Alternative Credit Investor December 2023 by Alternative Credit Investor

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Long-term track record Lendwise has a 5-year track record of earning stable returns on the platform. Visit lendwise.com for more information.

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Why invest on Lendwise We are an education finance platform enabling a sustainable form of impact investing by matching lenders with aspiring individuals who require funds for their postgraduate or professional qualifications studies. Earn up to 9% p.a.* (on average). We believe in transforming how people make money while making a difference. The potential created by education is immeasurable from a personal and professional development perspective.

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EDUCATION, EDUCATION, EDUCATION

>> 6

Lendwise bucks macro challenges

DEVELOPMENT FINANCE IS BOOMING

>> 12

Debt funds taking advantage

Relendex’s Paul Sonabend on the importance of supporting SME housebuilders >> 16

ISSUE 88 | DECEMBER 2023

New long-term funds set to democratise private credit

NEW FUND structures in the UK and the continent are set to broaden access to private credit to professional and retail investors. The UK’s Long Term Asset Fund (LTAF) and the EU’s second iteration of the European LongTerm Investment Fund (ELTIF) are designed to encourage private investors to put money into long-term, illiquid assets, including credit. These structures could finally succeed in attracting wealth managers and financial advisers to private credit, an area where peer-to-peer lenders have struggled to gain traction, and bring the asset class to a wider pool of retail investors. One large manager already taking advantage of this is M&G Investments, which unveiled its first ELTIF fund last month focused on private credit, with

£500m committed ahead of the launch. The M&G Corporate Credit Opportunities ELTIF is currently open to professional investors, with plans to open it up to the retail market early next year when the new ELTIF regulations come into force. “This is M&G’s first ever ELTIF, which is really exciting to be involved in

for several reasons,” said Michael George, who is managing the new fund. “Firstly, it is opening up this asset class for the first time to a wholesale investor base. We’ve set a £25,000 minimum investment threshold. “The second reason is the high yield that's currently on offer, of around 10 per cent, combined with low

volatility. And given that it's floating rate, it's not impacted by duration. “Thirdly, we’re able to offer some liquidity, in contrast to private credit funds where your investments are usually locked up. We're mixing broadly syndicated loans in with direct lending in a 70/30 allocation split between liquid and illiquid private credit.” The LTAF and the second version of the ELTIF are different regulatory structures with a similar aim of opening up private, illiquid assets to a wider investor demographic. The LTAF was introduced by the Financial Conduct Authority (FCA) in 2021. It was recategorised from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI) earlier this year, meaning that mass market retail investors, self-select >> 4

Make a difference whilst earning a return by funding the postgraduate education of ambitious individuals Earn up to 9% p.a.* (on average) return on our ISA (tax-free) or Classic Account

Open your account today at www.lendwise.com/invest/ What our Lenders have to say: “Lendwise is a great way to combine ESG investment which helps in the postgraduate education of the next generation whilst Lenders receiving an attractive return on their investment.” - Andreas (Lendwise Lender) “Lendwise has a very quick and responsive team on board. The AutoLend feature is an incredible tool which helps to diversify your investments.” - William (Lenwise Lender)

EDITOR’S LETTER

124 City Road, London, EC1V 2NX info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@alternativecreditinvestor.com Kathryn Gaw Contributing Editor kathryn@alternativecreditinvestor.com Marc Shoffman Senior Reporter marc@alternativecreditinvestor.com PRODUCTION Tim Parker Art Director COMMERCIAL Tehmeena Khan Sales and Marketing Manager tehmeena@alternativecreditinvestor.com SUBSCRIPTIONS AND DISTRIBUTION tehmeena@alternativecreditinvestor.com Find our website at www.alternativecreditinvestor.com Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Alternative Credit Investor has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

he headline on our front page may perturb some of our readers from the peer-to-peer lending sector, who could (rightly) argue that they set out to democratise private credit long before LTAFs and ELTIFs came along. While some P2P lending platforms have built a loyal individual investor base who have benefitted from diversifying into private debt, I think it’s fair to say that the sector has failed to win over wealth managers and financial advisers in any meaningful way. With the likes of M&G now marketing their private credit offerings, it’s possible that professional investors could finally warm to the asset class, alongside a broader pool of retail investors. This is not to denigrate the achievements of the P2P sector, it’s simply acknowledging the brand power, marketing budgets and huge distribution networks that the largest asset managers have to offer. Could a warmer adviser community have trickle-down benefits for the P2P sector? Quite possibly.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

NEWS

cont. from page 1 defined contribution pension schemes and self-invested personal pensions (SIPPs) are able to invest into an LTAF. “Longer-term less liquid real assets can generate good alternative returns for investors and, crucially, help to grow the UK economy through investments, such as new infrastructure,” said Sarah Pritchard, executive director – markets at the FCA, when the new LTAF rules were unveiled in June. “Our new rules allow retail investors, and pension funds, to invest in productive finance, but they also recognise that long-term investments can be riskier. That is why people will be given clear risk warnings and customer assessments, in line with other higher risk products.” In the EU, the second iteration of the ELTIF comes into effect on 10 January 2024. The original ELTIF structure was first introduced in December 2015, but was not very popular, with industry commentators criticising its lack of flexibility and limited range of eligible investments. “The LTAF and the new ELTIF are coming from the same place in terms of encouraging an increase in private investment

into illiquid assets such as credit or real assets,” said David Williams, partner and head of the investment funds team at Simmons & Simmons. “They are different, cross-channel sides of the same coin, notwithstanding the differences in the detail.” Rather than competing, the two fund structures can be used in parallel as they have different benefits. “If you’re a big investment manager you’d look at using them together,” said Williams. “The ELTIF is a really good pan-European distribution regime, whereas the LTAF is a UK domestic product, designed to appeal to the defined contribution (DC) pension scheme investing community.

“The ELTIF won’t unlock DC investment money whereas the LTAF will. “You can have an ELTIF with a private credit strategy and have an LTAF feed into it to aggregate UK capital from investors who need an LTAF product for regulatory reasons. “On a macro level, ELTIFs and LTAFs are a set of tools that you can combine to give big managers a really powerful distribution solution.” Access to LTAFs is set to be widened even further. The Treasury is opening the Innovative Finance ISA (IFISA) to LTAFs from April 2024, as part of a shakeup of the ISA market confirmed in last month’s

Autumn Statement. LTAFs could not be held in an ISA until now because ISA assets needed to have the ability to be sold within 30 days. “The world’s most sophisticated investors, from endowment funds to sovereign wealth funds and family offices have long understood the benefits of investing in private markets as part of a diversified portfolio,” said Jonathan Moyes, head of investment research at Wealth Club. “The decision to allow LTAFs within an ISA provides investors with the potential to gain exposure to this growth, in a tax efficient manner. “The inclusion of LTAFs should see the [IFISA] become a more compelling option for wealthy investors.”

NEWS

‘Megatranche’ private credit loans on the rise PRIVATE credit loans are increasing in size, with some lenders now offering ‘megatranche’ facilities, as competition with mainstream banks heats up. The $1.75trn (£1.4trn) private credit sector has flourished in the current high-interestrate environment, growing from what was historically a middle market lender to a serious competitor to the broader leverage loan market. “I’ve been surprised by the size of some transactions, which are definitely getting

bigger,” said Kumar Tewari, partner and head of European private credit at Katten Muchin Rosenman UK. “Where traditional lenders have perhaps struggled to get the right terms on pricing and leverage, we’ve seen all-in-one solutions from private credit lenders. Some of these deal sizes are really quite large. I think that will be a relatively consistent feature going forward.” Innovation in the private credit space has led lenders to offer unique products that can be customised to fit

the needs of individual sponsors, Tewari added, which can include megatranche loans. “Typically, there were conventions around what a unitranche product looked like, how it was documented and how it was presented to the market,” he said. “In the last few years, that basic concept of the unitranche loan has really evolved. Some private lenders have gone on to do what we call the megatranche. “These are really sizeable private credit loans made available by private

P2P lenders leave Poland ahead of new rules EUROPEAN peerto-peer lending marketplaces are pulling out of the Polish market before strict new lending regulations come into effect at the start of the New Year. On 1 January 2024, Polish lenders will be prohibited from borrowing funds from investors via online platforms. This will impact any P2P lending marketplace which had previously listed loans from Poland-based loan originators. “Any ‘creativity’ in funding Polish lending businesses through platforms puts the

lending company at risk of losing its licence,” said Arūnas Lekavičius, chief executive of P2P lending marketplace PeerBerry. “The new law in Poland says that all loan companies are subject to the National Financial Supervision Authority; if any company finances itself through the platform, it will be deleted from the National Court Register and will be restricted from running business.” PeerBerry has already told its investors that no Polish loans will be available on the platform from 1 January 2024. However, the platform

has onboarded a number of new loan originators from countries such as Mexico and South Africa, in an effort to maintain its lending volumes. At the start of November, Polish loans represented 16.6 per cent of the PeerBerry portfolio. Croatia-based P2P lender Lonvest has also opted to withdraw from the Poland loan market. It stopped listing Polish loans on 1 November, and has offered fee-free exits for any investor who wishes to divest from their Polish investments. “Our legal team is exploring avenues to possibly reintroduce

credit lenders to private borrowers. These loans rival some of the largest jumbo syndicated loans that banks have written.” Private credit lenders’ secret sauce is their investment into relationships, Tewari said. “In order to give the type of leverage that a borrower may need, I think there’s a slightly different psychological investment that goes into looking at the credit and the structuring risk,” he said. “I think this is a really telling point about the evolution of the market and the maturity of thinking within this market.” Polish offers in the future, in compliance with the new regulations,” the platform added. ViaInvest exited the Polish market on 31 October 20232, after more than 10 years of listing Polish consumer loans from Polandbased originators. Poland-based loans represented 3.5 per cent of ViaInvest’s portfolio at the end of October. Hive5 – another Croatia-based P2P lending marketplace – has also stopped listing Polish loans, despite chief executive Ričardas Vandzinskas praising the platform’s Polish lenders for their profitability and low default rates.

NEWS

Asset managers respond to more demand for private debt liquidity ASSET managers are increasingly prioritising liquidity in their private debt products in response to investor demand. Several key players in the private credit investment space have recently spoke out about the growing need for more liquidity in what has traditionally been an illiquid investment product. In its 2024 investment outlook, Goldman Sachs Asset Management noted that secondary markets are increasingly being used by both limited partners (LPs) and general partners (GPs) in need of liquidity or capital solutions across their private credit investments. “Secondary markets allow GPs to provide

liquidity for their investors and extend hold periods for prized assets in aging funds,” explained Harold Hope, global head of vintage strategies at Goldman Sachs Asset Management. “Structured secondary market solutions, such as preferred equity, also are being considered by both LPs and GPs who need liquidity but seek to maintain longterm exposure to their portfolios or assets.” Meanwhile, recent fund launches are coming with built-in liquidity. Last month, M&G Investments unveiled a new fund targeting opportunities in the private credit space. The M&G Corporate Credit

Opportunities strategy has been described as a “semi-liquid private credit proposition” which is made up of both syndicated loans and direct lending opportunities and offers quarterly liquidity. Michael George, the fund’s manager, told Alternative Credit Investor that 90 per cent of his investor meetings now involve answering questions around liquidity. “[Investors] like the fund

because the alternative is locked up capital for up to eight years, and especially for the wholesale investor base, that just doesn't really work for them,” said George. “So having a semi-liquid proposition like this, giving them a diversified product and access to an asset class that they didn't have before with some liquidity works for them.” At a conference in November, Blair Jacobson, the co-head of European credit at Ares Management told Bloomberg that “the real focus for us now is absolutely on liquidity,” in another sign that the market is adapting to both the macroeconomic environment and investor needs.

Lendwise keeps low default rate despite higher course fees LENDWISE has maintained low default rates across its loan book despite significant increases in post-graduate course fees. The peer-to-peer education finance provider specialises in postgraduate and professional qualification courses such as MBAs. Borrowers pay off the loans once they are in employment after the

course has ended. Lendwise chief executive Rishi Zaveri said that less than two per cent of the platform’s loan book is in default or arrears, and it has only written off around £24,000 to date. “We haven’t seen a major effect on our loan book from the current macroeconomic challenges, as of yet,” he

told Alternative Credit Investor. “I believe this is in part due to the affordable rates that we offer as well as the fact that our rates are fixed. “When it comes to post-graduate education, universities and business schools are able to ‘uncap’ the fees and we’ve seen quite high rises lately coupled with living costs having gone up. Our

borrowers are coming out with decent jobs though, so they are able to service our loans which is reflected in our low default rate.” Lendwise is approaching £50m of loan originations since its inception in 2018. It launched the first education-focused Innovative Finance ISA in January 2022.

NEWS

Peer2Peer Finance Awards take place this month THE WINNERS of this year’s Peer2Peer Finance Awards are set to be revealed in a glittering ceremony on 12 December, ending months of anticipation since the shortlist was released. The leading event for the peer-to-peer lending industry takes place at London’s prestigious Hurlingham Club, comprising a sparkling drinks reception, gala dinner and awards ceremony, followed by a live band and dancing. The shortlist of nominees was released in September, with categories including P2P Lending Platform of the Year, Property

Lender of the Year, IFISA Provider of the Year, Law Firm of the Year and Investor’s Choice. The winners were chosen by an expert panel of judges: Neil Faulkner, managing director of 4th Way; Mike Carter, senior policy adviser at Innovate Finance; and Conrad Ford,

chief product and strategy officer at Allica Bank. Alternative Credit Investor’s editor-in-chief Suzie Neuwirth and contributing editor Kathryn Gaw also participated in the judging. “With just weeks to go until the Peer2Peer Finance Awards, the ACI team couldn’t be more

excited,” said Neuwirth. “We’re really looking forward to celebrating the impressive achievements of the industry during a challenging year. “Yet again, the P2P sector has proved that it can continue to grow and innovate in an uncertain economic environment. “The event will also be a great opportunity for attendees to catch up with industry contacts and network." To secure one of the last remaining tables, email sales and marketing manager Tehmeena Khan at tehmeena@ alternativecreditinvestor. com for more information.

SME housebuilders still struggle to access funding ALTERNATIVE lenders need to support SME housebuilders as banks retrench from development finance, Relendex’s executive chairman has said. Paul Sonabend told Alternative Credit Investor that access to funding is the key challenge facing SME housebuilders, who are needed to help tackle the housing crisis. “We are not building enough homes,” he said. “We’re supposed to build at least 100,000 houses more this year than we’re going to build.”

Despite the urgent need for housebuilding, Sonabend said that smaller developers struggle to access finance from mainstream lenders. “Before the crisis, every decent SME housebuilder was getting a facility from their bank,” he said. “Banks effectively stopped doing development finance after 2008. In the SME sector, very few SME housebuilders had facilities with the clearing banks after 2008 which meant that you were either with the secondary banks, regional or

specialist, or you were in the alternative sector. “We sprang up 2008 because there was a need for alternative lenders and there is still a need.” Relendex focuses on funding eco-friendly homes, which Sonabend says are “fit for the future”. “The housebuilders that we finance are mainly producing houses that have an energy performance rating of A or B,” he added. “What we are building today are beautifully insulated modern homes with air management

systems, which are lovely to live in whether it’s cold or hot outside. These are homes built for the future. It’s cheaper to tear down an old property and build something new than it is to retrofit something.” Relendex has recently launched subordinate participation loans – a new lending product which will provide 100 per cent of the funding required to complete a development. Read the full interview with Sonabend on page 16.

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*Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. † Gross annual interest equivalent rate (compounded annually (Pool) / monthly (Select)) Kuflink Ltd (Company Number 08460508) is authorised and regulated by the Financial Conduct Authority since 2017 (Firm Registration Number 724890). Kuflink Ltd has its registered office at Level 1, Devonshire House, One Mayfair Place, W1J 8AJ.

JOINT VENTURE

The three major investment trends for 2024

024 IS SET TO BE A disruptive year for fintech lenders, with macro-economic changes, environmental issues and technological innovation on the agenda. And Kuflink is ready for whatever the New Year brings. “We anticipate these three areas will dominate the agenda for investors across 2024,” says Kuflink’s chief executive Narinder Khattoare. “The UK general election, the growing importance of environmental, social and governance (ESG) investing, and continuing technological innovation.” A general election is expected to take place some time next year, with a new government likely to take power. Khattoare believes that the outcome of the 2024 UK general election will have “a significant impact on the world of investing, as the policies and regulations implemented by the new government will ripple across the UK economy and beyond.” Investors can position themselves for success by looking out for policies impacting taxation, regulation, spending and infrastructure, while also taking care to diversify their investments across different asset classes and sectors to help to mitigate risk. Taking a long-term investment approach and actively managing investment portfolios can also help investors weather any macro-economic changes. “While the 2024 election is likely to have a significant impact on the UK investment landscape, it is important to not let short-

term political considerations derail your long-term investment strategy,” Khattoare adds. Meanwhile, ESG investing is set to become an increasingly important part of investor strategies, fuelled by a growing awareness of the impact of businesses on society and the environment, as well as the increasing availability of ESG data and investment products. Khattoare says that investors should consider incorporating ESG factors into their investment decisions, as ESGcompliant companies are often outperforming their peers. He also expects to see more investors turn to robo-advisors, online trading platforms and AI-powered investment tools. “This makes it easier and more affordable for individual investors to access and manage

their investments,” Khattoare adds. “Investors should be aware of the latest technological developments and consider using these tools to improve their investment outcomes.” Kuflink recently revealed that it is planning a rebrand for 2024, including an enhanced digital presence and new logo. Khattoare says that this rebranding effort “is about more than a new visual identity,” with the aim of educating investors and promoting the peer-to-peer lending sector. “From investors through to platforms like ours, we understand that if our industry is successful, everybody wins,” Khattoare says. “We’re doubling down on our efforts to keep Investors informed and confident – whether you’re a Kuflink customer or not.” Next year Kuflink intends to produce more thought leadership content and to share knowledge and expertise that helps investors of all experiences to be successful. The company has also committed to making continuous improvements to its platform, importing real time data so that investors can invest with confidence. And Kuflink investors can expect to benefit from even more innovative products, which can help them find balance and success in their portfolios. “We are excited to share more about our plans for the future in due course,” adds Khattoare. “2024 will be an interesting year from a macroeconomic perspective and we are well placed to adapt to the new lending environment, while continuing to educate and support our investors.”

The Peer2Peer Fin The Peer2Peer Finance Awards take place on Tuesday 12 December 2023, at the Hurlingham Club in London. This glittering event will celebrate the best and brightest players in the peer-to-peer lending industry and the stakeholders who support them. Attendees can enjoy a sparkling drinks reception and gala dinner. This year we are delighted to announce a Hollywood theme for the event, as well as a live band for attendees wishing to celebrate (or commiserate) after the awards ceremony! There is limited space at this event, with many tables already sold. For table sales and sponsorship enquiries, please email sales and marketing manager Tehmeena Khan at tehmeena@ alternativecreditinvestor.com for more information.

Photo from last year's awards event

nance Awards 2023 Peer2Peer Finance Awards shortlist announced! Business Advisory Firm of the Year Kroll RSM BDO Evelyn Partners Deloitte Debt Advisory Firm of the Year EY KPMG RSM Deloitte Evelyn Partners Restructuring Firm of the Year Kroll Quantuma Moorfields BTG Advisory CG&Co Open Banking Provider of the Year Yapily ClearScore TrueLayer

Business Lender of the Year HNW Lending Qardus Folk2Folk Rebuildingsociety Property Development Lender of the Year Relendex easyMoney Property Bridges CrowdProperty Invest & Fund Kuflink CapitalRise Bridging Lender of the Year easyMoney Kuflink Shojin CrowdProperty Blend

P2P Software Provider of the Year Crosslend White Label Crowdfunding Lenderkit

Property Lender of the Year easyMoney CrowdProperty Folk2Folk Kuflink Shojin Simple Crowdfunding

P2P Institutional Partner of the Year Crosslend Fasanara British Business Investments Fintex Capital

Commercial Property Lender of the Year Proplend CrowdProperty Kuflink Relendex

Law Firm of the Year Shearman and Sterling Gunnercooke Hogan Lovells RW Blears Pinsent Masons MSB Solicitors

Residential Property Lender of the Year Relendex easyMoney CrowdProperty Kuflink Sourced

Property Law Firm of the Year Gunnercooke VWV Stephensons Solicitors Farrer Freeths Ashfords Consumer Lender of the Year Lendwise Elfin Market The Money Platform Unbolted

Ethical lender of the Year Lendwise Folk2Folk Abundance Qardus Lendahand The Money Platform Rising Star Lande Nester Qardus

Financial Inclusion Award Lande Loanpad Plend Elfin The Money Platform Innovative Lender of the Year Qardus Shojin AxiaFunder CrowdProperty CEO of the Year Roy Warren, Folk2Folk Jason Ferrando, easyMoney Narinder Khattoare, Kuflink Uma Rajah, CapitalRise Jatin Ondhia, Shojin Mike Bristow, CrowdProperty IFISA Provider of the Year easyMoney Kuflink CrowdProperty Invest & Fund Abundance P2P Lending Platform of the Year Relendex easyMoney Folk2Folk Kuflink CrowdProperty SaveLend Bridging Broker of the Year Fluent Money Propp Clifton Private Finance Capricorn Commercial Tapton Capital Connect for Intermediaries Development Broker of the Year Finspace Group Aureum Finance Pure Structured Finance Positive Commercial Finance Sirius Property Finance Commercial Broker of the Year Capricorn Commercial SPF Private Clients Propp Watts Commercial Synergy Commercial Finance Investor’s Choice Winner to be announced on the night

DEVELOPMENT FINANCE

Building returns Development finance is continuing to flourish despite economic challenges, with alternative lenders poised to benefit, reports Kathryn Gaw

ROPERTY DEVELOPMENT is a notoriously difficult business to navigate, mainly due to the lack of mainstream, easily available funding. Before the 2008 global financial crisis, banks were happy to lend to both new and established development businesses, but the housing crisis spooked these major lenders and caused them to pull back. Post-crisis regulation around liquidity and capital requirement ratios saw most banks review their risk profiles and many have opted to simply stop lending to small- and mediumsized enterprise (SME) property developers altogether. It didn’t take long for alternative lenders to identify this gap in the funding market and tap into the opportunities it presents. 15 years later, the property development funding space is dominated by private lenders, and business is booming. Earlier this year the Blackstone Real Estate Partners X fund closed with $30.4bn (£24.22bn) of total capital commitments, making it one of the largest real estate fund managers in the world. While details of the fund’s allocation split are not

publicly available, Blackstone has a history of backing multi-million pound development projects in the UK from its real estate debt funds. “We're seeing a slight increase in volume,” says Keith Miller, global head of product, private debt at Apex Group. “Real estate debt funds have obviously been through a period of shoring up their portfolios every year, making sure that they are secure. But we're starting to see a couple of fundraises now in that space. So that's a sign, hopefully, that there's a little bit more optimism on the way.” Kumar Tewari, partner and head of European private credit at law firm Katten Muchin Rosenman UK agrees that the real estate debt fund market is “buoyant” at the moment, despite challenging macroeconomic conditions and high interest rates impacting property sales. While there has been a slowdown in property purchases postpandemic, there is still a shortage of new builds, and property developers are seemingly in constant need of new sources of financing. Real estate debt funds have traditionally taken an opportunistic approach

“ 2024 is a fantastic time to be building because 2025 will be a fantastic time to be selling

”

to allocations, which allows them to take advantage of these current funding gaps and build out their position in the market. “We have seen a really healthy share of private lenders, extremely well-known names really stepping up and having a good pipeline of really strong mandates with strong property assets, with good tenants, with a good receivable underlying the real estate,” he says. In short, if you are an SME property developer planning a new project for 2024, private debt funds may represent the

DEVELOPMENT FINANCE

best chance for funding. Banks have been extremely slow to return to property development lending post-2008, and private lenders have seized the opportunity to extend their presence in the sector. These funds have a long track record of performance, and they have earned the trust of institutional and high-net-worth individual investors along the way. They have done this by focusing on solid credit underwriting, specialising in specific segments of the market, and making opportunistic investments. For example, Tewari notes

that some lenders were able to take advantage of the low occupancy rates in offices to up their investment in commercial real estate in the aftermath of the pandemic. Other fund managers have recommitted to the residential side of the market, in an effort to address the ongoing housing shortage in the UK and Europe. “When it comes to residential property, the government is still trying to build affordable new homes,” says Tewari. “And I think the private credit market to a large extent, has really begun to play its

part in funding the right sponsors to deliver the right schemes.” Property development finance can offer higher returns but also comes with the threat of higher risk. Property developments are fraught with potential issues, from delayed planning permissions to weather-related stoppages, to supply chain shortages. The challenge for property lenders is to manage these risks on behalf of their investors. This is usually done by taking security against new projects, and conducting detailed due diligence on the project managers.

DEVELOPMENT FINANCE

Some lenders are choosing to make funding available in tranches, which allows them to establish preagreed milestones and manage the risk of the project more accurately. Tranche funding allows the lender to have more control over the project and when done effectively, can minimise the risk to the investor. This in turn enables more funding to be made available more quickly, bolstering the property market at a time when financing is in short supply. “Typically for development finance, you may have your primary financing, acquisition financing or some other working capital finance,” explains Tewari. “It may be refinancing, but the development tranche is really a specific loan product, often within a wider loan offering. The ability to utilize that loan largely depends on agreed milestones and the delivery of what we call conditions precedent (CPs) and project deliverables. So against your receipts or your milestones, a sponsor is typically able to draw down all or some of that development tranche in tranches or as a whole loan. “But the requirements to be able to borrow under that development tranche are fairly evolved. Lenders will go through a CP requirement where they tick off certain deliverable rules that need to be met. They number crunch, they look at the forecasting, the budget, and if all those things are met and other conditions within the facility agreement are met and are likely to continue to be met, then a drawdown of that next tranche or that entirety of that development loan is permitted.” Some alternative property lenders have also opted to make affordable

“ The reality is there is a shortage of affordable housing”

housing and energy-efficient housing a priority in their business, in response to the growing demand for environmental, social and governance (ESG) friendly investments. According to recent research from the CBRE, property lenders are increasingly focusing on ESG issues,

with many lenders refusing to fund housing projects which come with an energy performance certificate lower than a B. As a result, new build developments are taking preference over refurbs, as lenders can have more control at the blueprint stage, ensuring that affordable housing and energy efficiency are embedded

DEVELOPMENT FINANCE

“ We're seeing a slight increase in volume

”

in the project from the very start. “The reality is there is a shortage of affordable housing,” says Tewari. “There's a shortage of housing generally. There are old buildings that, frankly, probably need to be retired. There are new buildings that need to come up in order to meet current ESG thinking and other environmental credentials. And I think lenders are fully on top of that.” Real estate debt funds are offering

something else that investors want – double digit returns. Property development sits at the high-risk, high return end of the investing spectrum, with dedicated property development lenders often targeting returns of 13 per cent or higher. Real estate debt funds can benefit from this upside by including more development loans within their portfolios, while enhanced due diligence can minimise the associated risks.

On the borrower side, real estate debt funds offer a lifeline during a prolonged funding crisis. For SME developers seeking funding of $100m or less, private debt funds are often the only option available. Meanwhile, for smaller developments, P2P property development lenders can bridge the funding gap by providing up to 100 per cent of the funding of smaller projects which may not have the scale to attract larger debt managers. “There are different genres of real estate and different ideas around what constitutes real estate finance and the type of risk that goes with that,” adds Tewari. “But if you are looking to construct a scheme, for example, in the private rental sector, or the purpose built student accommodation sector; if you have a concept that works well within that geography and there's a clear need for it, and from a credit perspective, it's something that can be banked, I think lenders will look at that.” In a recent report on the property market, the law firm Macfarlanes commented that the current market environment, characterised by diminishing credit supply, rising interest rates, and higher margins, has led to what many managers believe to be a unique opportunity in real estate debt, “not seen in the last decade”. Development finance is most certainly a key part of this unique opportunity, which is set to benefit debt funds and investors alike.

PROFILE

Time to build

Paul Sonabend, executive chairman at Relendex, tells Kathryn Gaw how the platform is innovating in property development lending

ROPERTY DEVELOPMENT lender Relendex is a veteran of the sector, but the platform has not stopped innovating. Earlier this year, Paul Sonabend, executive chairman at Relendex, unveiled a new lending product which will provide small- and mediumsized enterprise (SME) property developers with 100 per cent of the funding required to complete a development through subordinated participation loans. Sonabend explains why property development loans are superior to other types of property loans, what investors are looking for in the current high interest rate environment, and why Relendex is the right platform to pioneer this new funding model. Kathryn Gaw (KG): Why is it so important to fund SME property developers? Paul Sonabend (PS): We are not building enough homes. We’re supposed to build at least 100,000 houses more this year than we’re going to build. In the UK, we have a growing population and a housing shortage, and so much of the housing that we have has to be pulled down. With climate change, we’ve got to have houses that are fit for the future. And that’s where we come in. The housebuilders that we finance are in the main producing houses that have an energy performance rating of A or B.

What we are building today are beautifully insulated modern homes with air management systems, which are lovely to live in whether it’s cold or hot outside. These are homes built for the future. It’s cheaper to tear down an old property and build something new than it is to retrofit something. KG: What is the demand like for these modern homes? PS: There’s a massive demand for high quality new builds and

they do not need to be expensive. Most of the developments we are financing have an affordable element. These homes are sold at cost – the developers make no money on the affordable homes, they make them on the others. KG: What are the key challenges facing SME housebuilders at the moment? PS: Access to funding. This sector came out of the financial crisis. Before the crisis, every

PROFILE

decent SME housebuilder was getting a facility from their bank. Banks effectively stopped doing development finance after 2008. In the SME sector, very few SME housebuilders had facilities with the clearing banks after 2008 which meant that you were either with the secondary banks, regional or specialist, or you were in the alternative sector. We sprang up 2008 because there was a need for alternative lenders and there is still a need. KG: How has your offering evolved since 2008? PS: Lenders such as Relendex provide senior debt on property development projects. Sometimes we provide slightly more junior debt. This means that the debt is secured on the development or property. It’s designed to be pretty safe for the lender. And as such it produces a rate of return that is better than you’d get on a bank deposit and is over the years better than bonds and equities, but doesn’t give you the chance to make real money. But here’s the issue. As a lender, you can only lend up to a certain maximum percentage of the value of a development. That’s fine if the borrower can find the rest of the money from their own resources. But that is not often possible. Our new loan offering is addressing this market failure. We will provide 100 per cent of the funding on a new property development via subordinate participation loans which are designed to replace the borrower’s equity contributions. Developers effectively give away half of their profits to whoever is providing the risk capital. It’s a very expensive way

of raising money, and very often they won’t find the equity piece. Most developers get their equity from two or three people who are friends – they don’t have access to a pool of capital, so there could be lots of people who would like to invest with them who don’t even know they exist, and don’t know where to go. We have a pool of investors who are very interested in a high-risk, high-reward product. So we have capital-starved builders and investors looking for higher returns. What makes us innovative is that amongst our developers we have what we call our select portfolio. These are developers that we have hand picked. We have spent a lot of time looking at their financial records and choosing who we believe to be the best of the best. KG: Who are the developers within this select portfolio? PS: There are around 14 developers in the select portfolio and all of them are relatively young and ambitious. They’re all growing. Some are prize winning. They’re all passionate about what they do. They specialise in a particular geographic area, they build to very high standards and they are all people that I have gotten to know really well. And they all have the same problem – they could be growing faster if they had access to that riskier, equity-type of money. KG: What has demand been like so far? PS: In the early days the amount of money that will flow in will be smallish, but we have enough demand from our existing select portfolio base. We will grow the portfolio but that doesn’t

mean that new members will be eligible for the product. They have to have a track record. Everything is reputation in finance. I would rather grow more slowly and say no to people in the short term than take a 50/50 punt. KG: Have any other lenders rolled out these sorts of subordinate participation loans? PS: I think we are the first to do this in the way that we are doing it. We’re growing slowly but nowhere near at the pace that we have the potential for. We’re looking all the time to stand out from the rest of the industry. This product is interesting because it solves so many problems. The amount of time that developers waste putting together finance is horrendous. Others might copy us but if you don’t build a painstaking relationship with the developers, if you don’t know them inside out, if you haven’t visited their offices once a month for the last umpteen years, if you haven’t been on site and seen the build for yourself, no algorithm can do that. It’s not like SME loans. This is the riskiest part of the business because you get paid out of the profits last. KG: Why is Relendex the right platform to offer these types of loans? PS: We weren’t ready to do this seven years ago. We’re only able to do this because we’re a business that’s been consistently profitable for three years, and because we have built relationships on repeat business. We are a slim, efficient fintech but at the core we are a relationship lender. Nothing can substitute knowing our counterparties.