Peer to Business Lending
Alternative Finance Sector Report - November 2014
22
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
P2B lending to property developers will usually make up senior debt, mezzanine debt or a blend of the two called stretched
senior debt. Mezzanine debt is more expensive than senior debt and stretched senior debt sits between the two rates. The
former generally has the benefit of the second charge security but the latter two debt structures usually come with the benefit
of a first charge security over the property. The property is often bought with initial developer equity – which shows the
developer (or principals) behind the project have a vested interest in its success. Property lending is often relatively short-
term and capital and interest will be repaid at the end of the loan term, when the property is sold.
There are significant differences between lending to SMEs and lending to property developers. SMEs often use funding for
additional working capital, expansion or new capital expenditure. As long as the underlying business is cash generative they
should be able to continue to service the loan and pay interest. Returns from SME lending are strong, terms generally range
from 1-5 years and there is a wide choice of opportunities available.
The major advantage of lending to property developers is that it is often shorter term and can present the opportunity for
high returns, often 10% plus per year. However it is generally much higher risk, as despite often being backed by physical
property or the assets of the developer, there is the risk that the project will be delayed, not built or not sold for the expected
amount. Investors also have to wait until redemption of the loan to receive any return.
In some cases the borrower may use a type of funding called bridging to buy and sell a property quickly or to fund the cost
of modest refurbishment of the property. Unlike development finance that is typically drawn down monthly against surveyors
certificates of work completed, bridging finance is paid out as a bullet payment at the beginning of the loan and repaid as a
single repayment at the end of the loan.
“Bridging is primarily carried out with the benefit of first charge security over the
property and sensible loan to values extend to around 70% inclusive of rolled up
interest which is often kept on account for the benefit of the lenders.”
- Assetz Capital
BENEFITS
Potential for high returns
Often much shorter-term
Charge on property and assets owned by the SPV
Lend to established developers with track records
of success
Exposure to property market without the high
transaction costs involved
RISKS
Higher risk - the property may not be built, delays
could occur in construction, costs could rise, the
property may not sell (or sell for much less)
Interest rolled-up and paid at the end of the loan
term when the property is sold
