It is worth reflecting on just how far the short-term lending industry has come, not just in the past 12 months, but in the 10 years since the global financial crisis of 2007 to 2008.
Back in 2008, the world was a very different place.
As the credit crunch tightened its grip early in the year, interest rates were cut from what now seems like a positively stratospheric 5.5 per cent to 5.25 per cent.
Meanwhile the UK specialist lending sector was dominated by banks, be they high street lenders or American banks, funded largely by the securitisation model.
When the US housing bubble burst, those of us working in the industry remember very clearly just how quickly funding lines evaporated and US banks disappeared back across the Atlantic.
A large void was left. But into this space – slowly at first but then with ever greater momentum – grew a strong and vibrant specialist lending sector, underpinned by an unprecedented diversity of funding sources.
New lenders proved that they could thrive in any macroeconomic environment, many being founded and forged during a period of huge economic uncertainty.
This new breed of lender played a hugely significant role in financing the inherent dynamism of our property investors and SMEs and, in doing so, helped to ensure the UK bounced back from the financial crisis more strongly than virtually any other nation.
Arguably the worst recession in living memory, a crisis that was actually housing market-led saw UK house prices fall 13.7 per cent between 2007 and 2009. But this fall was recovered in a little over three years.
Today, some of the first new entrants have grown and become banks themselves. They have been joined by challenger banks and peer-to-peer lenders and, in recent months, by a further surge of new lenders as family offices and private investors have widened their investment strategies in the face of volatile equity and bond markets.
This wave of liquidity and increased competition and driven rates down to levels that were unthinkable just three or four years ago while loan-to-value limits have increased, despite the backdrop of a subdued and even, in pockets, declining property market.
Total lending of more than £4bn in 2018 underlined the increasing maturity of the short-term lending market.
On the face of it these trends look like great news for borrowers and, in many instances, they are.
But despite hugely competitive borrowing rates and record employment levels the wider UK property market has finally begun to reflect concerns over the shambolic handling of Brexit as March 29 draws ever closer.
According to the Halifax, December saw annual house price growth slow to its weakest pace since February 2013 and a monthly drop of 0.7 per cent.
Faced with massive uncertainty around the eventual outcome of Brexit, it is hardly surprising that UK homeowners are increasingly sitting on their hands and waiting for the storm to pass.
Consequently, we have reached the point where a slowing property market, combined with intense competition between established specialist lenders to maintain market share and newer entrants to gain some has inevitably seen some lenders, both old and new, pushing both rates and loan-to-values to unsustainable levels in pursuit of new business.
These same lenders have often paid inadequate attention to their clients’ exit strategies.
The assumption that rising property prices would always ensure an exit by refinance have proved to be deeply flawed and default rates for these lenders have spiralled.
Against this backdrop of rising defaults and growing losses, some established lenders have lost their funding and have begun to exit the market.
Meanwhile, some newer lenders have based their underwriting strategies on algorithms and automated procedures.
This one-size-fits-all mentality simply does not work in a sector where deals are often extremely complex, requiring the sort of ‘outside of the box’ thinking and tailored solutions that only highly experienced underwriters can provide.
Rigid product offerings do not work well in the bridging space.
Finally, compounding the above, due to the rapid growth of the sector, it is now often the case that relatively junior underwriters and staff are being offered positions and levels of responsibility for which they are too inexperienced and ill-equipped to cope.
Immediate contact with senior personnel is often the key to a successful outcome, but this can be impossible with some newer lenders, who just do not have the in-depth knowledge within their teams.
Now, more than ever, advisers need to take a more holistic approach when determining the lenders they deal with.
A simplistic focus on lower rates, coming as they often do in rigid, less flexible product offerings, can be a mistake.
Frankly, there is much more to making a good choice than price, particularly when the average duration of bridging loans is counted in months rather than years.
Rate and LTV should always be balanced against a multitude of other factors, including an ability to offer both conventional and unconventional solutions, access to senior decision-makers from the start of the application process until the day the loan completes, autonomy to make decisions in-house, certainty of funding and a consistent and, above all, decisive service.
Fortunately, there are many lenders with highly experienced teams and strong and diverse funding lines which were formed and have been forged in the last recession.
It is these lenders that will underpin the specialist market in 2019 and that stand ready to meet the funding needs of borrowers, be they opportunistic investors in a buyers’ market or the entrepreneurial SMEs that are the backbone of the economy.
The specialist lending market is well positioned to end 2019 stronger, leaner and fitter than ever before. But now, more than ever, it is important to make sure you are working with the right lending partners.
By Brian West, private client manager at Conrad Capital
Source: FT Adviser