Like a bridge over troubled waters

Banks rein in lending, prompting a rise in bridging loans, an industry that comprises flexible firms and which also offers investors the chance to exploit the market and generate income.

A bridging loan is essentially a short-term loan that is often arranged within a short time-frame. The defining characteristic is that it is a loan that bridges the gap to an exit, which is usually a refinance or a sale of the asset. While a bridging loan may be arranged far quicker than what a traditional bank will lend, most bridging finance companies will still apply a sensible and relatively conservative lending criteria. Usually such lenders are nimble operations and specialise in doing all of the usual checks that a bank will do, without the encumbrance of bank bureaucracy.

Institutional investors have gained general investment exposure to the mortgage market for many years through Mortgage Backed Securities (both Residential MBS and Commercial MBS). However, as bridging loans are short-term, they do not really fit within the proper securitisation structure. In the past, bridging finance companies in Britain have funded themselves through the assistance of institutional lines of credit, seemingly providing those institutions exposure to the short-term mortgage market.

The constrained credit environment means many bridging finance companies have also experienced the same difficulties as mainstream lenders (such as the reduced availability of credit, and bad legacy loan books). As a result, a couple of bridging finance companies sought funding through setting up investment funds. There are a couple of sensible choices for investors that may be interested in gaining exposure to this market opportunity.

There are various reasons why a bridging loan – or more specifically an investment in a bridging finance fund against a portfolio of bridging loans – is a sound investment. As each underlying loan is short term, the risk of long-term exposure to movements in the property market is significantly mitigated. Also, because of the increased demand for bridging finance, a lender is able to select from a larger pool of potential borrowers. Furthermore, the margins achievable in the market make an attractive investment proposition.

Investing in a real estate bridging finance also offers investors an interesting way to gain exposure to a property market that has shown signs of stabilising. While the statistics are somewhat mixed depending on the index and methodology used, even the more dramatic doomsayers are not predicting a significant fall in the British residential property market. The problems experienced in British residential market are nothing like the problems experienced in America. A recent report from Fitch illustrates the point. The rating agency revealed that just 3% of AAA rated RMBSs issued during the boom years in the eurozone have been downgraded. This contrasts with America where over 80% of the same RMBSs where downgraded.

A real estate bridging finance fund offers investors the opportunity to capitalise on the market situation and generate a superior return for the risk assumed.