The report, which was exclusively revealed in the March/April issue of Bridging & Commercial Magazine, found that 33% of respondents saw a rise in the foreclosing of properties in 2022 — compared to just 4% the year before.

The changing macro environment has resulted in 58% of participants expecting to see foreclosures climb in 2023.

“Unsurprised” by last year’s increase, Jim Gott, senior director at Mount Street, said: “Inflation has led to higher development and operational costs, while the hike in interest rates has led to higher capital costs and lower valuations — this has squeezed margins from all directions.”

Given that all of this has occurred in a very short timescale, Jim added what is surprising is that “there hasn’t actually been more distress”.

The survey also highlighted that half of businesses introduced variable interest rates over the past 12 months.

Of respondents who have not launched variable rates, 10% intend to introduce them over the next year.

Avamore brought out variable rates in the summer of 2022 and chief executive officer, D’mitri Zaprzala, said it “felt rather alien at the time as we had always offered fixed rates, but it felt like there was no other option considering the ever-changing rate environment.”

According to D’mitri, this highlighted that “rates remain just part of the decision-making process for brokers and borrowers, as the key considerations were still around our ability to lend on schemes”.

For the first time in the history of the UK bridging market study, a question was asked on the average level of default interest rate applied to loans. 
Some 49% of respondents cited that the average is between 1-2%, followed by 27% that reported a range of 3-4%.

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Commenting on why defaults are happening within the industry, Philip Gould, chief lending officer at Avamore, said the company had seen the average loan duration lengthen: “Some development works have been delayed due to cost concerns and shortage of labour — while bridging facilities have, on average, taken longer to redeem due to the prevailing conditions in the term financing market.”

“While times are certainly hard for all participants in the specialist finance sector, the current conditions do present opportunities for non-bank lenders who can apply a more bespoke approach to the underwriting process to find solutions that may not work for high-street lenders and challenger banks,” Philip continued.

Another interesting statistic from the study is that the majority of funding for lenders now comes from senior and mezzanine facilities — with HNW individuals, private and family office money coming in second.

In 2022, senior and mezzanine wholesale facilities made up only 15% of the main sources of funding for lenders — in 2023, this now sits at 28%.
HNW, private and family office money made up 32% last year, but has now dropped to 21%.
Not surprised by these figures, D’mitri commented: “We’ve seen the market continue to mature and institutionalise.

“HNW and family office money tends to be more flexible and expensive, and therefore more suitable for newer entrants in the space.

“As track records are established, the move to (generally) cheaper funds is a natural progression for a lender, and indeed a journey we have been on ourselves.”

What about ESG measures?

It’s also not a shocker that ESG came into play in the study, with 35% of lenders planning to launch a bridging product linked to broad based ESG measures beyond EPCs.

Some 33% are aiming to implement a bridging product linked to EPCs alone.

Sabinder Robinson-Sandhu, director of operations at Avamore, stated: “There is a clear opportunity to support developers and landlords that are bound by law to improve the EPC rating on properties.

“Supplying a product which aligns with this is filling a gap in the market, which is in part why specialist finance exists.

“The challenge will be identifying which of these are effective in making an impact and which have been labelled as such for a ‘marketing wrapper’.”

Commenting on the 14% of lenders that plan to introduce environmental stress testing of their portfolios, Jim stipulated this was “more important than ever”.

He said Mount Street’s view of the market suggests that “lenders are taking a harder look at both borrowers and business plans and are being a lot more selective in the deals they choose to invest in”.

Overall, the future looks bright for the UK bridging sector this year, with 51% of respondents believing the 2023 macroeconomic environment will have a positive impact on the market.