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How Has The Bridging Industry Evolved In The Past 15 Years?

The UK’s bridging industry is still in its relative infancy. In truth, while bridging loans first emerged as a form of specialist finance in the 1960s, it is only the past decade or so in which the market has really begun to grow at pace.

Posted: 29th October 2021 by Finance Monthly
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It means that Market Financial Solutions (MFS), which celebrated its 15th birthday in October 2021, is something of an elder statesperson in the bridging sector. More than that, this milestone also presents an opportune moment for reflection and what is a curious time for both the bridging and property markets.

Bridging market grows at pace

It makes sense to first establish the growth and evolution of the property market since 2006 when myself and the MFS co-founders first began providing bridging loans. Back then, there was just a small group of lenders operating in what was a relatively niche, unknown corner of the alternative finance sector. In truth, the bridging sector suffered from a poor reputation, with the loan shark imagery haphazardly attached to short-term lenders. Positively, however, over the past 15 years, this misconception has been challenged, with bridging finance becoming more and more popular, particularly among property investors.

A key turning point came in 2007 with the onset of the global financial crisis, which naturally had a significant impact on all types of lenders. For bridging loan providers, the credit crunch that followed presented a significant opportunity; banks quickly became more risk-averse and, in short, more reluctant to lend – products were pulled and the criteria that borrowers had to satisfy became more extensive, not to mention more rigid. Bridging lenders were on hand to fill the gap, providing specialist solutions to those unable to access traditional credit lines.

Since this point, we have seen impressive, sustained growth. Estimates suggest gross bridging lending in the UK stood at around £400 million in 2010; by 2019, this figure had reached £4 billion. And while the pandemic did result in an almost inevitable dip in lenders’ loan books – given the property market ground to a halt for around a third of the year – the signs since late 2020 have been positive, suggesting that the market has begun to expand again.

Bridging becomes more diverse and creative

The above narrative is, of course, an oversimplification of how the bridging market has changed since 2006. Yes, it has grown significantly in terms of both the number of lenders that are active in this space  and the volume of deals being completed. Of more interest, though, is the way in which bridging products themselves have changed. Indeed, at MFS, the difference between our product range during our early years of lending compared to today is stark. It is a trend that has been seen across the industry.

Residential, semi-commercial, commercial; first-charge, second-charge; auction finance; buy-to-let (BTL) products; hybrid loans; development exit; refinancing – there are almost too many types of bridging loans on offer today to list. But it is positive to note just how creative and diverse bridging lenders have become in creating specialist solutions for all manner of clients and the potential complex circumstances they find themselves in.

To that end, the bridging industry has also had to adapt to some challenges related to reform and regulation within the UK property market. The changes that have taken place relating to BTL investments perhaps best exemplify this.

An additional 3% stamp duty surcharge was introduced in April 2016 for second-home purchases. A year later, the Government introduced a tapered reduction in mortgage interest tax relief – BTL landlords now receive a 20% tax credit, meaning those paying basic rates will be unaffected, but landlords who pay higher and additional rates will be charged more.

In 2018, changes were introduced for houses in multiple occupation (HMO) standards, which resulted in many landlords carrying out significant refurbishment and renovation works within their property portfolios. Then, of course, the pandemic arrived in 2020 – this saw many tenants placed on the Government’s furlough scheme, which was set up to protect businesses and employment rates. To help protect financially-affected tenants, the Government introduced The Coronavirus Act 2020, which protected tenants by delaying landlords’ ability to evict. Landlords had to provide six months’ notice before starting the process.

Bridging loan providers have had to evolve in line with these changes and challenges, thereby ensuring they can support BTL landlords, which are key clients for many of the lenders. Products have been introduced and revised to enable property investors to manage and adapt their portfolios effectively. Similar examples can be seen in the ways that bridging firms have assisted businesses, international buyers and property developers by establishing new solutions tailor-made to their particular needs. For me, this is the main story of how the bridging sector has evolved since 2006 – not simply growth, but innovation and improvements. 

Speed and flexibility remain key

Since MFS was founded, we have witnessed the global financial crisis, multiple recessions, Brexit and the Covid-19 pandemic; there have been five Prime Ministers and a vast amount of regulatory and legislative reform in the property market. Clearly, it has been a turbulent period; the wider political and economic landscape has been reshaped several times over. 

Through it all, two qualities have remained integral to the success of bridging lenders: speed and flexibility. And the pandemic – or, more specifically, the stamp duty holiday – illustrated just how important both factors are.

It goes without saying that the SDLT holiday triggered a huge uptick in activity across the property market; data from the Office for National Statistics shows that UK average house prices increased by 10.6% over the year to August 2021 as a result of increased demand among buyers, something that made the market fiercely competitive.

In the face of such strong competition, property buyers needed to act fast – delays in accessing finance, which became common as mortgage providers struggled to satisfy the increased demand for loans, could often result in a buyer losing out to a rival bidder. In many instances, bridging lenders stepped in.

The fact that bridging loans can be delivered in a matter of days, rather than weeks or months, has long been one of their defining features. During the stamp duty holiday, this speed became not just attractive, but essential – it was the difference between completing a deal, meeting the deadline and preventing any untoward gazumping. Similarly, flexibility is a critical reason for the increased use of bridging loans. There are simply many clients – such as BTL landlords, international buyers, high net-worth individuals and property investors – whose financial profiles and wealth structures are deemed too complex for traditional lenders. With fewer regulatory restrictions, bridging providers have the ability to be more flexible when assessing enquiries, which means they can serve parts of the market that are otherwise not adequately catered for. 

Reflecting on the past 15 years, the growth and evolution of the bridging market has been impressive. Put simply, the industry is far better established and, in general, lenders are acting with greater maturity in the way products are devised and delivered. 

As ever, though, there is no room for complacency – as the UK’s lending and property markets adapt and change in the coming years, so too must bridging firms to ensure they remain relevant and can meet the needs of clients. Given the evidence I have seen to date, there is every reason to think that the best lenders will take up this challenge. 

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.

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