300,000 reasons property loan notes could be a 'radical' solution to Britain's housing crisis
Last year the Government announced plans to build 300,000 more homes. But following the 2008 crash, banks are still wary of fully funding developers. Property loan notes could be part of a radical solution argues Investor Square
Says Ross: 'While many developers have permission in place, and even land waiting to be built on, new developments are still being delayed because, since 2008, banks have been far more cautious about property construction loans. Many banks and established lenders offer only around the 60-65% of a development's total cost, leaving a funding gap of at least 35%'.
Ross believes a new 'crowdfunded' style approach is becoming increasingly popular; with private investors stepping into the vacuum created by the banking industry. 'New ways of funding developments include peer to peer lending, joint ventures, property bonds, and perhaps most attractively of all, loan notes.'
Ross explains: 'A small investor, the loan note holder, lends a fixed sum of money to a developer, in return for a pre-agreed rate of interest (usually ranging between 8-15% in the first year), over a certain period of time: typically 2-5 years. To offer security, loan note holders usually have first legal charge on the properties throughout the duration of the loan note. Property loan notes can offer a win-win, creating extra funding for property constructors to build urgently needed affordable housing and new estates; while helping small investors who would like to get involved in the property market, but have no desire to take on tenants or maintenance costs by buying properties of their own.'
Adds Ross: 'Because the loans don't need to be for significant sums potential lenders can, for example, use a little of their pension pot. It's a step on the property investment ladder, but without the significant financial outlay needed in buying a property to rent themselves.'
Ross concludes: 'This short-term model can be very attractive to lenders, offering speedy returns because the loan notes have maturity dates built in. The developer will be keen to avoid paying premium rates of interest for any longer than needed, so there are incentives for both sides to set a relatively short period before the maturity date on which investors are repaid the capital they effectively loaned the developer.'
To find out more about how property loan notes can play their part in ending the UK's housing crisis, and discover any potential risks involved in a developer attempting to default on a repayment: see: https://investor-
For further information contact: David Jinks MILT