Jumbo bridging loans used to be less common but landlords are now investing in more multi-asset developments
Last year brought significant change for the buy-to-let market, with lenders dealt several blows by the Prudential Regulation Authority. By September, clients who relied on the availability of buy-to-let mortgages to provide an exit for developments were beginning to feel the squeeze on lenders’ criteria.
In the past few months this has expressed itself in unexpected ways in the shorter-term funding market. We have seen more ‘jumbo’ pre-planning development deals. There was a plateau following economic uncertainty but the bounceback has been impressive in terms of developers’ attitudes to large speculative schemes.
There could be several reasons for this. However, one dynamic definitely shifting as a result of the tougher commercial considerations being placed on landlords has been a growing appetite to invest in semi-commercial developments, houses in multiple occupation and multi-unit lets.
Bridging finance is, in many ways, a good indicator of the direction of travel for the wider BTL sector – certainly in terms of deal type. We are seeing clients look for development opportunities where yields are stronger and will withstand higher rental income ratios, tougher interest rate stress testing and higher costs as a result of the imminent tax relief changes.
Developers are always considering their exit and in Q4 2016 exits deemed commercially viable tended to be found on larger, multi-unit projects that would continue to afford landlords a profit. This has particularly been the case in London and the South-east recently, where we have done a healthy number of really large bridging deals – loans in excess of £5m and sometimes £10m.
Double drivers
Jumbo bridging loans used to be less frequent in the wider market. Now, certainly where house prices are very high, they are occurring more regularly. Although partly driven by the search for yield by investors purchasing developments and BTL lenders refinancing them, this is also spurred by the pressure in high-value prime markets, such as London.
Forecasts of house prices in the capital have been gloomy off the back of a drop in inflation across the city’s homes and actual price falls on high-value properties. The weak pound has dampened international investment in London’s super-prime housing stock.
Transactions in prime central London have fallen off a cliff and much higher stamp duty has discouraged sales. But there remains enormous pent-up demand for housing in London and bridging activity reflects that.
It is important not to oversimplify this: there is increasingly a division of appetite on high-value bridging deals within the M25. Where developments are single asset, lender appetite is much less. In fact, across the market we have seen LTVs on this type of deal fall back to a maximum of around 65 per cent.
However, there is a stronger appetite to lend on multi-unit and multi-asset deals. We are seeing LTVs of 70 per cent on these more complex deals in the region, and sometimes, depending on the underlying asset quality, even up to 75 per cent. A downward pressure on prices raises the argument for spreading risk across multiple saleable assets.
Finding funders for these deals is not straightforward, though. Lenders remain publicly reserved on criteria and are reluctant to show too great an appetite to lend on high-value developments. Within the reassurance of an established introducer relationship, however, there is money available and a will to get these deals done.
Lucy Hodge is managing director at Vantage Finance
