What is debt investment, and why is it becoming so important for property developers?fjpinvestment
Demand is currently outweighing supply in the property market across the UK. The most common reason for this is a lack of finance available for property developers.
Whilst the majority of the conversation is about the political situation across the UK, the government’s failure to provide clear direction over the long-term plan for the property market is a cause for concern for many property investors.
Whilst it is easy to assume that the property market across the UK will have suffered through this relatively unstable period, the actual facts are far more reassuring.
Positive signs in the market
Recent data by Halifax highlights that prices have actually risen by 1.1% in May 2019, with mortgage approvals at their highest rates in over two years. Outside of London, cities such as Liverpool, Manchester and Birmingham are performing particularly well.
Low supply remains the significant hurdle in the market. More finance is needed therefore to attempt to match this supply; this is where debt investment plays a key role in the market.
The importance of finance
According to a recent survey, 57% of small developers identified finance as the biggest obstacle they face in the market. We have seen this trend rise over the past decade or so, and this is ultimately down to the way in which lending has shifted.
As a result of the 2008 financial crisis, traditional lenders such as banks have become far more risk adverse than they once were, not only to reduce the amount of defaults on loans but also because of new compliance regulations brought in to avoid the crisis from happening again.
Although this has accounted for some relative stability in the market, it has created a shortfall in investment funding for construction projects. With conventional methods of obtaining funding becoming less viable for developers, more and more are turning to alternative sources of finance.
Fortunately, then, alternative methods of finance are becoming available in the market. Whereas the traditional approach to investing focused on firms exclusively looking to bank and other lenders for finance, debt investment allows private investors to access funds more directly.
Firms can access private finance in the form of loan notes, harnessing this funding to purchase land and construct property projects, scale operations and ultimately benefit from the ever-growing opportunity in property that would otherwise be unattainable for most. This also provides more homes for those that need it, bolstering the economy in turn.
Why debt investment is so attractive
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Debt investment not only provides developers with a much need source of finance to develop projects, but also provides investors with very healthy returns. This is because debt investments deliver fixed returns over a pre-defined period of time, with exits clearly defined before entering into the investment.
This benefits the investor not only financially, but also because they can have greater control and structure over their investments.
Loan notes, a growing form of lending, have a pre-defined date of maturity which means that investors do not have to concern themselves over exit. The capital is provided upfront to the developer, this is then paid back with interest by a set date. In contrast to the strategic headache of traditional investments under the current regulatory scheme, you can start to get an idea of why this investment in getting so popular.
With interest rates stagnating at 1% over recent years, peer-to-peer (P2P) investing, that falls under the blanket of debt investments, have soared in popularity.
The figures are supporting this also. The total value of the alternative finance market grew a substantial 35% to reach £6.2 billion by the start of 2018, with this figure set to be considerably higher now.
The importance for the housing sector
Whilst the rise in this alternative method of investment is growing, with good reason, we have to appreciate the reason why this is happening. A reluctance to invest in the traditional sense through a lack of returns and strict regulations are steering savvy investors towards this method of investment.
The fact that it is reliable and stress free when compared to other investments and have very attractive returns is only going to see this “alternative” investment become more and more popular.
Debt investment is an increasingly common option for sophisticated investors to support Britain’s developers and increase housing across the country. Britain’s traditional loan market may have stagnated, but the alternative loans market is booming.