DIY investor

The landlord turns lender
September 18, 2013

If Britain’s disgraced bankers could undo just one of the errors that led their industry into crisis, I suspect it would be their fatal enthusiasm for lending against commercial property at “courageous” levels, compared to the value of the property. More than anything else it is the dead weight of failed commercial mortgages in deep negative equity that has crippled the banks.

Although London and the southeast have fared better, the values of offices, shops, industrial buildings and tenanted accommodation in most areas remain well below pre-crisis peaks. This is partly because there is now little appetite among banks to lend against buildings in unfashionable places and partly because the economy has been weak and commercial property depends on a decent amount of commerce going on.

In the past few months, however, it has become popular again among investment commentators. Why? First, because investors’ endless search for yield has lured them beyond the usual risk-free sources, and commercial property has long been an accepted alternative. Second, once values have stopped falling, property investment can offer a reasonable degree of security (provided, of course, you get the valuation about right and there’s a good slice of equity to support the debt). Then there is commercial property’s ability to act as a partial hedge against inflation, because rents tend to rise in line with retail prices long term. Third, and crucially, the economy is starting to look a little better.

From the DIY investor’s point of view, this asset class has recently become more interesting for another reason. Traditionally, investing in commercial property has meant playing the landlord’s role: you buy into a fund that owns equity stakes in buildings and take your yield from what’s left of the rental income once mortgage interest and management costs are paid. Now, however, other options are emerging as part of the spreading peer-to-peer or crowdfunding movement.

Several online operations have launched this year that let you operate as the lender rather than the landlord, meaning that the building’s owners must pay you your interest before taking anything for themselves. Although these sites all operate in slightly different ways, the basic idea is to allow groups of investors to fund fixed-rate loans, normally secured by a first charge against the property. Unlike most other forms of P2P lending, this gives you a claim on a tangible asset if things turn sour.

My own experience of “secured P2P” lending is via Relendex, which launched in the summer promising pretax returns of 5-7.5 per cent a year for three-to-five-year loans on mainstream commercial properties with existing tenants. I believe this kind of “alternative fixed income”—suitably diversified across a range of loans—could sensibly figure in many more private investor portfolios, so I also bought shares in Relendex.

For those looking for racier fare, platforms such as Assetz and Lend Invest offer the chance to fund deals such as property development or bridging loans and buy-to-let mortgages. These can offer higher gross yields—up to 18 per cent a year before fees and tax—but involve specialist types of lending where the risks are greater. Lend Invest is open only to self-certified sophisticated or high net worth individuals and has a minimum investment of £10,000. The others demand considerably less to get started.

Clearly, lending against commercial property is not risk-free (just ask a banker) but for DIY investors prepared to put some work in, the opportunities to create a more diverse fixed-income portfolio—and one that doesn’t involve exposure to commercial property via equity markets—are becoming interesting.