Lending as an investment class

@Big Al = Big Heart and Big honesty. One of the reasons he is so successful. Thanks for sharing Al, I'm sure many appreciate it.

 

Thank you @Alex Straker . Appreciate the kind words.

Cheers

 

Thread revival since I have some further updates on this investment for those interested. Its been 3.5 years since I first dabbled into this asset class. And we have arrived at our first syndicate that has run into trouble with a second syndicate looming.

At this point I have invested in close to 40 syndicates. I am currently holding investment in 20 syndicates.

A run down of the experience and result of the 1 that's gone pear. It was a loan for a small boutique prime Sydney location apartment building. I went in 18 months ago. It had 50% pre sold and a completed LVR of 68%. Looked good to me being a small complex in a solid Sydney location with half of the apartments pre sold. Build went into overtime and the pre sold apartments sunset expired. Market has turned with the virus situation and the developer has been unable to move the apartments in a timely manner. Lending manger took possession and was able to secure a relatively quick sale of all apartments in one line. But at a heavy discount.
End result was a return of capital being 91.5c in the dollar. A 8.5% capital hit. In the 18 months i had collected 15.5% return on invested capital. End result was a positive 7% return over the 18 month hold period.

Not the best outcome but certainly not a terrible result. Had a lengthy chat with the manager about what went wrong and what could be used from this experience to ensure better outcomes in future syndicates. For me the one thing I took from this was watch the sunset clauses. Pre sales are one of the key metrics used to asses the loan and its suitability to invest in. But pre sales are worthless if the sunset dates are not sufficient to factor in delays. Its now the first thing I ask before entering a new syndicate.

There is a second syndicate which has now past its due date and the developer has been unable to come up with the owed funds. Manager taking possession of the asset and feedback is that the manager believes the current market value should be sufficient to return 100% of capital as the LVR was only 58%. Will see shortly I guess.

So far so good with this asset class, though the current virus situation is making me a little nervous. Looking at just holding back for now on adding anymore syndicates and just building up the ammunition for when things are looking a little clearer.

 

Hi Big A, this is indeed very valuable experience to share in the forum. And your overall return for
one that gone sour is quite an admirable outcome in current environment!!!

Just one thing to ask if you don;t mind. How does one start at investing in such syndicates from
fresh without prior experience and not knowing what source are credible vs those not? Are there
broker specialising in sourcing these kinds of deals?

Thanks,
FXD

 

Thanks @FXD . Glad you find this helpful. While I personally like this asset class I believe its also fraught with danger. There are lots of players in this segment that I would not touch. The only reason I went into this investment is that I was comfortable with the manager. Australian Unity are a big player. They are a large investment manager in a number of different asset classes. I first looked at them for there property trusts. Then I saw this option of Mortgage syndicates. I jumped on line and did some research and compared a number of managers that offer such investments. The other one I considered was La Trobe. I met with the reps for the Australian Unity fund and liked what I saw and heard from them. So I decided to go with them and only them.

I figured with there size and reputation there has to be a greater level of transparency and risk mitigation compared with smaller boutique players. Another thing I liked about AU is that they also manage large scale property developments as part of there other investment funds. Unlike other lenders who act purely as lenders and don't have the development experience. I feel this gives AU an edge in managing the risk.

If this is an investment class that interests you I would suggest you do as much research as you can into it online. Look at the different managers and any online reviews. You will find some old articles about issues with these type of investments that arose during the GFC. Keep in mind they are not liquid on demand. Most are locked for 12-18 months. Then if there's any settlement delays you have to factor in another maybe 6-12 month scenarios in which you might not get back your original capital.

You will find old articles about AU themselves regarding a similar fund they ran during the GFC. It was a pooled fund back then, which meant you could not choose the loans you wanted to go in on. All your money went into a big pool and you could only cash out if money was available. GFC came along and everyone wanted out at once. Being one large pool it took many years until all the loans in it were settled any everyone could get there money back. Even though they were still receiving interest payments during that period, once the panic set in and people couldn't get money out instantly everyone ran for the doors. Single asset syndicates mitigate that to some degree, as you only need to wait till the asset you have lent on is sold to get back your money. I have asked AU about that pooled fund they ran and the end result after the GFC. They advised that even though it took a few years to wind it down and get everyone's capital back, they did manage to get everyone's capital returned and when factoring in interest earned most investors walked away ahead.

 

Hi Big A,

i had 2 questions 1 what was the original sunset clause length? and now what do you look for?

2. interest rates atm are fine but are you concerned about locking in capital for 18 months when you are also running the risk that interest rates could increase? working of a scenario the funds are equity.

 

I have 0 concern that rates are going to go up any time soon if ever again. Rates have been drifting lower for a long time and yes there may be a day far in the future they may move up again but I cant see any large moves up ever again. And even if they did. I am happy with the 8% being offered to me. Not sure what you mean by working of a scenario the funds are equity. If you mean that the funds could be converted to ownership of the asset than yes I am fine with that in a worse case scenario. Again thats why you have a buffer of 30-35% lvr to absorb any shift in asset value over the 18month period.

But yes there is always an element of risk that you could walk away from any one syndicate in the red. I try and mitigate that by holding a number of different syndicates.

 

Thanks for sharing BigA. I have a small portion of my investments in P2P loans and I see this as a similar space.

Since one of the p2p companies I use has recently introduced a maximum interest rate earned which is lower than my target rate of return for P2P I’ll be not reinvesting any funds as the loans are repaid. This thread gives some interesting food for thought.

Regards,

Jason

 

i meant if it was equity as in you were paying bank interest on it it could go up in that 18 month period which i also see unlikely any time soon.

what was the original sunset clause length? and now what do you look for in relation to the sunset clause?

 

Ok now i see what you meant.

So at the moment I am not using leverage to invest. I have been considering using debt to increase returns as I can draw against PPOR at 2.79% and get 8% from these syndicates. Interest rates would have to move up significantly to close that gap.

With all the uncertainty I am not willing to leverage up for such an investment as this. I would use some leverage for investing in shares if and when the market comes back down significantly enough to entice me to take some additional risk by leveraging. In normal economic times with product such as this I would be comfortable using low interest debt.

So from my discussion with the manager the sunset clause was 18 months from the time they issued the loan with an extension clause that was apparently missed by the developer. So from here on I am looking for a sunset clause with a minimum 12 months past the expected completion date. The manager has advised me that this is now one of there focus areas and they are reviewing all sunset clauses to ensure they are adequate and are extended when required. I think this is something they dropped the ball on with the syndicate i mentioned.

 

thats interesting, i can't see how any OTP buyer would agree for such terrible terms etc 18+12month sunset clause i would have thought maybe 1-2 months at best etc.

 

@Big A I can't seem to find a way to DM you. I have been investing in this asset class for also about 18months. Would like to share some details but can't figure out a way to message you. Perhaps you can message me and then I can reply ?

 

Just sent you a message. Check if you got it.