Why Property Developers Should Consider Private Debt

 

The world of property development has its own well-established finance ecosystem – one in which banks and also specialist lenders provide a range of funding options to investors, developers and entrepreneurs.  

And that is good news for anyone preparing plans for an investment in the buy-to-let market or something more ambitious – perhaps a property refurbishment or a building project. For a landlord seeking to increase a portfolio of rental properties, the first port of call might be a buy-to-let mortgage provider. If the project is bigger and more complex – say the purchase of a plot of land on which to build new houses, some kind of bridging loan to cover the the cost of the work until the units can be sold is often the most appropriate solution.  

Many property entrepreneurs already have broad experience of the real estate market and will also know the funding options. Others will seek advice from experts who can act as guides through the myriad of options and competing providers.   

And increasingly, those advisers might flag up options that sit beyond the traditional lending market. In recent years we’ve seen an explosion of platform lending to businesses of all kinds, including property developers.  

Essentially, all debt platform lenders connect a community of lenders to businesses and individuals. This is often seen as a Peer to Peer (P2P) marketplace but there are variations on the theme – and sometimes the differences are very important.

A typical P2P platform will have a certain percentage of ‘retail’ investors in its lending community. These will be ordinary men and women who are seeking a better return on their capital than would be available through bank savings accounts. Increasingly, they are lending alongside high net worth individuals and even funds, who have similar ‘alpha return’  motivations.

Those who lend through these platforms – particularly the retail investors – will often be, understandably looking for lower risk opportunities. They will lend to businesses, but are unlikely to favour certain projects where the risks might appear to be – on the surface at least – overly high.  

The Route – Finance is positioned not as a P2P but as a Private Debt platform. The difference is important. The Route’s community of lenders are High Net Worth Individuals who are prepared to commit capital on a pre-mandated basis. In addition, they are sophisticated investors who understand not only risk but also how to assess the business plans of prospective borrowers.  

That profile of The Route’s community of lenders means that the platform is ideally suited to consider ‘special situations’ loan applications from a broad range of businesses. Applications that might well be rejected by traditional banks or indeed some P2P platforms. Equally, The Route – Finance is also well suited to lend to property developers.

The circumstances of the loans differ. In recent months, The Route has arranged funding for projects as diverse as the knocking down of town centre offices to make way for residential property that is to be sold on or rented; or another example,  he purchase of an estate of rentable lockup garages from a housing association. In some cases, money has been borrowed to directly pay for projects and in others, to refinance existing and expensive bridging loans. Each case is different.

A Bigger Trend

The Route’s presence in the property market reflects a bigger trend in business finance. In the wake of the 2008 financial crisis, banks turned down their lending taps, causing funding issues not only for the wider business community, but also for some property developers.   

The gap in the finance market has been filled by Private Debt funds which lend direct to businesses and by the emergence of lending and equity crowdfunding platforms. The Route – Finance offers exposure to Private Debt investment through a platform format.  

But given the range of more traditional options, why would a property entrepreneur consider a Private Debt platform? One simple answer to that question is that Private Debt offers another source of funding and if only for that reason, it warrants consideration. It’s simply good practice to look at all the options.

There are other reasons too. As previously mentioned, a Private Debt solution might be used to refinance an existing more expensive product for a short period until a project is completed and the properties concerned sold or rented.

It may also be that Private Debt will be easier to access. For instance, The Route will say yes or no to applications (conditional on due diligence) more quickly than a bank. In addition, The Route’s lender community are looking for opportunities that offer the prospect of superior annual returns and are well able to assess the viability of projects along with the risks. On a more human level, they are often people who actively enjoy supporting entrepreneurial projects.

Private Debt can offer the most appropriate solution. To find out more: info@route-finance.com

 

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