Why stock market investors are turning to property developer loan notes

Leave volatility of values and income behind and enhance portfolio returns

If you sit down with a financial advisor, you’ll likely be told that the best investment historically has been stocks and shares. You’ll likely be told that your returns depend upon the time in the market, rather than timing the market.

Yet, if you look at the FTSE 100 Index – which measures the performance of the top 100 companies in the UK – you may be surprised to find out that, had you invested in the FTSE 100 at the beginning of December 1999, at the beginning of December 2018 your investment capital will have shrunk by around 3%. During those 18 years, the FTSE actually fell by almost 3%:

Property Developer Loan Notes

Effectively, the return on investment in the FTSE 100 since the new Millennium has been limited to the dividends paid by its constituent companies. That’s around an average of 3.5% per year. This is still way ahead of the interest you might have been paid had you invested in bonds or cash instead of the stock market. However, it is some way behind the income you could receive by investing in developer loan notes.

What is a developer loan note?

Developers borrow money to build residential schemes. In recent years, since the Global Financial Crisis, developers, like all other businesses, have found it more difficult to get financing from traditional lenders and banks. To plug this gap, they started to offer developer loan notes to investors.

Effectively, a developer loan note is an IOU. The developer takes an investor’s cash investment and uses it to get a development off the ground and completed. In return, the developer pays a fixed interest to the investor and returns the investor’s original capital at the end of a predefined investment period. The investor’s investment capital benefits from a legal charge on the property.

The difficulty of investing in the stock market

You’ll notice that at the end of an investment period (typically between one year and seven years), the investor is repaid their capital. That’s a guarantee that investing in the FTSE 100 over the previous 18 years couldn’t give:

  • If you had invested at the end of 1999 and sold in 2002, you would have lost around half your investment capital
  • It would have taken another four and a half years for your investment to get back to its 1999 level
  • If you remained invested, you would have seen your investment capital fall by more than 40% in the next 18 months…
  • …before climbing to your original investment amount again in 2014

Of course, if you had timed your investment correctly, then between 2002 and 2007 you could have doubled your investment capital. The same result would have been achieved between 2008 and 2014.

The problem, is, of course, that to maximise your investment in stocks, you must be a great timer of the markets. You could, of course, leave it to the professionals and invest in managed funds. You’ll pay a management charge for the privilege. There is also no guarantee that a managed fund will outperform the FTSE, either – research by Vanguard shows that 90% of managed funds underperform the index they are trying to beat! If the professionals can’t outperform, how are you meant to?

Consequently, what we’re witnessing is stock market investors turning to developer loan notes. Their capital is guaranteed, and they receive a very attractive interest on the money they invest with (lend to) a developer.

Dividend trouncing interest on developer loan notes

Given that investment in the FTSE 100 has produced no capital growth over the last 18 years, investors are left to rely on dividends. But history tells us that dividends cannot be relied on, either. When corporate profits fall – as they did during the Great Recession following the Global Financial Crisis – companies slash their dividend payments.

So, stock market investors are left with the conundrum of volatile share prices that may mean a huge capital loss if they need to take their money out of the market while depending on dividends that are not reliable.

Developer loan notes work entirely differently. In many cases, your capital is guaranteed (though, of course, this is subject to risks as with any investment). While you invest for a set term (usually between one and seven years), many loan notes will allow you to withdraw your capital on annual anniversaries. But it is the interest that developer loan notes pay that really excite investors.

Typically, the interest rate that developer loan notes pay sits between 8% and 15% per year. Plus, many developer loan notes add a bonus each year, to encourage investors to remain invested. In this way, the interest paid on a developer loan note may accrue as follows:

Developer Loan Note

An investor who invested, say, £100,000 in a developer loan note with the interest and bonus specifications would receive a total of £120,000 in interest – a return of 120% over seven years. Plus, the investor would be repaid their capital at the end of year seven. This is income that simply can’t be matched by FTSE 100 dividends.

In summary

Investing in developer loan notes helps to diversify an investment portfolio, with a time-limited investment that guarantees capital and pays an exceptional rate of interest. Investment can be withdrawn in line with the loan note’s terms and conditions, providing greater flexibility for investors.

If you have an investment portfolio that is concentrated in the stock market, and you are concerned about volatility and low income from dividends, it could pay to learn more about developer loan note opportunities. You can dip your toe in with a modest investment – some developer loan notes allow you to invest with as little as £5,000.

To learn more about the benefits of investing in developer loan notes, and how they may enhance your investment portfolio returns, contact one of the team at Gladfish at +44 (0) 207 923 6100. We’re looking forward to speaking to you, and think you’ll be as excited about the loan note market as we are.

Continue Reading Other Articles in the Series:

benefits of investing in developer loan notes  Risks when you invest in developers loan notes  Why stock market investors are turning to property developer loan notes  Investing in Property vs Investing in Loan Notes  How loan notes work in property development

 

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About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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