myi: How are you finding the current market conditions?
Market conditions at the moment favour the bridging companies. Banks aren’t lending the way they used to so many borrowers have lost faith in their banks and are thus turning to Bridging Finance.
In the past this was seen as a last resort but now borrowers are seeing the many benefits bridging finance can provide them. We have many repeat customers who are professional property investors.
We started the business in February 2008 at ‘beginning of the credit crunch’ when property values had fallen substantially especially in the commercial and land sector. We have seen lenders come and go.
There are always new entrants that come in as they think it’s easy to make money in Bridging. What you have to learn is it’s easy to lend money as everyone wants to borrow but the hard task is to bring that money back in.
There are lenders that are very aggressive at the moment as their cost of funding is very expensive especially if they are backed by a hedge fund.
Some new entrants that are backed by large hedge funds have very expensive borrowing at 8-12% per annum and are committed to lending out large loans as fast as possible.
At Mayfair Bridging our funds are from the high street banks and this gives us an advantage over the competition on rates.
I don’t not see the hedge funds backing the bridging sector for the long–term. If bad debts and defaults increase in bridging loan books then the hedge funds will quickly switch to something else.
We are seeing more and more new entrants in the market springing up backed by hedge funds. The average pay-out to these hedge funds is between 8.5% - 12% per annum usually on a quarterly basis. This compared to funding via a clearing bank is very expensive.
Where bridging lenders are funded by clearing banks, the average interest rate is usually between 3% - 4.5% depending on the quality of their loan book. Like with the banks, when the loan book performs poorly the hedge funds will become more hesitant to lend to the bridging lenders.
There are some lenders that are now offering 80% LTV albeit on prime central properties.
I can see their strategy here as they have supreme confidence in the prime central London market and depending on how well these loans churn, I can slowly see this LTV creep to 85% LTV for super-prime assets.
The Hedge fund back bridging lenders are desperate to lend as fast as possible and in some cases offer their funding facility to other bridging lenders in order to get funds out.
This can seriously hamper underwriting as the pressure of giving out loans will at some point impact the quality of underwriting which will ultimately result in defaults a few months down the line.
This may have a negative effect on their loan book and could negate further backing from the hedge funds.
Compared to bank funded lenders, the pressure isn’t there. Although the emphasis is to get the loans out and to churn the loan book, as the cost of funds are lower there is greater emphasis on quality underwriting ensuring a quality loan book.
myi: What does the future hold?
I personally don’t think the hedge funds will remain in the market for long. These funds are out there to make a large profit and where they see their lenders having defaults or not churning the loan book in time, I see the entire hedge fund backed model falling apart.
Especially if in a few months down the line they find something else more novel to park their funds in. I understand many hedge funds now want to enter the solar energy investment market where the yields are just as high and the income is government backed.
Bridging finance may be in vogue for these hedge funds now but who can truly say that several months down the line they won’t change their investment strategy to something else?
myi: What are your predictions for the future of the bridging industry?
It’s growing in popularity and a record number of deals and loans are being done by almost all bridging lenders.
I believe the funding is going to be the biggest issue for bridging lenders in the future. Clients will get more savy and use bridging finance to its full potential.
myi: In your eyes, what is Mayfair's biggest achievement to date?
Well we got FSA regulated this week so I’d have to say that is our biggest achievement so far.
myi: What makes you different from your competition?
You only speak to a decision maker at Mayfair Bridging regarding your deals and we have always had a no non-sense approach. When we say we will lend to a deal then we will commit to it and not change the goal posts at processing.
myi: What has helped you to weather the storm during the credit crunch?
We kept to our lending criteria not taking unnecessary risk. We have grown our loan book organically and kept our costs low. The high street banks still back us because of our business model.
We are not out there to grow our loan book exponentially and lend aggressively. This cautious approach has put us in good step and we will continue to employ the same strategies that have made us successful.
It has also helped that we started in the credit crunch so we knew where other lenders suffered losses and kept away from those type of deals. We also have to thank our brokers and packagers that give us business for helping us to these great deals
myi: If you were in charge of the FSA for one day, what would you do?
I’d resign because running the FSA would be just too much for me. I think they do a great job in an industry that’s had so much change in the last few years.
A lot of people are critical of the FSA but in a country where finance is such a big factor I think they are doing a great job given the circumstances.
