Bridging lenders have seen much upheaval in the last few weeks, with many of them having to pull out of the market. but in the medium therm, the bridging market is likely to do well. During the lockdown, new valuations have been difficult to obtain and solicitors’ response times have slowed, while some smaller solicitor firms appear to have shut down. As such, funding right now is difficult, and this is likely to continue as the country gets moving again.
As for the wider economy over the short term, it appears we are looking at a contraction that has not been seen in the UK for centuries; the reduction in economic activity has already been compared to the Great Frost of 1709 and the bursting of the South Sea Bubble in 1720.
Unequal impact
However, not all areas of the economy have been impacted by Covid-19. For example, while the hospitality industry has been devastated, supermarkets have seen an increase in sales. What property will make for good lending security in the medium term?
Take the classic case of bridging for refurbishment in order to let a property. I think that demand for this product may fall in some of the larger cities, such as London, as a number of holiday lets come back onto the market as standard rentals, which will in turn reduce the housing shortage. In general, areas relying on large numbers of foreign tourists are likely to suffer the worst. If long-term social distancing is required in bars, clubs, restaurants and theatres, we are likely to see many of these businesses failing.
Domestic tourism boom
‘Domestic tourism, however, is likely to increase when the government allows people to travel in Britain, so hotels focussed on the domestic market will probably outperform overall. Where I see more demand for bridging is where businesses require funding to meet the new demand – for example, hospitality businesses serving domestic tourism, such as cafés, pubs and hotels in UK resort towns.
Banks generally aren’t keen to support new businesses, so bridging finance is likely to be key here. Towns serving domestic tourism are also likely to buck the trend and see an increase in refurbishments, with people accommodating additional demand by converting houses to holiday lets. Refurbishment for longer-term lets may rise in the medium term, as prospective homeowners may now find it harder to buy and thus rent for longer. Residential property in general should hold up better than some other property classes, but not all residential is the same. Affordable residential in higher-employment areas is likely to outperform other residential.
Good security for bridging loans in the medium term is supermarket and minimarket retail with good tenant covenants. This subset of retail is currently performing well, with the larger players reporting increases in sales. Industrial and distribution businesses are also likely to perform well, particularly as retail declines – especially those businesses with modern, high-quality properties in good locations.
Retail woes
Among the most difficult property types is general retail. Retail has been on the decline for years, and Covid-19 will make this worse. A combination of internet sales, high rents and business rates will continue to squeeze retailers, and we will see a lot more vacancies in our local high streets. In the short and medium term, I think bridging will see more enquiries. I suspect some banks will look to leave some sectors; businesses will therefore need to refinance their loans, and bridging lenders are likely to fit those gaps nicely.
The key issue for these businesses is that banks might be concerned by poor business performance, so it is important to understand that poor performance is only short-term. In these instances, introducers could ensure that borrowers have a workable plan in place to improve business performance, so they can go back to the banks once the market improves. Ultimately, when the banks won’t lend to businesses and developers, it is the bridging lenders that step in to help.
Clint White is head of property lending at Fiducium
