Alan Cleary, Managing Director at Precise Mortgages
The latest figures suggest that short-term lending experienced a boom in the second quarter of the year, with more than £1bn worth of bridging written during Q2 2019 — an 11.8% increase on the previous quarter and a 4.1% increase on Q2 2018.
While I agree that the bridging market, which is currently worth more than £4.6bn, is in good health at the moment, these figures include a constantly fluctuating mix of both residential and commercial loans, making it difficult to extrapolate meaningful trends.
I find a more helpful indicator of the opportunity bridging finance offers is behaviour in the buy-to-let market, which is more often than not where short-term loans exit to. There are several established trends in buy-to-let at the moment, none of which are new, but all of which point to the potential for further growth in certain parts of the bridging market.
We recently conducted research with BDRC and found that the proportion of landlords deriving a profit from letting edged down again in Q2. Although net profitability remains very high overall, at 81%, it’s the first time ever there have been three successive declines.
Another interesting finding was that a record proportion of landlords are planning to divest property in the next 12 months. Some 26% of landlords told BDRC they intend to sell at least one property from their portfolio in the next year, up eight percentage points from Q1 and the highest level of planned sales ever recorded. The proportion intending to sell is three times higher now than it was at the start of 2015, when it was 9%.
Taken at face value, this might look less than positive for buy-to-let, but look deeper and these numbers tell a different story. Buy-to-let has been going through a significant restructure over the past four years; it is one that is not yet over. But the number of landlords planning to sell doesn’t mean there’s about to be a mass exodus from the market. Pressure on profitability is a kicker to improve the status quo — there’s a good chance the two figures are closely related.
Seen in this light, landlords’ plans are actually very reassuring. There are a number of well-worn changes that have become increasingly pronounced in buy-to-let since 2015 when the tax changes affecting landlords were first announced.
The phased reduction in tax relief on buy-to-let mortgage interest is already influencing how professionals prefer to structure their portfolios on purchases. There will soon come a tipping point, where the numbers make the sale of existing properties, held in their personal names, the sensible thing to do financially. That does not preclude the repurchase of those same properties or the purchase of other, better yielding ones, through the limited company route.
I suspect that the BDRC figures are indicating this already, and that highlights the opportunity for the short-term sector. A rise in the number of lower-yielding buy-to-lets coming on to the market provides a strong pipeline for refurb bridging business — something we are already experiencing.
The launch of our refurbishment buy-to-let proposition, which combines bridging finance with a buy-to-let refinance with one underwrite (but two proc fees), is proving popular at the moment, revealing the opportunity to improve yields on properties that have been sold by landlords for whom they no longer make commercial sense. That, clearly, doesn’t make these properties a dud for all landlords, especially those willing to refurb in a way that improves the yield on that security.
The phasing out of mortgage interest tax relief is ongoing and many landlords will not yet have reached their own personal tipping points, meaning this particular trend is likely to continue for the next few years at least.
Far from being a negative outlook, we consider the changing face of buy-to-let to be a driver of sustainable business growth in both the longer-term buy-to-let side and bridging sector, too.