Property lending safer than equity investing, says 4th Way
Lending against property development projects is less risky than taking an equity stake, according to 4th Way.
The peer-to-peer lending ratings and research firm explained that if demand and prices fall for property, any money raised from a project – for example if some of flats in a development have been sold – will first go to pay off development loans rather than the equity investors.
4th Way cited a project listed on Brickowner, where investors put £1.7m into the platform to become co-owners in a property development which was expected to sell for £5.8m on completion.
Read more: Developers urged to consider liquidity of exit strategy
However, a drop in demand and prices meant that not all the flats have been sold. 4th Way said that a bank which had lent around £3m is getting paid back first, while a junior lender is set to be repaid afterwards who is owed £520,000.
“So nearly £1m is still left to be paid before the property owners can dream of getting any money back,” 4thWay said.
“With all these difficulties, the latest projection reported through Brickowner is that its investors could ultimately lose over £9 for every £10 invested.”
In contrast, the senior lender is likely to get all its money back as well as all the interest due, which could be in the eight to 12 per cent range, 4th Way added.
And the junior lender will also expect to recoup all its money and some of the interest.
Read more: Is P2P property lending the new BTL?
“Property lenders get repaid first, so they are in a far safer position,” said 4th Way.
“The owner will be wiped out before the lenders would lose any money. This is still true even if you’re in the junior lending position.
“Property lenders also get paid all their interest – in addition to the amount lent – before the owner makes any money from a sale of the completed development. You could earn eight per cent if doing this through P2P lending, or even a lot more if you’re taking the junior lending position.”
Read more: Invest and Fund predicts “exodus” of London BTL landlords
