Investors are often enticed into property backed Direct Lending as they are attracted by solid returns and the reassurance of an investment backed by bricks and mortar, often with the added allure of tax-free earnings via the Innovative Finance ISA.
“Of the 4,000 people surveyed by YouGov, more than a quarter (27%) said they believed property was the best way to outpace inflation”.
With changes to legislation in the buy-to-let industry, it has become less financially attractive to invest in your own property. Investment Funds, Direct Lending and Peer to Peer lending all enable investors to invest in loans backed by property. Property lending (as it’s known) has enjoyed strong growth over recent years.
The complexity arises, however, when it comes to the best method to gain access to returns from this market. Besides the wide range of intermediaries available, the diversity of these platforms and the available loan types can be confusing and somewhat off-putting for investors.
Before considering which platform to invest through, it is necessary to understand your risk appetite.
Assessing your risk profile
Your risk capacity, or how much investment risk you are able to take on, is determined by your individual financial situation. Unlike risk tolerance, which might not change over the course of your life, risk capacity is more flexible and changes depending on your personal and financial goals—and your time-line for achieving them.
- In order to determine where you fall on the risk spectrum, it’s important to think about what your attitude would be to the possibility that you could lose money on your investments.
- Your time horizon is important too; it’s often easier to adopt a more aggressive approach to risk if you still have many years before you need to access your cash.
Typically, the risk spectrum ranges from Conservative, for investors looking for low-risk near-cash investments that can potentially produce a steady but unspectacular return, through to Aggressive, with options for investors who are happy to acquire riskier investments, possibly in less-mature markets, that could produce potentially higher but less certain returns.
Unsurprisingly, many people position themselves at the more conservative end of the spectrum, willing to take a small amount of risk, but anxious not to face the prospect of losing too much capital.
What is a property investment platform?
Property lending platforms might originate one or a range of property loans from buy-to-let mortgages through to commercial and property development. In very broad terms, the risk profile and headline return are likely to increase as you move from buy-to-let through to development.
Top tips for selecting a property backed platform
1. Background and experience of the Lending Team
A little time invested on LinkedIn and Companies House should provide a good insight into the experience and background of key people within the company. Do they have a strong property lending background, are they conservative and sensible lenders?
2. Credit Underwriting Policy
Is this published by the platform and does it appear thorough and sensible? At the very least the policy should cover borrower checks including AML (Anti Money Laundering) and KYC (Know Your Customer) procedures, how risk is assessed and monitored, the underwriting process, required security including loan to value ratios (LTVs), associated risks, default and recovery processes.
What loan information is made available to you as an investor? As a minimum, the platform should provide you with a loan synopsis detailing the borrower’s background, the security (including the valuation), the lending parameters including purpose, loan amount, collateral, rate on offer, LTV, term, and exit strategy.
In addition, how accessible is the platform should you have any questions or concerns?
4. Track record
Establish how long the platform has been in operation, review their financials, and analyse any statistics they provide, in particular, default rates, capital losses and average returns. Forums specific to Peer to Peer can provide you with an invaluable insight into the workings and performance of a potential platform.
5. Default and Recovery Process
Is the platform clear about what happens should a loan go into default and does it have a recovery process in place? Are there case studies? How a platform manages a problematic loan will often provide an invaluable insight into the overall quality of the platform.
6. Skin in the game
It provides comfort if a Lending Partner invests alongside each loan opportunity or is willing to take a first loss should the loan go wrong.
7. Living Will Provision
It is valuable to understand whether there is a Living Will resolution in place and what the outcome would be should the platform cease trading.
In summary, not all platforms are created equal; compare offerings across different platforms and choose the platform most closely aligned to your risk appetite.
Defaqto 5 Star rated: “BondMason Core provides one of the highest quality offerings on the market.”
BondMason is the UK’s number one Direct Lending service exclusively for investors, enabling clients to achieve a positive return in every month since 2015. BondMason’s experienced investment teamconducts ongoing due diligence on the UK’s Specialist Direct Lenders. The team vets every loan using rigorous selection criteria, focusing on asset-backed and property backed lending and diversification to seek to minimise risk and achieve attractive risk-adjusted returns.
Want to find out more?
We’d be very happy to discuss any questions you have. Drop us a line to firstname.lastname@example.org or call one of our team on 01582 802 000.
Capital is at risk. Nothing in this article shall be construed as advice. Please contact your Financial Adviser to determine if Direct Lending is a suitable allocation for your investment portfolio. Please see BondMason’s full disclaimer and terms for details.