The UK association of Bridging Loan Lenders

This article originally appeared on Finbri and has been published here with permission.

Property investors shrug off market volatility

Despite a barrage of concerning reports on the state of the UK economy, alongside unprecedented political turbulence, more than 50 per cent of property investors intend to make further purchases in 2023, according to a major recent survey.

Finbri property investors shrug off market volatility

Half of respondents still think that “now is a good time to invest in the property market,” the survey found, even though a third of the 1000-plus respondents are ‘strongly concerned’ about inflation, with many also worried about the cost of living, interest rates, borrowing costs and the state of the property market.

A quarter of property investors would struggle to remortgage or refinance if interest rates rise sharply, but the most common response (36 per cent) was to cut back on discretionary spending, rather than sell up, or stop investing.

Taking the long view

“We think that investors are taking a long view of the current chaos,” says Stephen Clark at bridging finance broker Finbri, which commissioned the survey and has seen strong demand for its services as banks have withdrawn mortgage products. “They can see that market fundamentals remain sound – there is excess demand over supply – and they are confident that conditions for investment will continue to be attractive in the longer term.”

With so little clarity over the future direction of government, as tax and spending promises are made and withdrawn and Prime Ministers come and go, investors are naturally nervous over making long-term commitments. Yet there is still a massive appetite for UK property, with billions of pounds available to spend and investors eager to put their capital to use.

Experts have analysed previous property corrections and found some clear similarities with today’s predicament: spiking interest rates, higher energy costs and volatile government policy. In the housing market downturns of 1973-77 and 1979-82, prices fell by around a fifth, whereas after the 2008 financial crisis, interest rate cuts sustained demand and prevented a sudden and catastrophic crash.

Currently, rising interest rates combined with the cost of living crisis and historically high inflation could well impact prices, depending on how long these conditions persist.

Banks are more cautious

“Affordability calculations suggest house prices could easily fall by about 20 per cent, a similar rate as the previous two crashes,” wrote housing market analyst Neal Hudson in the Financial Times, following Jeremy Hunt’s appointment as Chancellor in mid-October. Hudson pointed out that banks are more cautious than in the past, mortgage lending is more tightly regulated and buyers can no longer self-certify their income. “The upshot is that recent buyers are probably the safest cohort of borrowers we’ve ever had,” he argued.

Across the wider economy, a moderate fall in house prices would work in some people’s favour, allowing more first-time buyers to get on the property ladder. Equally, it could tempt more property investors to enter the market.

At Finbri, Stephen Clark has noted an upsurge in demand for bridging finance set against bankers’ reluctance to lend. More than 90 per cent of mid-sized UK residential developers expect to source funding from specialist lenders such as Finbri in the coming years, thanks to the greater flexibility and speed they offer.

Sustained demand

“Traditional lenders have scaled back their lending dramatically in recent weeks,” notes Clark. “By contrast, we have registered sustained demand, as customers look to extend their portfolios and complete investments that were already in progress. Investors often turn to bridging finance during downturns, or market volatility, in order to take advantage of new opportunities.”

The value of the UK bridging finance market rose by 22 per cent in the year to September 2022, with customers citing investment property as the most common reason for borrowing. In the second quarter of the year alone, bridging finance increased to £178.4 million from £156.8 million in the previous quarter, a leap of 13.8 per cent.

Demand for bridging is coming from some new demographics, recent reports suggest. The ‘Bank of Mum and Dad’, where parents fund property purchases for their children, is one such group. “During the past two years, we have seen a huge number of parents exploring ways in which they can release equity on a property in order to support a home purchase for their children,” reported the Home Owners Alliance. “We expect to see this client profile increasing,” it added, as bridging loans enable buyers to move quickly and secure good deals. Average mortgages take 10-12 weeks to organise and complete, compared with 10-12 days for a bridging loan.

Solid investment

Property investors are by necessity committed to medium-to-long-term financial horizons, since real estate is not a liquid asset. Indeed an advantage of the sector is that property is less vulnerable to short-term shocks, and has proved to be a solid investment over the long term for many generations.

Even so, investors are particularly sensitive to interest rate rises, since most of them borrow at least some of the funds to buy property. Finbri’s survey found that just under half of respondents would be ‘strongly concerned’ if rates rose above 4 per cent. When asked where they expected the Bank of England base rate to be at the end of 2023, the most common response was ‘between 3 and 4 per cent’.

“These results show that while property investors are concerned about present day volatility, on the whole they believe that conditions will settle down and that the chaos of the Conservative Party’s in-fighting will be short-lived,” says Stephen Clark at Finbri.

People still need somewhere to live, families need to move to accommodate children or downsize, and the government hasn’t addressed the national housing shortfall.

“There is plenty of life left in the market,” concludes Clark.

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