Indeed, in its February White Paper, Fixing our Broken Housing Market, the government identified lack of funding for small developers as a significant barrier to new house building.
It is in this setting that bridging loans have become increasingly popular for property professionals as they look towards alternative forms of finance.
Bridging provides immediate cash flow to meet current financial obligations, and can be used for a wide variety of purposes and on a range of property types. Those include property renovations and conversions, as well as small-scale property development work.
With average bridging finance lending being just under £1m and loans carrying no exit penalties, it quickly becomes clear that bridging is a useful tool for smaller-scale projects or projects with quick turnarounds.
Indeed, we’ve seen steady growth in the UK’s bridging sector this year; as confirmed in West One’s latest Bridging Index, gross annual lending grew for the third consecutive quarter, to reach £4.3bn in June. This is a substantial 4.2% increase from June 2016’s figures and approaching 2016’s pre-EU Referendum high of £4.4bn.
Property professionals are dominating the bridging market, with property projects accounting for an estimated 85% of total lending.
That means bridging providers are lending £3.5bn of funding per year for significant property ventures, making it an increasingly favoured form of finance. This compares favourably with De Montfort University’s estimate that the total market for development finance lending was £7.7bn in 2016, according to its Commercial Property Lending report.
This figure suggests bridging is providing half as much funding again as conventional development finance and goes some way to proving the wealth of interest in the market.
£10m minimum lend
The issue of project scale comes to the fore when we consider the De Montfort study found only 20% of development finance lenders were interested in lending on projects under £10m.
By contrast, Knight Frank research in its latest 2016/17 residential developer survey, showed that 62% of those studied were pursuing minimum development funding in the £1-10m range, with a further 16% wanting to finance smaller projects up to £1m.
With only a fifth of the market willing to lend less than £10m, this is likely to leave a large number of residential development projects inadequately provided for by conventional development financing.
Bridging up to higher loans
Bridging lending characteristically functions in precisely this underserved area of loans up to £10m, with some larger projects financed as well.
It is capitalising on an area which straightforward development finance lenders overlook in favour of larger, high value projects.
Reflecting this SME need, the government’s White Paper also featured the establishment of the Home Building Fund.
This was created to provide “£1bn of short-term loan finance targeted at SMEs, custom-builders and innovators”, with the intention to support SME developers to involve them in the home-building market once again. This highlights that there is yet more slack in small project funding that bridging can continue to capture.
With an overwhelming discrepancy between supply and demand in the housing market, it is key to remember that small developers are still active.
We suspect there is sufficient space for bridging to continue to benefit from the opportunities which remain, even if the slower pace of the property market leads to fewer opportunities as a whole.
The bridging sector is growing and we’re optimistic this upward trend will continue, as many seek to make the most of the flexibility and speed this unique type of financing offers. This suggests bridging will break the £5bn barrier in the near future.