Many have expressed concerns over the role of bridging finance in the market following the Brexit vote – but I would be interested to know specifically which part of the market they are worried about!
The 2008 crisis was predominantly about a lack of liquidity in the market place. However, the capital requirements of our largest banks are now ten times higher than before said crisis. The Bank of England has stress tested them against scenarios much more severe than what the country currently faces and UK banks have raised over £130bn of capital, leaving them with more than £600bn of high quality liquid assets.
Following the EU Referendum, the Bank of England stood ready to provide more than £250bn of additional funds through its normal facilities, as well as having substantial foreign currency reserves. The biggest dilemma seems to be whether we need rates to go up to stop inflation, or for rates to go down to stave off recession. Market sentiment initially seemed to point towards the latter; however, the expected base rate cut is yet to happen.
For real estate, the reality is that the fundamentals of UK (especially London) property which make it a magnet for investors remain the same. We have a huge housing shortage and that isn’t going to change overnight, but the UK is a global economy, not a European one. We have a mature real estate and legal framework which is the envy of many and in times of trouble around the world (and there is plenty right now) the UK is seen to be a safe haven – something we hear on an almost daily basis.
As always the negatives create opportunities for those wise enough to spot and exploit them. Agents are seeing a renewed interest from international buyers as the fall in sterling makes UK real estate appear better value. They are also seeing the return of Russian buyers with a 40% rise in the value of the rouble since February, compounded by the recent fall of the pound.
We have specialist real estate lenders who haven’t thrown the baby out with the bathwater. They are actively lending across the country and will continue to do so. They are also stepping in to act quickly where some lenders have pulled out of loans, leaving the borrower exposed or just reducing loans, and we have been called in to bridge the gap in the funding structure.
These specialist funders are also being used to fund high value single unit developments which seem to have become harder to fund in the main stream market post-Brexit.
We have also seen a number of developers coming to the end of development projects and not wanting to sell in the immediate aftermath of Brexit, yet still needing to repay the development loans. Again there are specialist funders that can assist here.
The short term finance market has been a little crowded for a while. Cost of funds vs attracting new business was always going to see some casualties/consolidation. Brexit is a convenient time to deliver bad news whether it is the driver or not. It is a pity to see any lender stop funding (from a broker and borrower perspective), yet restrictions imposed by their funding lines leave some with no choice. The lenders with greater freedom are those who are investor-funded rather than bank-funded.
Lenders are being cautious on loan to value (LTV), looking closely at the liquidity of the assets they are lending against. This is prudent and responsible lending which we should all be promoting anyway, which, against the backdrop of valuers also being cautious, means a period of more modest gearing. Bridging finance has additional costs attached to it so the risk/reward model simply needs to be well managed.
The short term finance market grew out of the banks’ inability or unwillingness to lend and has, in my opinion, been a crucial part of the UK economy over the last few years. This plays an important role in this post-Brexit environment. I hope the majority of lenders will embrace the opportunities, rather than dwelling on what might have been – as our clients are certainly doing.