An alternative moneymaker from property

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LendInvest’s bond is exposed to London’s vulnerable market

Investors looking for a higher yield from property should consider this bond from LendInvest.

After a slow few years, the retail-bond segment of the London Stock Exchange looks like it might be about to get a second wind. There’s a huge amount of demand for well-established businesses to list their bonds on this retail-friendly exchange, with investors chasing the higher yields on offer. Nearly every recent issue over the last few years has been at a rate of between 4% and 6%, which is well above the rate on offer from the government (via gilts) and investment-grade corporate bonds.

We’ve also seen a few newish outfits tap the retail-bond market – prime among them alternative property lending platform LendInvest. In August 2017, this fast-growing fintech platform launched a listed retail bond, with a 5.2% yield, after raising £50m in an offer period that was oversubscribed and closed early. Its new issue looks more attractive, as it features a slightly higher yield of 5.35%, though the bond is actually slightly longer in duration, at 5.5 years, and matures in 2023. Cynics might question whether the yield should have been a bit higher, especially as it’s obvious that UK interest rates are heading north. And it’s also worth noting that the premium over risk-free bonds looks slightly less attractive. Nevertheless, the bond still looks like a good option, not least because LendInvest seems conservative in its lending practices.

The platform is focused on short term, bridging and development loans rather than buy-to-let loans. In total, its initial £50m fundraising has been invested in 89 different loans (implying an average of around £560,000 per loan), with an average loan-to-value (LTV) ratio of about 57% – so the average loan looks to be backing a project worth around £1m.

Of those 89 loans, nearly all are first charge, and at least 19 (of the 87 first-charge loans) have a LTV ratio of under 50%. That means that if there were a sharp property recession, a good proportion of the book should have plenty of equity in case of default. By contrast, 17 of the loans have a LTV of 70% or more, which might seem a slightly more worrying state of affairs in a downturn – you’d only have an equity buffer of around 25% to 30% at most. It’s also worth noting that 63% of the loans are in the Greater London area, which is arguably more vulnerable in a downturn.

Overall, the interest coverage of all the loans in aggregate is running at 192%, suggesting there’s plenty of cash coming in from projects to cover repayments. It’s also worth noting that these figures only apply to the existing portfolio loans financed by the first bond – the new bond might fund projects with tougher financial requirements.

It’s good to see that LendInvest the platform seems to be growing sensibly. In its latest financial report, it reported strong gross revenue growth, up 45% year-on-year, and continued profitability. Given the longer duration and the near certainty of higher interest rates (and thus higher government-bond yields), I’d have preferred the bond to yield closer to 6% per year, but I guess that LendInvest would have preferred to borrow from institutional investors rather than pay that much higher yield. If it keeps issuing £50m bonds, I don’t think they will appreciate much in value. But if there’s now a hiatus for a few years, there’s a decent chance these bonds – a decent-yielding investment from a sensible lender – could end up trading at a slight premium.