Assetz® News - Investors Fund Developers to Reap Higher Returns and Take Advantage of Credit Crunch

Investors Fund Developers to Reap Higher Returns and Take Advantage of Credit Crunch

17th January 2008 |

Assetz Fund Management has launched a new property development fund, enabling investors to benefit from providing funding to developers in the UK’s property market.

The fund will provide developer finance for a number of carefully selected small to medium sized development projects. The funds will target carefully selected locations where there is anticipated to be property price strength or growth and strong demand.

The typical size of schemes to be funded will have Gross Development Values (GDV) between £500k and £10m, highlighting a preference to lend on smaller niche schemes that have above-average profitability potential. Typical projects range from small schemes of possibly five houses in a desirable village, to developments of twenty holiday homes in prime tourist areas or the conversion of prime city centre buildings into the little-supplied owner-occupier offices market.

Developer funding involves providing a developer with a secured loan, which, in addition to bank lending, finances the costs of a scheme. A developer typically needs to provide 10-30% of the total scheme cost in cash (equity), with the rest funded by bank lending. The fund will make up any shortfall in the required developer equity. The objective is to target lending between five and 15% of the scheme cost as the smaller the loan, the greater the investor return for a given profit share negotiated for the fund.

The loans made to the developer will always have a second charge on the land as security, behind the bank that will be providing the senior debt. Once the development is complete the fund will be repaid its loan at a typical interest rate of 10-15% per annum on the loan (by negotiation), plus a priority share of the profits (ahead of the developer). Any further residual profit above this priority return for the fund will be split between the developer and the fund, with the fund typically benefiting from between 35% and 50% of this final balance of profits.

Patrick Seed, Development Director for the Assetz group of companies, and his team will advise the fund. Patrick has substantial project development expertise over both residential and commercial projects with a gross development value of well over £500m. It is envisaged that in many cases developers will benefit from Assetz’ planning, construction and development experience, which are likely to improve development profits further.

Stuart Law, Managing Director of Assetz comments:

“It is common for developers to have more opportunities than cash, even more so following the ‘credit crunch’ which presents a chance for investors to lend the balance of the capital required and to receive a priority return, ahead of the developer’s profit share.

“This type of property fund is an excellent way for investors to profit from a period when developers have found it a little harder to raise all the finance they need, meaning that greater profit share percentages can be negotiated than would have previously been possible.”

The new fund, Assetz Property Development Fund Number 1, is a five to seven year closed fund with target investor returns of at least 20% per annum. Investments will be spread over a series of carefully selected projects and will allow investors the opportunity to benefit from development profit as opposed to other types of investment that rely solely on property value growth.