Earlier this week, asset finance lender Borro announced it was leaving the bridging sector with new chief executive officer John Allbrook citing overcrowding in the market as the reason for the decision.
Industry commentators believe Borro will not be the last lender to back out of bridging.
“The market is well supplied and pricing is becoming very competitive,” said Mark Harris, chief executive of SPF Private Clients.
“However, if you are well funded and provide a first-class service there is plenty of business. I suspect the cost of funding was prohibitive for Borro which was only a small player. Potentially others will exit this market, such as the ‘dabblers’ who may excel elsewhere but have been drawn into the property market seeing the potential returns while not realising what is involved and how competitive it is.
“Bridging specialists are not reducing their appetite at all, while we are also seeing new entrants with a link to property finance already continuing to look for opportunities. Brokers tend to stick with trusted lenders who they know can deliver unless there is something exceptional, such as rate or criteria, being offered.”
Michael Perry, bridging finance broker at Enness Bridging Finance agrees.
“It’s not surprising to see Borro exit the bridging market as they had already stopped bridging earlier this year and reentered the market,” he said. “We’ve already seen Funding Circle pull out of bridging and I expect we will see more exits as the market is starting to crystalise, making it harder for new entrants to make any headway as it’s so crowded; competition is driving down rates and, therefore, lenders’ profitability.”
Perry says newer entrants tend to offer a higher loan to values (LTV) and that is where the fundamental risk lies for anyone looking to enter this market and aiming to offer something different.
“Lowering rates hammers profit margins, so offering high LTVs to attract customers brings an increased risk of defaulting,” he added.
However, Steve Walker, managing director of Promise Specialist Lending said while the unregulated bridging market is crowded, the regulated sector – in which Borro operated – is not.
“The non regulated bridging market has been overcrowded for a long time with very little to distinguish between many lenders other than the promise of a fast decision and slick service,” he said. “We tend to favour lenders which also have a regulated arm and others which can differentiate themselves in a demonstrable manner which benefits the borrower so it would be little surprise to see more lenders exit the solely non regulated market. However low overheads and low regulatory burden probably allows them to tick over satisfactorily.
“The regulated sector is far less crowded so it’s disappointing that Borro has decided to exit as more lenders would be welcome. However Borro’s core business is built on far higher margins so maybe bridging was just not attractive enough commercially.”