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Trust Insider: can the new-school of property credit trusts deliver?
by James Carthew on Oct 15, 2013 at 00:01
At the start of August we learnt the fund was 17.8% invested as two new loans had been made and in the interim results published at
the end of August Swef disclosed terms had been agreed for a further five loans (totalling £117 million) which, if concluded, would mean that Swef was 68% invested. One of these, a €45 million loan to refinance a portfolio of hypermarkets and convenience stores, was concluded in September.
The upshot of the slow pace of investment is that Swef is unlikely to hit its 3.5p dividend target in its first year. At the moment the board is saying 0.7p is on the cards for the interim dividend (to be declared imminently) and between 1.2p and 2.4p as a final.
The managers have been quite candid about why the pace of investment has fallen behind initial expectations – they were the underbidder on one large book of loans, competition is on the increase, borrowers are dragging their feet in the hope of securing better terms and in some areas, notably London, pricing has tightened to levels where they feel uncomfortable with the risk/reward ratio.
On the plus side though, activity is picking up and, as confidence improves, many borrowers are wondering about refinancing. Swef is going to concentrate on making whole loans for now and will consider whether it makes sense to syndicate these in future (which should enhance returns).
LBOW was listed in February 2013. It is sticking to the slightly less risky, slightly lower return end of the spectrum by making senior secured loans against UK property with maximum LTVs of 65% and no subordinated loans.
As with Swef, not more than 20% would be lent to any single borrower but only 10% could go against any single property unless it was let to multiple tenants, in which case the limit was 20%. Even then the tenants have to be ‘investment grade’.
LBOW had a target internal rate of return (IRR) of 8% per annum and a yield of circa 6% on the issue price and was aiming to be fully invested within six to nine months (ie, about now).
LBOW’s belief that it could get itself fully invested fairly quickly was based on an analysis it had done of the UK property market that showed a £44 billion funding gap for the sector in the period between 2012 and 2014 as banks reined in their balance sheets and new entrants, although plentiful, seemed unlikely to make up the shortfall.
Again, LBOW’s experience was that investing the issue proceeds was harder than they had envisaged. They made their first loan, £18 million against two student accommodation blocks in Birmingham and Glasgow, in June. At the moment they have only made two more; enough to make them about 50% invested.
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