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The property loan fund that won't surprise you with a lock in

A one-month notice period is just one of the things that make Luxembourg-based LendInvest Real Estate Opportunities a little bit different.

The property loan fund that won't surprise you with a lock in

Brexit has made some income investors wary of open-ended commercial property funds given that they made it difficult for investors to withdraw their money in the panic after last year's EU referendum.

For LendInvest Real Estate Opportunities, a small Luxembourg-based fund run by the former peer-to-peer lending platform LendInvest, post-referendum it has provided an opportunity.

Assets in the fund have more than doubled to £130 million since the Brexit vote as investors have viewed its investments in short-term loans to property developers as a different way to get exposure to bricks and mortar.

Notice period

Also, the fund makes no attempt at pretending that investors can always get their money out, requiring one month's notice for all withdrawals.

That put it in a much better position when a wave of sale requests by worried investors forced many property funds to temporarily suspend trading or impose big reductions on the redemption values that investors could obtain by withdrawing.

‘We were not waiting for redemptions,’ said Carl Giannotta, distribution director at LendInvest. 

‘Those property funds [that saw redemptions] were daily traded and have assets that are long term and illiquid, and they are holding physical assets. Our loans are short term and we do not offer daily liquidity.’

The one-month withdrawal period gives the fund some of the 'closed-end' benefits of an investment trust, where the manager is never forced to sell assets because investors can always sell their shares at whatever the prevailing share price might be. 

The fund can be held in a self-invested personal pension (Sipp) but is not an eligible investment for an individual savings account (ISA). 

Alternative investment

According to Giannotta some investors had switched out of real estate shares in LendInvest fund seeing its loan portfolio as a bit of a safe haven in the event of a stock market crash.

With equity valuations high and conventional bonds offering little return, many of the fund’s institutional investors are now seeing the LendInvest fund as a ‘generic alternative’, said Giannotta.

‘We are increasingly getting allocation from institutional [investor’s] fixed income bucket [of money], not just the alternatives bucket,’ he said.

The real estate fund has become a key focus for LendInvest as it has moved away from peer-to-peer lending after the Financial Conduct Authority (FCA) made it clearer what it thought P2P actually meant.

‘P2P had become very broad and used to describe anything that has an online lending aspect,’ said Giannotta.

‘The FCA got better at narrowing the definition but we were not comfortable making the platform sit within that definition.’

That was because the FCA banned the pre-funding of loans, which is the model operated by LendInvest. It pre-funds loans to residential property developments then back fills the loan from the ‘crowd’ of investors.

Development funding

The fund lends to professional investors, developers and landlords who use their property portfolio as a prime source of income, transact several times a year and operate as a business.

For example, the fund financed a project to turn a care home into 45 studio apartments, providing half of the £5 million needed. ‘The buyer had a short window [to purchase the site] as it was bought off market from a local council,’ said Giannotta.

‘The bank would have taken three-to-six months to give the loan which would have been too late. So we provided a 50% loan-to-value (LTV) and had first charge against the asset.’

The borrower went back to get planning permission, which he received in a matter of weeks, then took a second tranche of funding for the redevelopment.

‘We drip fed that money in with an appraiser going to the site every few weeks. He was marketing it in parallel at the same time [as developing] and by the time it was finished they were all let,’ he said.

‘He then went into discussions with the bank because he wanted to keep the asset and let it out, so refinanced. It had a valuation of £10 million, so 100% return in 10 months. We charged 15% interest.’

With interest rates that high it is not surprising perhaps that the fund has so far achieved its annual target of an 8% net return.

‘Analysts are saying 2-3% growth for UK housing which is not a great passive capital gain when we can generate 8% from a debt position and with average loan to values of 65%, which is pretty good from a risk-adjusted return,’ he said.

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