Investing in Property Development Loan Bonds – Key Risks
Capital is at risk when investing in property development loan bonds and investors could lose part or all of their capital. Before investing in development loan bonds through Property Partner, it’s important to understand the different categories of risk associated with this type of investment.
This summary of the types of risk involved in property development loan investment is intended as a guide and is not an exhaustive list of all the specific risks factors or scenarios where investors could lose all or part of their capital. Property Partner works hard to manage the risks and we believe that our product represents an attractive balance of risk and reward, however we consider property development loan bonds to be a high risk investment.
As with all investments, particularly high risk investments, investors should diversify their exposure across a number of property development loans and limit exposure to any single loan accordingly.
|Risk category||Potential impact||How we manage the risks|
E.g. the developer becomes insolvent or fails to complete the scheme with the funding received and cannot secure additional finance.
|The scheme is sold uncompleted to another developer for below its expected completion value (Gross Development Value, GDV). Investors could lose interest and capital.||Our lending partners are chosen because they have deep experience in the appraisal of development projects and underwriting of loans.
They carry out comprehensive due diligence on both proposed schemes and potential borrowers, only lending to developers who can demonstrate a strong track record for completing similar projects on schedule.
Our loans typically have second charge security over the development site, and additional security may be provided by either a charge over the developer’s other assets or a personal guarantee.
Loans will only be issued to a solvent developer whose other assets significantly exceed the value of the loan. This maximises the chances of recovering investors’ funds, in the unlikely event that a project fails to realise enough capital to pay back the loan.
E.g. the developer is unable to sell the completed property(s) or refinance the scheme before the end of the loan term.
|Investors may have to wait beyond the end of the expected investment term to receive their capital and interest.||The loan term is designed to coincide with the development’s completion and subsequent sales schedule and our property team undertake diligence to be confident that the completion and exit plan is achievable. However, a characteristic of property development is that timeframes are difficult to predict accurately and it is not uncommon for the term of the loan to be extended.
Depending on the specific circumstances necessitating an extension, our lending partner will work closely with the borrower, the first charge lender and Property Partner to achieve the best outcome. The provisions of the loan include penalty interest if the term is extended; in practise, whether and to the extent which this is imposed, will be determined by the specific circumstances. When penalty interest is imposed, Property Partner bondholders will receive their pro rata entitlement.
Please note, however, that any penalty interest imposed on the borrower by the first charge lender will rank ahead of any penalty interest due to Property Partner bondholders. In addition, the late repayment of the loan will result in additional interest becoming due to the senior lender, which along with the payment of any penalty interest to the first charge lender would result in an increase to the loan-to-value (LTV) of our loan./td>
E.g. an economic shock leading to a substantial fall in property values, could result in the completed properties being worth less than the total outstanding value of debt secured against the project.
|Proceeds of sale are insufficient to repay investors, and capital and interest is lost.||Investors are provided with a significant buffer against falls in property values. We typically lend up to 75% LTV of a project’s expected sale value at completion (GDV), meaning the project could be sold for up to 25% less than its GDV and investors will still be repaid in full.
Verifying the GDV of the scheme is critical to managing the risk of an investment. In addition to an independent valuation by a RICS accredited surveyor (backed by Professional Indemnity insurance), our lending partner carries out a detailed analysis of the scheme and local housing market, including carrying out visits to site, to produce their own assessment of value.
Finally, our in-house property team conduct their own thorough assessment of the site, and the property’s potential sale value and rental value at completion. Only schemes where all three valuations are consistent qualify to be listed on our platform, providing maximum confidence in the validity of the GDV and LTV of our loan.
Click here to learn more about the comprehensive due diligence undertaken by Property Partner before development loan investments qualify to be listed on our platform.
|Lending partner risk
E.g. our lending partner becomes insolvent.
|The lending partner ceases trading and is unable to fulfil its obligations to our investors, such as the repayment of capital and interest at the end of the loan term.||Whilst this unlikely event would require serious administrative attention and potentially some additional cost, our arrangements with our lending partners are always designed to ensure that this event would not prejudice the underlying value or security of the loan.
Property Partner investors are protected by the appointment of a security trustee who will step in to act in their interest in the event that the lending partner ceases trading or falls into default.
It is Property Partner’s responsibility to ensure that our investors’ best interests are pursued in all scenarios, using our in-house experience with senior professionals in the fields of property, law and finance.
|Senior lender risk
E.g. the senior lender moves to enforce their security if the borrower falls into default at the end of the loan term.
|The scheme is sold on an accelerated timetable for a low price, sufficient to repay the senior lender’s capital but not to cover our development loan.||We select our lending partners carefully, with a key criteria being their track record in maintaining a close relationship with both the borrower and the senior lender throughout the duration of a project.
By providing the senior lender with regular updates on progress, our lending partners instill confidence that they are managing the process effectively and ensure that they maintain a strong dialogue at all times.
E.g. an investor decides they would like to withdraw their capital from the investment before the end of the term but is unable to.
|The investor is not able to retrieve their capital until the loan is repaid, forcing them to wait longer than they would like.||Whilst every effort is made to ensure that the loan is repaid on time (see “Repayment delay risk”, above), investors will not be able to retrieve their capital until the loan is repaid.|
Learn more about investing in development loan bonds here.