Bridging deals set for bumper year
As inflation cools and borrowing expenses drop, there will be an increase in the number of development and refurbishment projects this year, boosting business for finance providers.
Meanwhile, bridging loans should also continue to see increased interest, according to Manoj Chitroda, commercial director at commercial property finance broker Finspace.
Although the bridging loan market had a record year in 2023, with Finspace seeing its revenue from this activity increasing by 105 per cent year-on-year, Chitroda said getting deals through to completion was more difficult.
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He noted that tougher criteria, down valuations and rising interest rates meant that the business saw a greater number of applications than it had ever before, while becoming more discerning on which applications to progress.
“By the second quarter of 2023, borrowers increasingly turned to bridging finance amidst uncertainties in the mainstream mortgage market following the 2022 Mini-Budget,” he said. “Bridging loans were predominantly utilised for their short-term nature, speed, and flexibility, aiding in the preservation of onward property purchases and averting chain breaks. Additionally, the rise in regulated bridging loans in 2023 can likely be attributed to the withdrawal of products by mortgage lenders.”
However, lenders became more stringent with underwriting in a tough environment, leading to an overall drop in application-to-completion conversion rates as a percentage, he added.
Now as interest rates and inflation stabilised, he expects more confidence to come back into the market and allow conversion rates to normalise.
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Development finance trends
The rising rate environment has impacted ground-up development as it made deals less profitable and discouraged new projects, according to Chitroda. Meanwhile, the rising cost of materials and labour impacted the overall feasibility of such projects.
“Developers are experiencing challenges due to rising interest rates and mortgage pricing,” he said. “They are selling out existing schemes on their books, leading to a hesitation to initiate new projects. Moreover, rising mortgage costs for end buyers have reduced demand for new developments, further dampening the incentive for ground-up development.”
But the need for new developments has not gone away. And mezzanine finance is increasingly emerging as an attractive way to finance projects.
“This hybrid financing avenue holds appeal for property developers, seamlessly blending debt and equity financing to furnish additional funds without compromising ownership stakes,” Chitroda explained.
“Its dominance in the industry stems from its aptitude in bridging the disparity between senior debt funding and developer equity, as a result elevating the loan-to-cost ratio.”
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