Hopes that 2018’s steady drumbeat of policy tightening might pull fixed income investment toward something like its pre-crash norm have been dashed this year, with the yield on benchmark sovereign indices tumbling back to sub 1%.
German bunds, having been positive yielding out to a six year maturity as recently as late last year.
The search for yield has been among the factors pulling what were traditionally seen as highly alternative sources of yield further into the mainstream.
Build-to-rent schemes, alternative energy and catastrophe bonds have all to varying degrees been increasingly accepted as viable retail choices.
Within credit markets, innovation has generally meant pushing the boundaries of new tech, in the increasingly tarnished promise of peer-to-peer, or the institutionalisation of niche areas such as securitisation and asset-backed lending.
One such area is bridging finance. The sector has been a source of yield for niche investors since banks retreated a decade ago, but is only now increasingly being unitised and packaged for fund buyers.
So is the area a stepping stone to wealth or a bridge too far?
Bridging finance is typically a form of short-term credit, usually secured, extended to fund the purchase of an asset while a borrower frees up capital or arranges long-term borrowing.
Execution times are the key selling point, meaning due diligence has to be truncated and the cost of capital consequently high.
While the direction of travel on rate expectations have reversed this year, the 2017/18 Fed tightening has driven some marginal players out of the market.
This has forced those that remain to identify new sources of capital, such as fund buyers.
‘There has been price compression on bridging loan rates over the past few years and this has been driven by more competition,’ said James Allen, head of Walker Crips Alternative Investments.
‘Recently some lenders have ceased lending, relieving some of the price pressure. Rather than seeing more competition I would expect to see the larger lenders increasing their access to capital and diversifying their product offerings.’
At the mass-market end of the spectrum net APRs of 18% are not unusual.
Within the high net worth market, which is the primary target for packaged funds, investors are more probably looking at a net annual yield of around 10%, with a top-rated borrower on the most secure of terms still paying around 7%.
Anthony Bodenstein, founder and managing partner of wealth manager Amram Capital, and operator of specialist bridging fund Whitehall Capital, said that returns have come down since Whitehall entered the arena, from around 1%-1.5 % per month gross five years ago to closer to 1%. They are also still declining slightly.
He said the portfolio has produced a net 10.4% return on an annualised basis since its establishment, but some of the continuing barriers to wide take-up of the asset class are obvious in its quarterly redemptions.
While the liquidity would not rival mainstream credit mandates, ‘not only do you have higher return, [than traditional fixed income at equivalent risk] but you have lower volatility’, he added.
‘We only do a loan if it’s right. We do a maximum 70% loan-to-value and will make sure there’s an exit plan. We have our own analysis of the property and get an external valuation and meet with the borrowers to understand their wealth.’
Butterfield Mortgages, the credit division of private bank the Butterfield Group which has been active in the sector for around 20 years, said the slowdown in prime London and South East England property began to kick in in earnest in 2017.
The bank have said increasing jitters about the market had also squeezed some peripheral players out of the market.
‘Most people are prepared to wait at the moment. Vibes we get from clients and professionals are that a lot of the downsides has been built into the market already,’ said David Gwyther, business development director.
He added that the firm will offer bridging finance out to two years in the right circumstances, which left it more exposed to duration risks, but better incentivised to forecast possible roll-over risks.
‘All we do is on an open bridge basis. The client has sold an asset and is waiting for the funds, which are coming, but there is no certainty over when the liquidity event happens.
'It is riskier, but from Butterfield’s point of view, we tend to deal with property markets in central London and the south east, which are quite mature.
‘It’s not a tick box exercise. All our loans are done in a bespoke way.’