Author Brightstone Law LLP

For some time now there has been concern that expansion in the bridging market has been as much about the appetite to lend than a natural growth in sensible lending opportunities; with scalability king and margins squeezed.

It was thought and hoped by some that Covid might reset the market, helping it return to its traditional values and a re-evaluation of the risk, of which established lenders are all too aware, but perhaps newer entrants have not yet experienced.

If anything, Covid appears to have simply turbo-charged demand.

Inflation is on the rise, significantly, as the general media are all too keen to publicise. Equity markets are now showing volatility and vulnerability, and interest rates have moved upwards, twice in succession. Whilst the traditional risks of fraud, valuation and regulatory issues have not gone away.

So, could a much-anticipated reset in the property market be next? And if it is, is now the time to re-think the one-dimensional skinny approach bridging lending?

Without doubt, it is time for most lenders to remind themselves that this is not the mainstream market, where loans are easily originated and recovered en masse and with a light touch – where margins are thin and costs are stripped down.

The danger in skinny lending is that every part of the process becomes commoditised and transactional to the extent that a damaging individual transaction may meet basic requirements, only to be uncovered by digging deeper. When volume becomes the main driver, risk control and expertise can be sacrificed. This includes the way in which a lender works with its partners, such as its legal advisers. With a skinny model, documents are produced and contracts are executed to a relatively basic level, with little else by way of added value.

This model can work in some markets – and does – but in bridging, where circumstances can be complex and flags deliberately concealed from lending principals, relationships are key, as is time, diligence, expertise and experience. A healthy property market disguises mistakes, a regressive one often lays poor judgment bare.

I’m a firm believer that this sector thrives with a multi-dimensional, full-fat approach to lending. This means something that is trusted relationship based and service driven, with thicker margins to allow for sensible process proportionate to the lend and security, caution and diligence. Full-fat is not particularly fashionable at the moment, but in the longer term it can be more nourishing in delivering a healthier more robust and future-proof market.

From a legal perspective full-fat means proper diligence, sensible investigation, and the right level of time commensurate with the value of the transaction – and added value too; lawyers used to be seen as persons of wisdom, not just another service supplier. Lawyers also have a broad range of experience and can support lenders in better understanding the pitfalls of their business and the issues within it, which the lenders may not have experienced themselves; identifying solutions and supporting best practices and development. The standard contractual stuff is a given, but it’s in this partnership-based approach that the bonus value lies and a skinny model simply does not allow for this.

A natural response to this might be to say “well, you would say that wouldn’t you”, but as a provider of legal services to the industry, my business is predicated on the success of my clients.

So, where our interests are aligned in bridging, full-fat may be the healthy option in an ailing property market.

Jonathan Newman, Senior Partner at Brightstone Law