How The Covid-19 Pandemic Brought Alternative Finance Into The Mainstream
It did not take the keenest of observers to note that, over the course of the pandemic, something remarkable was taking place within the property market.
Namely, the spike in both transactional activity and house prices. While many sectors were reduced to emergency survival operations, the property market basked in largesse. On reflection, the sheer scale of the property boom over the last 18 months makes it difficult to remember that, in the early months following the onset of the pandemic, this sector faced as many challenges as any other. The most immediately striking of which was the need for the sector to adapt to social distancing restrictions.
Estate agents and conveyancers, in this uncertain initial period, struggled to translate their offering to digital platforms, having lost the ability to perform on-site property viewings. In turn, activity slowed, as buyers were unable to assess these large investment assets with their own eyes. Should a residential property transaction have been completed in this period, there were significant obstacles to actually moving property, with removals firms, decorators, and tradespeople, all operating at a restricted capacity, if at all.
There were more fundamental issues clogging up the liquidity of the market. For one, obtaining wet signatures on crucial documentation became a tiring process. It was not until late July 2020 that HM Land Registry announced it would now accept witnessed electronic signatures. Equally disruptive was that, on the financial side, mainstream lenders took a particularly cautious approach given the prevailing economic uncertainty, with the consequence being the vast majority of basic mortgage products falling out of the market. It is important to establish these financial and structural challenges to understand how alternative finance, in particular bridging loans, became so well-placed to access a larger market, once the sector began to rejuvenate at pace in the summer.
How the sector turned around
By the summer of 2020, the dark clouds that loomed over the UK housing market began to part. In fact, the market bounced back from the initial gloom with unprecedented vigour – a marked and sustained period of growth which, more than a year later, has yet to show signs of plateauing. Naturally, the twin factors underpinning this reversal of fortunes were the tentative lifting of some social contact restrictions, and the seismic introduction of the Stamp Duty Land Tax (SDLT) holiday in July – instantly unlocking pent-up demand and instigating a flurry of opportunistic buying. The UK’s love affair with property is renowned, and in particular, during a crisis of long-term economic uncertainty, the SDLT holiday’s offering of a £15,000 saving for buyers on a safe haven asset naturally caused a boom in both house prices and volume of transactional activity.
Nationwide reported that the rate of growth in house prices in the year to June 2021 reached 13.4%; the highest rate seen in nearly two decades. Further data released by HMRC shows that transactional activity reached rare heights; with 350,000 residential exchanges completed in Q4 of 2020 – the highest levels in six years.
Alternative financing facilitating the market
This near-unprecedented surge in demand, volume of transactional activity, and sharp rise in prices, caught some elements of the property industry somewhat by surprise. A study conducted by Trussle found that, over the course of 2020, the time taken to approve a mortgage increased by more than double – from eight to 22 days. Significantly, this covers only the process from application to approval; it excludes the time for approved funds to actually be released. Given the urgency within the market, as buyers looked to take advantage of a rare and substantial immediate cost-saving, it is reasonable to suggest that the protracted application process was a source of anxiety for buyers. Meanwhile, many bridging loan facilities can be deployed in as few as three days – a huge boost for buyers.
It should also be noted that property purchases cannot be considered in isolation – most residential purchases depend on the sale of an existing asset, and so on, forming much-maligned property chains. Delays or obstacles faced by one purchase can have myriad consequences for any number of tangentially related purchases. Accordingly, the speed of delivery and flexibility of alternative finance afforded buyers greater confidence in their ability to proceed with a purchase. Should delays occur on a dependent sale, then the purchase can still proceed and be remunerated later on when the related deal completes.
Data from the Association of Short-Term Lenders (ASTL) reveals a clear shift by buyers towards engaging with alternative finance. In Q3 2020, there was a 25.7% increase in the volume of applications for bridging loans products. In Q4, there was an even greater surge in applications, with a year-on-year rise of 39.1%. It is evident that the conditions of the pandemic exposed buyers to the numerous benefits of alternative finance.
The question remains, as it does with the property sector as a whole, whether this growth will prove sustainable once normality properly resumes. After all, it is widely anticipated that the resumption of full rate SDLT will precipitate a cooling of activity in the property market – which would naturally lead to a reduction in the amount of financing required.
This is a credible projection, certainly, though it is my view that the alternative financing sector has emerged from the pandemic in a healthier position than before. The circumstances surrounding its boom in activity have afforded short-term lenders an opportunity to extol the virtues of these types of financial products.
Even in ‘normality’, there will continue to be a need to provide flexible loans to those with complex financial structures who may miss out on tick-box mortgage products; and concerns around property chains are here to stay. Accordingly, there is optimism within the sector that, even post-pandemic, bridging loans and alternative finance more generally will continue to engage a variety of buyers.
About the author: Paresh Raja is the founder and CEO of Market Financial Solutions (MFS) – a London-based bridging loan provider. Prior to establishing MFS in 2006, Paresh worked as a senior professional consultant in one of the top five management consultancy firms, and also set up an independent investment group.