Seizing opportunities with short-term finance

The economic conditions we have all experienced over the past two years has produced a shifting clientele for the finance market. Historically a significant proportion of clients seeking short-term finance have been property investors looking for a means of acquiring sites quickly or funding construction prior to securing a longer term refinancing package from a traditional lender.

Naturally, depressed market conditions and the lack of funding from mainstream lenders have both meant that property investors have struggled to launch new projects. Indeed, many of them have also lacked the appetite to do so. We have all become familiar with the sight of mothballed developments sitting on top of prime real estate in our city centres. Nevertheless, our lending statistics provide some evidence to suggest that this situation is beginning to reverse, and that property investors are beginning to take advantage of the opportunities that the current market has created.

The figures show that lending in Q2 2009 was more than double that achieved in Q1. Furthermore, a breakdown on ‘loan purpose’ shows us that whilst in January almost the entirety of lending at Bridging Finance was to clients that were looking to raise capital. By June, just under 50 percent of our lending was for either property purchase or property development.

This increase is not a result of any change in lending policy on our part, as we have always maintained our position with regard to the type of deal that we are prepared to fund. What the figures show is that there are a growing number of opportunities in the market that are not only enticing for investors but are also attractive and bankable propositions from the perspective of a specialist lender.

As has been the case for some time, short-term finance companies are being presented with a large number of deals that the banks are turning away. As they can be more flexible in terms of what constitutes suitable security, they are able to often provide the funding that is required to bring a project to the point where it becomes workable for a mainstream lender. This is an arrangement which works well for both parties, as it allows the bank greater leeway in choosing with whom they wish to work whilst also providing financers with the assurance that the client will have a solid exit route in place for their short-term facility.

Developers are sourcing their acquisitions using a number of different techniques, but one factor which is making a significant contribution to the number of quality deals that can now be found is the volume of distressed commercial property that is hitting the market. In combination with the fact that commercial property values are now down by as much as 50 percent on their pre-recession peak, this situation is creating rich pickings for those that have access to funds. As noted in a recent survey from the Royal Institute of Chartered Surveyors, there is currently a growing interest in UK commercial property from investors both at home and abroad.

We are now beginning to see similar activity to that which characterised the residential property market a few months ago, whereby hungry buyers are actually increasing the leverage on their existing portfolio in order to free up capital for further investment, a situation that would have been almost unthinkable six months ago.

As ever, auctions remain a popular source of property for bargain hunters, and with the exception of August (which is always a slow month in the auction industry) the past few months have seen commercial sales consistently out performing residential sales in terms of the percentage of lots sold. Money has also been loaned on deals where the buyer has simply driven out to a suitable location and then travelled around the area looking for vacant property that they can make a cash offer on.

The speed with which funds can be advanced funds by companies such as ourselves can meet the requirements of either type of buyer; however, whilst the general outlook for the economy is beginning to improve we have to bear in mind that commercial property values probably still have some way still to fall. It is for this reason that most short-term lenders maintain a focus on the quality of the client and property, and this is an approach that has brought some positively enviable deals to their door during recent months.

By means of one of our own examples, Bridging Finance recently funded a commercial property acquisition involving a large and historic church hall in the north of England. The building was of a classic Victorian, red-brick construction with many attractive architectural features including stained-glass windows. It had also been the subject of a comprehensive £2m restoration program which included conversion into several units of office space. As a result of it being miss-listed at a London auction house, our clients were able to acquire the property for an incredible £110k. They quickly filled it with quality tenants by significantly undercutting all the local competition, yet despite offering superb value to its occupants the building was still producing a rent-roll of £66k per annum. It was then sold on at £475k. Not bad for a £110K investment.

We have also recently provided development finance for a property on the Isle of Anglesey. This large and luxurious home sits directly on the waterfront and is partially suspended above the surface of the sea by means of struts that protrude from the cliff face. The property has been valued at £1.5m on completion and several prestigious national agents have expressed an interest in marketing it.

Despite the building’s obvious attractions in terms of features and location and even though the developer had funded the first half of the £440k development costs using his own capital, his bank decided to withdraw their funding half way through the project. We could see the potential of the development and were therefore happy to step in with the funding required to refinance the development and bring it to a successful conclusion.

There are great opportunities out there both for lenders and developers. However, as the availability of credit begins to improve and areas of the market show renewed signs of life, it is those deals that offer something extra in terms of value or uniqueness which are likely to be the most sought after.

Chris Baguley is Managing Director of Bridging Finance Limited Tel: 0845 337 5800, email: mail@bridgingfinance.co.uk or visit web: bridgingfinance.co.uk