Many of our clients will be aware of our private debt bond offering and have already allocated funds in their portfolio to it. We have found this product matches many people’s current appetite very well. There is a lot of noise in the market at the moment and understandably many people feel uncertain about the future. For those with longer timelines saving for their retirement goals in 10, 15 or 20-years’ time, the message remains the same. Stay invested for the long term, ignore the noise, and don’t panic. But for those getting closer to needing access to their savings, their tolerance to volatility and an uncertain market may have reduced. One of the problems with de-risking a portfolio and moving away from equities now is that interest rates are low and achieving returns is difficult.
One of the asset classes that offers the most attractive risk-reward profiles is private debt.
Following the last financial crisis, a funding vacuum was created due to stricter banking regulations that restricted the amount of funding traditional banks were providing to small and medium enterprises. The direct lending industry continues to benefit from this and has seen spectacular growth. This growth is expected to continue, with Blackrock predicting returns on direct lending over the next seven years to average 10.4% per year.
The only asset class with a higher expected return is private equity, expected to return 10.8% per year over the same period. However, private equity has a completely different risk profile. Private debt also needs to be considered more closely when looking from a cautious approach. Some forms, such as venture debt and subordinated loans would probably not meet the risk profile of a cautious investor. These investors should be looking for opportunities in the secured lending market where they benefit from the strongest protection. For this reason, we think the UK real estate bridge lending market is by far the most attractive area of private lending.
What are real estate bridging loans?
Real estate bridge loans are short-term loans that are fully secured by the value of a property. Following a valuation of the property from an independent valuer, the loan provider obtains a legal charge over the property that enables them to force the sale of the asset in case the loan is not repaid. To improve this security further, most companies will not issue a loan that is more than 75% of the value of the property, so the property value would have to decrease more than 25% to present any kind of risk.
The UK is by far the biggest bridging market in Europe with a well-established legal framework and strong lender protection. According to the Association of Short-Term Lenders, UK bridging loan books grew 19.7% to £4.5 billion in 2019, which is more than the combined market size of all other European countries.
What are the reasons real estate developers are willing to pay such high rates?
A recent study by EY found that the key consideration when choosing a bridge lender, is the speed of execution. The most common use of a bridge loan is for refurbishment projects with a relatively short duration. Another reason is an acquisition bridge to complete the necessary down payment within 30 days after purchasing a property at an auction. Developers might also seek bridge funding to start a development before replacing the bridge loan with a cheaper construction loan or mortgage by a bank. Sometimes, a partial construction or a certain level of pre-sales help to get a more favorable long-term bank loan, which more than offsets the temporary high rates for a bridge.
What are the benefits to investors?
Bridging loans have durations anywhere between 3-60 months, so investors benefit from the short duration of the bridge loans and clear exit strategies. As mentioned before, the loans are secured against the value of the property and the lender has a legal charge over the property which means they can take control of the asset should they need to. Investors can count on best-in-class valuation companies that ensure a fair, current appraisal of the properties before a loan is given.
How can I invest in this asset class?
We have researched the market extensively and partnered with an industry leader in the bridging loan market. They have been able to create an investment process and structure that is already familiar to our clients. Each investment is set up as a Bond between the investor and the company.
The bond pays a fixed return per year, with interest paid monthly. Depending on the length of term you invest, the returns range from 4 – 6% per year. Interest being paid monthly makes this a particularly attractive proposition for those wanting to generate an income from their money. Demand for these bonds has been strong and we are currently fully subscribed, but new allocation will be available in the next few weeks, which we expect will fill very quickly.
Please get in touch with your adviser or via the form below if you would like to register your interest and receive more information. Up to date prospectuses with the details of terms and returns will be available soon and we will provide them as soon as possible to those who have inquired.
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