As a bumper year for property investment comes to a close, emerging trends towards non-bank finance in the property space gather steam heading into the new year.
Developers need more funds to deliver their projects as the major banks pull back on finance.
As more investors get comfortable with researching higher yielding investment opportunities, we take a look at the key things you need to know about 'Peer-to-Peer' (P2P) debt-style lending in the Australian property market.
Don’t Chase High Returns
If a debt offering is returning 18-30% and is a mezzanine type, deal chances are it is extremely risky. A developer is only paying this pain money as a last resort as access to cheaper funds are no longer an option for them.
If things go wrong you are at the bottom of the pile and you will probably not see a cent.
Know Your Investment Timeframe
Investing in a P2P loan means you are essentially becoming the bank and loaning money. Borrowers, in this case property developers, are looking to use your funds and in return you are providing them with a fixed rate for your money for a fixed period of time.
You generally won’t have the option of getting your funds back prior to the expiration of the agreed period, as most developers will need these funds for 12-36 months until they receive settlement proceeds at the end of the project.
Seek Investment Security
Just like the banks, P2P investors should be looking at security in the underlying asset to protect their investment.
Security can be achieved in a P2P debt loan by being the senior debt provider and in exchange receiving a 1st mortgage over the property. Combine this security with lending up to a maximum of 60% of the Gross Realisation Value (the assets value once the development is complete) and your investment is cushioned with a relatively good factor of safety.
Lending on a first mortgage basis is the safest way to ensure your investment is protected. Generally returns around 7-10% per annum can be expected in today’s interest rate environment.
If a developer defaults on your loan the benefit of first mortgage security is you have the ability to act swiftly and recoup your investment should things go wrong.
Research Sectors and Markets
Like the stock market, investors need to do research. You need to understand the basics of a property market and the drivers of economic development.
Where is the project located? Is it close to new government infrastructure? Is there a need for housing, education, commercial offices, healthcare services or retail services in that particular area? What are the underlying economic forces that give this project the best chance of success? Does the borrower have a proven development team with a proven delivery experience and track record.
You should ask all these questions prior to investing.
Deal With Local Established Private Lenders
Your best chance of a good initial (and repeat) experience in the relatively new online P2P lending market is to deal with local established operators.
If you come across a P2P website pick up the phone, make contact and get to know who your dealing with. You will soon find out if they know what they’re talking about.
Established operators operate in an ASIC regulated environment usually within Managed Investment Schemes. Invest in contributory mortgage schemes as opposed to pooled mortgage schemes. With a contributory scheme you are investing in a mortgage fund with the benefit of your investment being limited in default liability to only your project as opposed to multiple projects.
Private lending by pooling funds to loan to borrowers is not a new concept, it was once only available to wealthy individuals who had the contacts to achieve higher returns.
Now with the internet opening up investment markets and major banks pulling back funding, these P2P opportunities are becoming more readily available.
David Lovato is the founder of Crowd Property Capital. CPC offers project finance via loan partners to established Australian property developers. CPC's investments are available on a wholesale basis to local and international sophisticated investors with a minimum investment of $500,000 AUD. All investments are within a contributory mortgage scheme where our investors can select to invest in a single project or multiple projects, with each investment secured against real property on a first mortgage basis.