News

Income Generative and First in Line to be Repaid

Published on February 21, 2017

In the persisting long term, low interest rate environment, both individual and institutional investors are searching for stable and predictable forms of income.

Commercial property can fulfil these requirements through two linked but very different asset classes – equity and debt. In a similar fashion to traditional stocks and bonds, commercial property offers both equity and debt investment opportunities, but with differing risk and return characteristics.

 

Position in capital structure

Property debt investors …

  • Take the least risk;
  • Are the first repaid and;
  • Have the highest claim on loan collateral.

Equity investors take the most risk, are last to be repaid and have the lowest claim on loan collateral.

 

Unique benefits of commercial property debt

Attractive and stable income for a predefined period

The loan interest payments are contractual obligations and therefore, the amount and date of the payments are generally predictable. This in turn facilitates regular streams of income for debt investors.

Payment Priority Funnel For Rental Income

Capital preservation

Although investors’ capital is always at risk, commercial property debt offers investors protection in the form of the property offered as collateral. The property equity investor provides a first loss ‘cushion’ and they would lose all of their invested capital first before the debt investors are impacted.

 

Through the security documentation, the borrower pledges the property and any income it may produce to the lender in the event that they fail to make interest payments or repay the loan principal as it falls due. The debt investors are first in line to be repaid when the property is either sold or refinanced.

 

The table below shows the effect of changes in the underlying property value on the returns for both equity and debt investors. The debt investors are more resilient to a drop in commercial property values and sitting lower down the capital structure, are comforted by a greater amount of capital protection. Here Tranche A and B debt investors also get comfort from Tranche C debt investors, as well as from equity investors.

 

Volatility of Returns For Property Debt and Equity Investors Comparison Table

 

Investing in debt, backed by commercial real estate, whether peer to peer (P2P) or not, provides investors with attractive rates of risk-adjusted returns. Being high income generative and the first to be repaid, means that debt investments outperform equity in flat or negative asset value environments. Therefore, a peer to peer debt strategy backed by income producing UK commercial property can play an important role in any investors fixed income portfolio.

 

Proplend connects investors directly to borrowers

Our online platform enables individual Investors to lend direct to corporate Borrowers with loans secured by income producing UK commercial property, to achieve better returns. Proplend’s P2P loan investment tranche model, groups investments according to the level of loan to value risk afforded by the securing property.

 

Similar to property debt’s position relative to property equity in the capital structure, Proplend’s Tranche A investments are first in the queue to be repaid and therefore the lowest risk. The value of the security is more than twice that of the loan capital, so there’s a better chance of capital repayment in full should the first legal charge need to be exercised.

 

Tranches B and then C are next in line to be paid, therefore offering higher risk-adjusted rates of returns. Investors on the Proplend loan platform also benefit from the peace of mind of a 6-month interest reserve and comprehensive due diligence (on the Borrower, the property and the tenant) – just two of a range of measures established on the platform to help minimise lender risk.