Written By: Paresh Raja, CEO of Market Financial Solutions
The United Kingdom (UK) has become globally renowned for its ability to cultivate innovation across established and emerging sectors. Leveraging its position as an international capital for commerce and finance, the country is a popular destination for those seeking to take advantage of lucrative business and investment opportunities, ranging from commercial and residential real estate,to stocks and bonds.
One of the most exciting developments we have seen unfold in the UK in recent years is the rise of the alternative finance market. This broad term encapsulates all the financial channels, processes and instruments that sit outside of the traditional and mainstream finance systems that are typically dominated by big banks.
Alternative finance’s sudden rise to prominence occurred in reaction to the stringent lending measures that were imposed by mainstream lending institutions during and immediately following the global financial crisis. With consumers, investors and businesses struggling to access the capital they needed to fulfil their investment goals, innovative new companies sought to address the gap in the market by providing creative new ways to source finance.
After nearly a decade, the UK’s alternative finance sector shows no signs of slowing down – a report from last year found that the market grew by an astounding 43% in 2016 to reach a value of £4.6 billion. This is an impressive rate of growth for any industry but given the alternative finance market was only worth £0.3 billion in 2011, there has been a clear shift of preferences from mainstream to alternative lenders.
The rise of specialist finance in the property market
Of all the sub-sectors within alternative finance, one which has become popular amongst investors in the property space is bridging. This form of specialist finance allows people to use an existing asset that they own, most commonly a property, which is then offered as security in order to acquire a bridging loan. Moreover, the loans can be arranged in a matter of days following an inquiry, allowing people to overcome the long and protracted delays typically encountered when engaging with mainstream lenders.
Bridging finance is not a new concept, but its maturity as an industry has coincided with the rise of alternative finance. Over the past decade, the UK’s bridging industry has firmly established itself within the alternative finance space. Gross annual bridging lending in the UK surpassed £5 billion in 2017, which was a new record for the industry.
There are a variety of circumstances where bridging finance can be used; this can range from a business owner offering an existing real estate asset as a security to release funds and pursue a lucrative investment opportunity, to those needing capital to address temporary cash-flow issues. However, the most common reason for people typically assessing bridging finance in the UK concerns a residential or commercial property purchase.
UK real estate is a popular investment class for those seeking a secure asset able to weather market shocks and periods of economic volatility. This has been most recently demonstrated in the opening months of 2018. Despite the uncertainty surrounding Brexit, a recent Market Financial Solutions study found that over half of investors (53%) are planning to direct their capital into traditional asset classes such as property this year.
Supporting property investment through bridging finance
The eagerness to invest in real estate over a number of decades has resulted in the steady growth of average national house prices. Nationwide’s latest House Price Index revealed that the average price of a UK home has risen by 2% in the year to June, reaching £215,444. Buyer appetite is clearly strong, but with demand currently outpacing supply, the residential property market has become much more competitive for both first-time homebuyers and seasoned investors.
At a time when market demand for UK real estate has surpassed the available supply, the property market has become a fiercely competitive arena. That’s where bridging loans come into play, offering prospective homebuyers quick access to capital and removing the chances of a buyer from losing out on a sale due to delays in acquiring the right finance.
For buyers who have not yet completed on the sale of their own home but fear missing out on a prospective real estate purchase, they can use their existing home as a security and apply for a bridging loan against this asset, in turn enabling them to quickly buy the property they are after. The bridging loan can then be paid back once the home offered as security has been sold. In these instances, the buyer does not risk losing out on their desired property due to the delays they are encountering from selling their home and they can therefore act confidently and quickly.
Taking advantage of alternative finance
The alternative finance sector can seem initially overwhelming for those who only have a topline understanding of the industry. However, it is important for investors, businesses and consumers to ensure that they are taking advantage of the alternative finance products that are currently on offer. With interest rates in the UK at 0.5%, the minimal returns on offer from traditional saving options means that people need to be clever in how they manage their financial goals.
Property remains a popular asset due the stable level of returns on offer. What’s more, alternative finance has allowed investors to take advantage of this sector, with specialist finance loans such as bridging providing new avenues to access funding. Despite the political uncertainty surrounding Brexit, the alternative finance sector will continue to thrive over the coming years, offering flexible advantages to those willing to embrace the opportunities on offer.