Residential property debt is a traditionally inaccessible asset class that offers dual benefits for investors, LendInvest has said.
The specialist property lender noted the growth of the build-to-rent sector after tax and policy changes made buy-to-let investing less attractive.
It cited CBRE research which showed £4.1bn was invested into the UK’s build-to-rent sector in 2021, a £500m increase on the previous year. Investors have typically accessed this market by buying up assets directly or gaining equity exposure through investment trusts and companies.
Investor access to debt exposure is far more limited, LendInvest said, largely because historically residential property lending has traditionally been the preserve of big banks.
However, this changed after the credit crunch when a new generation of lenders entered the space.
LendInvest said that net returns on residential development debt average between six and nine per cent in today’s market, and while this is lower than a decade ago, yields have remained stable.
“Inflationary pressures and a rising interest rate environment are likely to support debt returns at no less than these levels in the coming years,” LendInvest said in a blog post on its website.
The lender said that the asset class offers a “dual benefit” for investors: “steady income from loan interest repayments coupled with capital security of the underlying asset”.
LendInvest also noted that residential property typically displays a low correlation with traditional equity and bond investments, thus providing strong downside protection for diversified investors.
Given the volatility of the equity markets since the start of the pandemic, and high levels of inflation that can make long-term assets such as government gilts unattractive, investing in property debt can provide a degree of inflation protection.
LendInvest said that loans which are floating rate will help hedge against ongoing inflation, with returns positively correlated with rising interest rates.
“The underlying real estate assets themselves also generally increase in value when there is high inflation, as a result of increases in the rental income they could generate,” the lender said.
“For example, according to the ONS Index of Private Housing Rental Prices, private rental prices increased by three per cent in the 12 months to June 2022, representing the largest annual growth rate since the index began in January 2016. In addition, unlike equity investment strategies, the debt investor does not suffer the first loss of any degradation of value so is further protected.”