Wealthy earn 15% lending to developers
Mar 2nd, 2010 | By Les Sheppard | Category: Property InvestingWelcome back! Have you made sure you never miss a new property? Subscribe to updates with your best email address in the sidebar to the right.You see everything new at least 48 hours before the crowd!
Wealthy private investors are increasingly lending their money to small property development schemes in London and the south-east, attracted by double-digit returns.
Property developers have been hit hard by the economic crisis with fewer banks prepared to provide development finance. This has caused a glut of partially-built schemes with developers unable to gain finance from traditional banking sources. Some are turning to wealthy private investors.
“There’s much more private equity now coming into our market, with investors lending up to £10m to niche developers,” says George Cardale, head of new homes at Savills in Bristol.
Wealth managers say that, in recent months, there has been a growing number of investors interested in providing loans to property developers. In some circumstances, private individuals will even finance the whole scheme.
The returns can be attractive. According to Savills, investors can achieve an annual return of between 15-18 per cent. The investment period is typically 12-24 months.
Some investors charge an exit fee based on the profit made – rather than the amount lent – when the development is sold.
“It is not unusual for a funder to demand up to 50 per cent of the profit, which can be a substantial amount,” says Nigel Bedford of Largemortgageloans.com.
Bedford says funders are in a position to demand these high costs because they know that developers only approach them when there are no alternatives.
“Some of these high-net-worth individuals are fed up with investing indirectly,” explains Paul Stevens of Investec Specialist Private Bank. “They have relied on fund managers to manage their cash and they’ve been hurt. They’d rather invest in something they can see.”
Simon Gammon, managing director of Knight Frank Finance, says a number of his clients have lent money recently to property developers: “These tend to be ex-bankers and they’ll lend around £5m of their own money to a scheme.”
In central London, equity requirements tend to be in the £5m-£20m range. Tim Whitmey of Savills says the company has seen a lot of interest from Asian investors, with demand focused on prime areas of Knightsbridge, Kensington, Mayfair and Chelsea.
But experts warn that investment in such schemes is suited to sophisticated investors who have plenty of liquidity. “A lot of it comes down to your assessment of the developer and the project,” says Stevens.
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