There has never been a greater demand for bridging loans, and peer-to-peer lending platforms are ready to rise to the challenge. Michael Lloyd reports…
The bridge loan sector had a record quarter last year.
According to the latest data from the Association of Short Term Lenders (ASTL), applications for bridging finance reached £12.7bn in the last quarter of 2021, while the value of completions hit an all-time high of £1.2bn.
These numbers tell us everything we need to know about the demand for bridging finance products and the urgency with which bridging finance is needed in the post-pandemic, post-Brexit economy.
“The bridging market continues the momentum it built post-pandemic, and there seems little sign of slowing in the number of new inquiries hitting lenders and brokers,” said Vic Jannels, ASTL Chief Executive.
“Current indications from the market suggest that this growth trend will continue.”
There has never been a better time for peer-to-peer property lenders to get involved in bridging finance – and many are doing just that. Around a third of all UK-based P2P platforms currently offer bridging solutions.
Bridging loans are short-term loans that “bridge” the gap between two transactions, for example to allow for a smooth transition from one real estate development project to another.
P2P lending platforms are good for bridging because they are fast, flexible, and review offers on a case-by-case basis, making developers more likely to be approved for funding if they have been denied funding elsewhere. More importantly, the speed of P2P lending decisions means borrowers can get their funds quickly, which is critical for bridging finance.
In fact, some P2P platforms started out as bridging lenders before diversifying into other areas such as real estate development finance.
A former bridging loan provider turned P2P brand, Kuflink offers bridging loans suitable for personal, commercial, semi-commercial and auction purposes. It can offer borrowers a policy decision within two hours.
“We’re still seeing a fair bit of development, but we’re trying to build more bridges as I think more brokers have seen us as a development lender because of the volume we’ve transacted over the last 18 months,” says Narinder Khattoare , Managing Director of Kuflink.
“We like both, but getting more bridging deals for us will make it even better.”
At least 16 P2P lenders are now offering bridging services to borrowers ready to capitalize on a growing market.
“Demand in the housing market is strong, demand for new construction homes is strong, the housing crisis means we are a million homes short of demand,” said Lee Birkett, CEO of P2P bridge lending platform JustUs.
“Most small and midsize business developers do some sort of bridging.”
The growth of the bridging sector can also be explained by the increasing awareness of the product and more developers who need short-term loans to meet difficult conditions.
Brexit, the pandemic and the war in Ukraine are affecting supply chains and contributing to rising inflation while building material prices continue to rise.
However, P2P bridging and development lending platform Invest & Fund says these are mainly logistical issues and a good bridging product can offer developers practical help in overcoming these challenges.
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“We believe the market is healthy and we will continue to support customers with these facilities at an ever-increasing level,” added the spokesman.
Most P2P home lenders offer bridging loans. This includes all the new ‘big three’ – Assetz Capital which has lent £1.4bn so far, Folk2Folk with cumulative lending of £536.5m and CrowdProperty which has deployed £261.6m.
In many ways, P2P and bridge financing together make perfect sense. Both specialize in providing short-term, fast-turnover asset-backed loans. P2P platforms have excellent underwriting processes that can deliver quick lending decisions with minimal risk.
The decision-making process can be accelerated even further by using fintech solutions. JustUs uses open banking to better assess a borrower’s affordability, and Peer2Peer Financial News understands that HNW Lending is currently evaluating the data sharing initiative to view borrower track records and make more informed lending decisions.
Speed is key in bridging borrowers, and P2P platforms are faster, more nimble, and more flexible than traditional banks, which can take up to six months to approve a short-term financing loan.
“Platforms can assume common sense and no creditworthiness, while a bank only has a ‘computer says no’ answer,” says Birkett.
“P2P platforms are faster, better, more efficient, more nimble and more personal and flexible.”
However, while the P2P sector is well positioned to serve bridge borrowers, the sector is becoming quite competitive.
Assetz Capital CEO Stuart Law said bridging funding costs have “collapsed” while the number of lenders continues to grow.
“The number of competitors has gone through the roof and there are more institutional buyers looking to invest in bridges and loan values are rising,” he says.
“There’s too much money chasing too few investments, and bridging is one of the big recipients of that money.”
Ben Shaw, chief executive of HNW Lending, says his P2P home lending platform has struggled to compete with many lenders offering cheap money and hasn’t completed as many loans as a result.
“It’s not easy right now, there’s a lot of money out there versus a limited number of deals, and we pay commissions to our brokers, so they want to come back to us,” he says.
“It’s a tricky market, we didn’t write as many deals this year as we would have liked. But we also have borrowers who used us before coming back to us.
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“We’re doing our best, but it’s a more competitive market. I think we’re doing a pretty good job of meeting investor demand, but we’re not expanding the loan book in the way I would have expected, all things being equal.”
In a saturated bridge market, platforms will be forced to adapt and carve out their niche. Some do this by only working with experienced developers to mitigate risk, while others focus on offering lower-cost senior financing to their lenders, and other platforms choose to make their existing products more flexible and accessible.
LandlordInvest co-founder Filip Karadaghi says his platform sets itself apart by offering a whole range of products, from first-charge bridging loans to mezzanine financing.
“Most bridging lenders are restricted in what they can do, e.g. B. in terms of residential, commercial or loan size,” he says.
Meanwhile, Kuflink’s Khattoare says his platform doesn’t compete on rates and instead is in for “the long haul.”
“We’ve never been the cheapest or the loveliest, we’re always working on service and recommendations,” he says.
“We always had a good presence. Unlike other lenders who get fed up with money and lend quickly without doing any real duty of care, we’re in it for the long haul.”
There are a number of new opportunities for savvy platforms to expand their presence in the UK bridge market. Traditional lenders are withdrawing funding and taking a less risky approach due to rising interest rates and inflation, meaning the risk of default is higher.
JustUs’ Birkett believes bridging lenders won’t get into P2P lending because of “strict regulations,” but he says it’s “viable and makes perfect sense” for more P2P platforms to get into bridging.
“We expect demand to pick up as banks tighten their credit ratings and the housing market remains buoyant,” he says.
“Bridging will become a more important segment in the P2P space in the coming year. We have already seen buy-to-let funding lines tightening, bridge funding lines will tighten, presenting an opportunity for more P2P platforms.”
However, bridging is still not suitable for every P2P home lending platform.
Relendex is one such lender — it focuses on development finance and only does the occasional “random” bridging deal.
Chief Executive Paul Sonabend says the platform works with professional developers and home builders, just bridging to build and maintain long-term relationships.
“We might give an established client a bridging loan and a new client if we see it as an opportunity to develop a longer-term relationship, but that’s the scale of our activity in the bridging market,” he adds.
While there’s no shortage of challenges, the fact remains that more than a third of all UK P2P platforms now offer some form of bridging funding. While it’s still a bridge too far for some, more and more P2P platforms are poised to capitalize on the significant opportunities that will arise as the country gets back to work and starts building again.
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