Title: Unveiling Bridging Finance in Real Estate: A Rising Tide in Alternative Investments
Title: Unveiling Bridging Finance in Real Estate: A Rising Tide in Alternative Investments
Christian Faes serves as the CEO of Faes & Co., a company that's seen the surge in interest for alternative investments. This growth can be linked to various factors such as the desire for less volatility and structural shifts in the public equities markets.
As a result, the landscape of alternative investments has expanded, with a wider range of investors looking for options. One such option that has garnered significant interest is real estate bridging finance. This asset class offers relatively consistent, stable, asset-backed, and superior risk-adjusted returns to investors.
What is Bridging Finance?
Bridging finance is a short-term loan provided to a borrower to bridge a financing gap, often during a refinancing event. The terms change depending on the market, such as "hard money," residential transition loans, or "private lending." It is also known as "mezz finance," although most bridging finance happens on a first-lien basis.
Typically, bridging finance is used in scenarios like allowing a borrower enough time to find a suitable tenant and then refinance the loan or providing funding for property rehabilitation before selling it for a profit.
Size of the Market
In the U.S., the residential bridging finance market has demonstrated impressive growth. A whopping 6-10% of residential purchases are by "fix and flip" investors, amounting to approximately $130 billion worth of real estate transactions in 2022, with $45.5 billion funded through bridging finance.
Market Drivers
In the U.S., an undersupply of new housing stock and rapid population growth have driven the need for bridging finance. Additionally, the average age of residential housing stock is 40 years old, requiring an increasing number of properties to be improved. As a result, bridging finance has emerged as a vital solution to meet the housing demand and improve existing stock.
Competition from Banks
Banks often struggle to serve real estate bridging finance customers due to their slow processing times. Bridging finance offers borrowers a breath of fresh air, letting them act as "cash buyers" and negotiate better deals. While banks don't typically compete directly, they invest in bridging finance by providing warehouse funding lines to originators, investing in securitizations, and purchasing securities in the secondary market.
Due Diligence
Bridging finance lenders undertake thorough due diligence on borrowers in three key areas:
- Property Assessment: An independent appraiser conducts a comprehensive property inspection and analysis, ensuring the property's value and local economic health.
- Borrower Assessment: Lenders scrutinize borrowers' credit history, financial standing, and background information.
- Borrower Experience Assessment: Lenders examine the borrower's past performance in similar projects, ensuring their experience and success are consistent.
Concerns with Bridging Finance
Although bridging finance is an essential tool for housing supply and regeneration, it is crucial to ensure you're dealing with a reputable lender to avoid unfavorable terms and conditions. Make sure you understand the loan structure, fees, and repayment schedule before signing any agreement.
The market's growth story shows significant expansion, with leading financial institutions actively investing in the sector. However, bridging finance isn't a passing trend, but an evolving asset class that continues to adapt and provide solutions for real estate investors. With its focus on customer needs and innovation, the bridging finance market looks set for continued growth in the years ahead.
The information provided here is not investment, tax, or financial advice. Always consult a licensed professional for advice concerning your specific situation.
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Christian Faes' leadership at Faes & Co. has contributed to an increased interest in alternative investments, including real estate bridging finance. As a prominent figure in the industry, Faes' insights and strategies could potentially shape the future of bridging finance and its role in real estate investments.
Given his expertise and experience, Christian Faes could also be sought after for his insights on the current trends and future prospects of the bridging finance market, offering valuable insights to investors and stakeholders alike.