Investment in property loans a diversification option for HNW investors

 Investment in property loans

Distressed retail is providing significant opportunities for conversion into well-located and much-needed residential homes or offices.

We are living in very unpredictable times with Brexit and Covid-19 at the heart of the volatility. The pound has gained strength following the avoidance of a no-deal Brexit, the vaccine is being rapidly administered and equity markets are reaching record levels. But how long will this last, especially with repayment of our Covid-19 debts on the horizon? And, with interest rates near zero, choosing to increase your cash allocation could cost 5% per year in long-term returns according to behavioural finance experts, Oxford Risk.

What is the best strategy?

Market uncertainty does in fact create opportunities, for example in alternative investment classes such as real estate. Globally, investors are pouring money into alternatives and diversifying their portfolios. Now is the time for private investors to think about diversification too and getting a line of sight to individual investments that can deliver in the current market.

Real estate is a good option as there are currently many opportunities, either as a result of the pandemic or unaffected by it. For example, the significant housing shortage in the UK remains, and distressed retail is providing significant opportunities for conversion into well-located and much-needed residential homes or offices. There is also a huge shortage of student accommodation as a result of a population bulge in this age bracket, meaning purpose-built accommodation is required to supplement the shortage of houses in multiple occupation that are needed for the residential market. In addition, renting is on the up and build to rent schemes are becoming popular for their high-spec facilities and communal areas, without the responsibility or debt. Equally, purpose-built senior living is rising in popularity and even more in demand given the ageing population.

How to take advantage of the opportunities

Not everyone wants to be a property developer or can gain access to large property deals across multiple sectors. Selecting the deals and finding the opportunities is not easy either. However, there are many ways to take a slice of the action by investing into property loans.

For the smaller investor, peer to peer (P2P) schemes allow anyone to invest as little as a few thousand pounds into a loan against a site. For the more sophisticated investor with more on their balance sheet, there are options to participate in loans offered by boutique, specialist lenders, which argue that unlike traditional lenders they can react to new market trends with flexibility and invest in deals with better risk-adjusted returns. You are advised to ask how the loans are underwritten and an encouraging sign is if the lender also invests in the loan.

Why not invest in a property fund?

Investing in traditional property funds does not always allow access to high returns over shorter periods of time and also gives no transparency of individual investments. Alternative lenders however, pick up more interesting and niche opportunities in high-growth areas across a broader spread of property asset classes and offer transparency and choice over each individual investment.

This is becoming an increasingly attractive model. According to Knight Frank, investors are starting to see the value in broadening their portfolio diversity. Their figures show that only 13% of investors are currently active across a spread of three residential asset classes but they expect this to rise to 38% by 2024.

What are the returns and risks?

Investors typically earn between 7% and 12%. Returns are dependent on the loan to value and the structure of each deal. First charge loans tend to be lower risk with lower returns and second ranking loans that may offer up to 12% to reflect that risk.  Through our management process investors benefit from effectively being a co-lender with a charge against the underlying property.

How do I manage and exit my positions?

As with online banking, advances in technology have driven the development of platforms for investors to manage their investments. Investing small amounts of money in peer to peer schemes may possible at the click of a button. We ask that investors must first satisfy the criteria of the client onboarding process, but then they have access to an online portal where they can view all their investments, receive statements and view new opportunities. The flipside of these models however, is that no investment advice is given, but deals are clearly outlined, and you can always use an external adviser to help qualify opportunities.

Overall, despite the current uncertainties, alternatives can generate returns for all investment levels and risk appetites. Portfolio diversification is key, as is the ability to react to the market and choose opportunities for their individual merit and performance potential in the current climate. Property can provide some very attractive returns and is currently seeing a surge in opportunities despite the existing economic situation. I believe in response we will see significant uplift in investment in property debt markets.

Daniel Austin is chief executive and co-founder of property lender ASK Partners

Further reading: Investing post covid-19 and the new rules to follow

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