The bridging finance sector has shown significant growth in the UK since the 2008 US mortgage crisis which led to a worldwide recession. Interestingly, the level of growth seen in the UK has not been replicated across many parts of Europe where there is still an unwillingness to take on additional risk. It is only perhaps the French bridging finance market which shows any real appetite although there are challenges for foreign investors looking to secure French bridging finance.
It is safe to say that the UK is leading the European bridging finance market, filling a vacuum left by many European retail banks in light of the 2008 US mortgage crisis and subsequent worldwide economic downturn. While short-term bridging finance terms can be anywhere between 24 hours and four years, it is only really the UK market which entertains interest-only arrangements. In theory, the whole point of a bridging loan is to secure short-term finance, maintain cash flow and then either refinance or sell an asset to pay off the bridging finance capital. So, while there is some appetite for bridging finance in France, as one example, there is little appetite amongst French banks for anything but capital and interest repayment arrangements.
At this moment in time, the UK bridging market is one of the most developed in the world, a fact which is perfectly illustrated by the graphs below. It is not only mainland European retail banks which have taken a step back from short-term finance. Many UK banks have also been forced to follow suit because of weakened balance sheets and regulatory issues.
There are high expectations for the UK bridging finance market going forward with a compound annual growth rate of 11% expected between 2018 and 2022. This forecast growth is even more impressive when you consider the backdrop of Brexit and the uncertainty surrounding the U.K.’s withdrawal from the European Union.
European and UK base rates are both towards their historic lows and in the short term, there appears to be little prospect of a significant rise. As a consequence of lower base rates and increased competition in the bridging finance market, UK average monthly bridging finance rates have fallen in recent times. How further they will fall will depend upon the market, competition and both the UK and European economies. There is also talk of small to medium-sized bridging finance companies merging to create larger entities where cost savings will feed directly into the bottom line.
So, if we use the UK bridging finance market as a base measurement for Europe going forward, how does the rest of Europe compare?
Retail banks in the UK and across Europe, and indeed across the world, have significantly reduced their appetite for risk in recent years. These operations are extremely tightly regulated by the authorities with new affordability calculations and often limited appreciation of unorthodox income streams. As with many areas of the financial market, this has created something of a vacuum which private banks and private equity groups are more than happy to fill.
That is not to say some retail banks may not accommodate straightforward, relatively risk-free, bridging finance, but on the whole, the majority of finance now comes from private banks and private/niche lenders.
The mainland European bridging finance sector has been significantly impacted by Brexit, regulations and the fact that retail banks have withdrawn from what they deem to be high-risk transactions. This does not mean there is no demand for bridging finance in mainland Europe but for competitive rates and acceptable processing times, investors may need to move outside the domestic market. When you also consider the number of UK ex-pats living in France, Monaco, Spain, Italy, Germany and the Netherlands it makes perfect sense to at least investigate UK-based bridging finance to fund mainland Europe transactions.
As the term suggests, bridging finance is literally a means of bridging a gap between one transaction and another where different settlement dates can impact cash flow. Here at Enness, we have acted for investors from all areas of the world, looking to acquire property right across Europe. Often discussed in the same breath as development finance, bridging finance is literally a means to an end. Development finance will involve the physical development of a property with the idea of increasing the value and negotiating an exit route. The exit route could be a sale of the property or refinancing, often put in place at the same time as the development finance, on higher asset value.
Even though France is perhaps one of the more active European financial markets when it comes to bridging finance, outside of the UK, there are hurdles for overseas investors to navigate. As we touched on above, very few French banks will even consider an interest-only bridging finance arrangement with a strong preference for capital and interest payments. In many ways, this negates the attractions of bridging finance which are means of maintaining cash flow in the short term prior to a sale/refinancing of assets.
Interestingly, despite the fact that the European Union prides itself on a “level playing field” there are various property/finance fees that are significantly higher for non-French nationals. This has had the impact of reducing demand for French-based bridging finance. Many investors prefer to use UK finance backed by UK/French assets, but for those determined to secure French finance, this has increased profit margins for French institutions. It is also worth reminding ourselves that the UK failed to adopt the euro therefore for those looking to secure finance in sterling, and convert into euros, there is an added exchange rate risk.
On the whole, there is bridging finance available outside of the French retail banks with private banks and private lenders more welcoming of overseas investors. That said there are barriers to entry for those looking to secure French euro-based bridging finance which is where Enness and our array of expert brokers come in. We have extremely strong relationships with an array of French private banks and French niche lenders. These are lines of finance which are often only available on an introductory basis. Some French lenders, providing finance above €1.5 million, will also often tie-in assets under management arrangements as a means of extending and expanding their long-term relationship with new customers. Thankfully, there is always room for negotiation and these terms and conditions are not necessarily set in stone.
Property Location: France
Property Value: €2.2m+
Purpose of Loan: Business
LTV: 50% to 65%
Term: 18 Months
Interest Rate: 0.90% per month
Security: First mortgage over property, debenture over bank account and personal guarantee
While Monaco has a dual tax agreement with the French authorities, the real estate market in Monaco is fairly unique. We are looking at properties valued at €107,000 per square metre in central Monaco falling to €75,000 per square metre on the outskirts. While the use of public limited companies and SPV’s (special purpose vehicles) is common used across Europe, due to Monaco’s confidentiality regulations they are the norm in Monaco.
Here at Enness, we have significant experience in arranging bespoke mortgages as well as bridging finance for clients looking to acquire property in Monaco. Traditional loan to value (LTV) ratios are in the region of 50% of to 70% although there is often room for negotiation depending on the level of security available. Our position as an independent mortgage broker means that we can speak with any lenders in the financial market. This allows us to create a level of competition, trim headline rates and keep costs as low as possible. In many cases, we have been able to secure LTV ratios of 80%.
The fact that we have a very strong presence in the Monaco mortgage market allows us to negotiate not only the best deals for our clients but also accommodate often complex financial scenarios. Away from the retail banks, private banks and private lenders tend to be more relationship-based as opposed to simple figures and ratios. If there is appropriate security available, sometimes even without any evidence of income, this is all they need to begin negotiations.
Property Location: Monaco
Property Value: €5m
Purpose of Loan: Property Purchase
Term: 18 months
Interest Rate: 14% fixed per annum
Security: First charge over property and charge over the share of borrower
It is fair to say that the Spanish financial market is still struggling in the aftermath of the 2008 US mortgage crisis. Many Spanish retail banks are still being supported by the Spanish central bank and therefore there are significant restrictions on how partial taxpayer finance can be used. Huge bad debts accumulated over the last 10 years are still having a major impact on individual bank finances. The size of these debts means they are impossible to write off and therefore Spanish retail banks will to a degree depend on central bank assistance for some time to come.
Under Spanish law interest-only debt has been outlawed for retail banks and it is even difficult to arrange equity release with some domestic Spanish banks. Not only are there tough restrictions on affordability calculations – no more than 30% of a potential clients net income can be allocated towards debt repayment – but the property valuation system is extremely cautious.
In Spain, there is a valuation system known as the Tasacion ECO which is administered out by officials from societies registered by the Bank of Spain. All valuations carried out under this system focus purely on the value of the property as it stands; not the area, not market trends and not even potential for expansion. As a consequence, these valuations are extremely conservative and when you bear in mind general LTV ratios for bridging finance in Spain are between 50% and 60%, this can be extremely challenging for those looking at Spanish property. Again, this has created an environment in which UK private bank/niche lender bridging finance is much sought-after with no risk committees, no excessive regulations and much quicker processing times.
Property Location: Spain
Property Value: €500,000
Purpose of Loan: Business
LTV: 55% to 60%
Term: 12 Months
Interest Rate: 0.90% per month
Security: First mortgage over property, share pledge and personal guarantee
The Italian financial sector is another that is struggling to recover from the 2008 US mortgage crash. Local banks have near-zero liquidity after a raft of bad loans which have led to a significant reduction in their loan book risk profiles. One of the major problems for property-related bridging finance in Italy is the fact it can take between seven years and 10 years to repossess a property through the courts. If there are issues with a tenant then this will obviously have an impact upon rental income, a knock-on effect to the owner’s ability to cover finance obligations and can create a very messy situation.
Even UK private lenders, which have been the driving force behind the European bridging finance sector, are reluctant to get overly involved in the Italian market. Those UK private institutions offering bridging finance will increase their rates to somewhere in the region of 20% per annum, in order to accommodate the enhanced risk perception. One of the best ways to acquire Italian property using bridging finance would be to utilise UK assets as collateral. This would ensure that in the event of default there are assets within the reach of UK lenders. In many ways, the use of UK-based assets to secure bridging finance right across Europe is more straightforward and much sought after by UK lenders. The fact this is not always possible has put some high net worth individuals in a very difficult situation.
While the German bridging finance market is one which is expected to grow significantly in the future, it is nowhere near as strong as the UK market. This will surprise many people when you bear in mind that Germany is in effect the lead member of the European Union and has an extremely robust economy. As a consequence, a general lack of bridging finance in Germany and a legal system which is very different from that in the UK have not assisted growth in bridging finance for international investors.
Therefore, many UK bridging finance lenders will require a dual secondary charge with an LTV on combined assets of between 20% and 40% fairly common. Despite the fact that the UK is on the verge of leaving the European Union, it will take some time before mainland Europe is able to offer the same liquidity for bridging finance as that available in the UK.
A number of bridging finance companies have targeted the Netherlands of late although it is fair to say the domestic bridging finance market is in its relative infancy. As with European retail banks, there is a general aversion to risk with the majority of transactions undertaken by private banks and private lenders. Again, this is an area which has attracted the interest of UK-based bridging finance operations although due to the differential between European Central Bank base rates and Bank of England base rates there is a difference in monthly charges.
The rate of bridging finance in the UK tends to be around 0.8% a month with more competitive rates often available across Europe where ECB base rates are currently lower. For example, UK pension funds and private investors would consider rates of between 0.5% and 0.7% per month for French bridging finance transactions. However, when looking at some of the EU countries less welcoming of international investors this rate can increase significantly. Indeed the Italian legal system has killed demand from the UK bridging finance lenders with rates of 20% per annum the norm.
The simple fact is that the greater the level of risk-free security offered against a bridging finance loan the more competitive the rate. When you consider that some lenders will sell on LTV ratios of around 50% this gives significant headroom in the event of financial difficulties going forward. If we look at the larger picture from a distance, many international investors will experience increased costs with regards to valuations (up to 3 times more expensive in France for international investors compared to domestic investors) and anomalies such as the Spanish valuation system. All of these increased costs will eat away at the perceived competitive headline rates although here at Enness we have experience in negotiating the best deals, incorporating appropriate levels of security and negotiating not only interest and capital arrangements but interest-only deals. When you consider that for many investors the whole point of a bridging loan is to bridge the gap between capital investment and receipt of funds, being forced to pay capital and interest is not appealing.
The process for bridging finance companies is relatively simple, carry out a valuation on a property, review the client’s financial situation/credit history and then make a decision. However, in practice, there are many other issues to take into consideration such as:-
• Potentially legal challenges on security assets
• Levels of security available
• Exit routes
• Contingency plans
• Refinancing where applicable
• Currency movements
Unfortunately, the vast majority of retail banks across Europe have tightened their risk profiles and effectively turned their back on anything but traditional bridging finance applications.
This has left the door open for private banks and private equity funds to enter the market and fill the vacuum. What you will find is that private banks and private equity funds tend to be less interested in a customer’s credit history and income, taking more interest in assets under ownership and potential AUM arrangements. In many ways, this is the major difference between retail banks and private bank/private equity funds, their approach to risk, ability to look at the bigger picture and focus more on assets available for security as opposed to simply income and credit history.
When looking to acquire property overseas it makes sense to research domestic bridging finance liquidity. As we touched on above, UK base rates are currently 0.75% while ECB base rates are 0%. This has an impact upon lending rates and in theory, euro bridging finance should be cheaper than sterling finance. However, this does not take into account competition in the marketplace, appetite for risk and domestic appetite for bridging finance.
So, when looking at bridging finance across Europe it is essential that you consider factors such as:-
• Are bridging finance rates competitive?
• Are the terms competitive? For example, many French banks will not entertain interest-only loans for international investors, preferring capital and interest repayment transactions.
• Might there be legal issues further down the line? Many international investors have fallen foul of legal differences between their homeland and the country in which there are investing. The French market is one where there is particular friction between French laws, socialist based, and those from the likes of the UK, of a more capitalist nature.
• Exchange rates – even though there is greater liquidity in the UK bridging finance market there may well be exchange-rate issues when looking to acquire property priced in euros.
• Is it worth considering a company or SPV structure? It may well be possible to sidestep any potential legal friction between different countries by utilising company/SPV vehicles.
• The greater the degree of security available the more competitive the rate for any form of bridging finance. Are clients fully utilising their assets?
Here at Enness, we have access to more than 300 lenders across the financial markets and due to our independent status, we are not restricted in any way. We have created extremely strong relationships with retail banks, private banks and private lenders. As a consequence, we are very quickly able to match customer requirements, and potentially complex finances, with traditional or specialist bridging finance lenders. Due to the trust factor, we have nurtured with many lenders, processing times are often extremely short. We know the information they require, the format and the best structure for individual applications.
We consider all client applications on a case-by-case basis and are extremely adept at negotiating the best rates and the best terms. If you are looking for bridging finance across any of the major European markets then please give us a call for a no-obligation chat. We can discuss your requirements, finances, plans and create a bespoke bridging finance offer for your situation.