The impact of Covid-19 on the Bridging Finance Market
Covid-19 has brought the bridging finance market to a standstill. In this article we discuss how bridging finance lenders have adapted to the change in market conditions, how borrowers have been affected and looking ahead.
Lenders have adapted in different ways during lock down:
- Ceased or temporarily paused new bridging loan applications due to the difficulty in assess risk
- Social distancing guidelines compromised the lenders due diligence process. However, lenders have adapted by using AVMs and desktop valuations to make lending decisions
- Use video conferencing apps in place of face to face interactions
- Work remotely
- Tightened criteria, reduced maximum loan to value (LTV) for all property types and loan to gross development value (LTDGV) for developments and refurbishments
- Reduced appetite for larger loans
- Paused and restricted funding for developments and commercial property purchases – both considered higher risk
- Withdrawing loan offers and changing existing terms.
- Fewer active lenders reduced the availability of credit to fund purchases and refinance existing loans
- Loan offers withdrawn and changing existing terms jeopardized transactions and caused cash flow shortfalls
- Larger deposits required due to reduced LTV criteria and cautious valuations as valuers apply Covid-19 related clauses
- Property developers have had a particularly hard time. The inability to access supplies and ensure building sites are safe halted most construction projects during lockdown. Moreover, the closure of sites caused delays, increased costs and prevented drawdown of development facilities due to surveyor’s inability to carry out site visits and delays getting building regulations signed off.
Office of Budget Responsibility (OBR) forecast a 35 per cent decline in economic output in the second quarter of the year – the largest quarterly decline in 100 years before rebounding 27% in Q3 and an overall 12.8% decline in 2020. With unemployment to gradually decline from 10% in Q2 to 7.3% in 2020 – increasing from 3.8% in 2019 according to Statista. These numbers does depend on the speed in which the economy can normalize and continued government support to individuals and businesses.
Capital Economics predicts UK commercial property values will fall by 10 per cent this year and further falls cannot be ruled out if uncertainty persists and recovery is slow. Furthermore, turmoil on the high street, commercial tenant defaults, corporate bankruptcies, long term decline in office-based staff and prolonged social distancing requirements will put further pressure on commercial property demand and values and lower maximum LTVs offered by bridging finance lenders.
Knight Frank forecasts a 3 percent fall in UK residential property prices this year and bounce back by 5 per cent in 2021. Savills predict prices will drop between 5 and 10 per cent this year before bouncing back next year.
Many lenders we work with have shown forbearance and granted mortgage holidays for struggling borrowers. But as we approach the end of the three-month period, lenders need to continue supporting borrowers, treat them fairly in order to manage distressed situations and avoid bridging default fees and penalties as far as reasonable.
Covid-19 has forced bridging loan lenders to be flexible in the way they do business. They have seen that technology can speed up the lending process, make life easier and add value to the customer experience. Examples of technology used include:
- Telephony systems enabling staff to work from home and work flexibly
- AVMs, drive-bys and desktop valuations used in place of physical valuations
- Video tours for site inspections and online communication tools like Zoom, Skype and FaceTime used to hold meetings
- Remote verification used for anti-money laundering (AML) checks where face-to-face contact was not possible
As Covid-19 restrictions ease and the market stabilizes, lenders and borrowers need to work together and strike a balance between risk, cost and reward. This means:
- Understand, assess and mitigate risk factors
- Setting leverage and pricing at commercially sensible levels
- Greater scrutiny of exit routes with realistic timescales to sell of refinance bridging loans
- Realistic assessment of costs, profit, demand and valuations.
It is inevitable that, as we enter into a recession, confidence will fall and so will lending appetite. Therefore, customer focused lenders, with sensible lending criteria and ability to balance risk with commerciality are most likely to prosper.
The economic situation remains unpredictable and uncertainty. However, historically low interest rates and pent up demand should ensure a robust demand for short-term bridging finance, but at more restrictive levels.
Recently, we have seen construction and physical valuations restarted subject to strict safety guidelines – kick starting the bridging loans market. Some bridging lenders have re-entered the market, others have relaxed maximum LTV but at around 10% lower than the recent highs.
Caution, however, needs to be exercised as the threat of a second wave; global political and economic instability; consumer nervousness; phasing out of government and lender support; and not forgetting Brexit can potentially threaten sentiment and derail recovery.