Lending is a cornerstone of any functioning economy. During the Middle Ages, it was widely believed that lending money at any rate of interest was sinful. Today, most agree that lending is crucial to economic success. Good access to credit is key to driving growth, so much so that many view it as one of the critical methods of alleviating poverty. If the economy is a vast engine, then credit is the vital grease which makes it glide rather than sputter.
In the case of property, lending is beneficial for developers, investors and the wider economy. Developers can access finance quickly and easily, allowing them to build ambitious projects without bringing in new shareholders and losing their expert control. Investors enjoy fixed, regular, and strong returns with their investment, often legally secured and asset-backed. So, property lending is great in theory, but like anything, it must be done right. What are the factors to consider around property lending in the UK as we move into 2019?
The experience of the team behind the lending
It is important to know that the platform that you are investing with is going to be making informed and sensible choices about originating and managing loans as well as being able to identify loans and lenders to avoid. As a start, the right questions to ask are:
What other projects have they been involved in?
Are any of their previous loans defaulting?
Have they the experience needed to bring the loan to a successful conclusion?
Loan to Value
Taking in to consideration the loan to value ratio in any property lending is important. The Loan to value (LTV) ratios tells us how much capital vs how much debt is owed on a given property (i.e. mortgage). Ensuring that a realistic value is given on the property and the level of lending against that value can give the lender a better understanding of the level of risk their investment has. A higher LTV is often seen as higher risk than those with a lower LTV. Being confident that the property will hold its value during the length of the loan is essential to achieving an exit and good returns.
Location, location, location
At the moment, London is struggling, but the Northern powerhouse is flying. It’s no secret that London and the South East have been seeing a slowdown in recent months. However, this isn’t country-wide: other cities like Liverpool, Manchester, Leeds and Birmingham are displaying positive growth. These factors, however, whilst they impact property prices, they are of more impact on equity investments, when considering a loan it is the loan to value (see above) that affects the investment, rather than its location. Investors should understand that location should be considered when understanding how a borrower intends to exit. Crucially, wherever there is value in property, there are lending opportunities for investment; as long as suitable security is given.
Risk diversification and Fixed Terms
One advantage of property investment via platforms is to diversify your investments, enabling you to manage your exposure to risk better. For example, if you spread £50,000 over 10 loans and one of those loans defaulted, your potential loss is £5,0000. Whereas if you spread the same £50,000 over just two loans and one defaulted then your potential loss is £25,000. Another essential factor to consider is your exit: investing in opportunities with fixed terms allow you to better plan when investments will be realised.
At present, no investment post could be completed without mentioning the white elephant in the room: Brexit. “Brexit angst is a major factor for market sentiment right now, particularly in London,” said Savills’ Lucien Cook. Foreign investment has been a major force in driving London’s astronomical house-price growth over the past decade, and it’s these foreign investors who are likely to be most nervy about Brexit. Nonetheless, there is a light at the end of the tunnel for those lending against property. Given that lending provides a fixed return based on the underlying security, lending provides a hedge against uncertainty secured by underlying property values.
2019: Cautiously Optimistic
Over 2019, provided that the correct criteria are met – namely that property is valued correctly, then this should provide a good hedge against Brexit and any market fluctuations. Brickowner is optimistic about the potential returns from property loans. Sign up to our mailing list to keep posted about our latest opportunities.