years the number of lenders offering funds secured on property has increased exponentially. We now estimate that there are now about 3,000 sources of funding for property backed transactions in the UK alone. This is one of the reasons why we created the Racefields Exchange through which borrowers have direct access to a considerable number of these lenders.

As you would expect the vast number of lenders in the market has forced interest rates to fall. Coming into 2018 we believe that average rates for both bridging loans and development finance was running at 0.85% per month. However, over 2018 we believe that average rates have reduced to about 0.75%. Specialist development finance lenders can still demand rates of around 1.25% per month. Some bridging loan companies who are prepared to take on what could be regarded as risky loans can achieve rates of between 1.15% and 1.3%. Completion fees have tended to stick at 1% though exit fees are often removed if the loan is repaid on time.

Lenders continue to push LTVs upwards in an attempt to generate new enquires. Levels of 70% and more are becoming common as lenders seek new business and try to preserve their interest rates. We have heard of one development finance lender now offering 100% LTV which may cause other lenders to further increase their LTV tolerance to remain competitive.

Brokers and other intermediaries continue to dominate the market. Fees of 1% based on the capital value of a loan continue to be paid by lenders and sometimes fees of between 1.5% and 2% can be paid by lenders struggling to source new business. Sometimes brokers are also paid a proportion of any exit fee which is meant to incentivize them to refinance the loan elsewhere before the term is reached.

We believe that 2019 will see the number of new lenders entering the market to rapidly decline. Brexit and the financial uncertainty that goes with it will probably cause interest rates to rise as all property lenders consider their lending criteria. We do not think that either the bridging loan or the development finance sectors will grow significantly in 2019. In fact, our view of current indicators suggests that lending volumes will either remain stable or may even decline over the current year as institutional lenders reduce their exposure.

NOTE: This report is the view of Racefields Ltd and is not to be taken as investment advice.

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