Paul Sonabend, executive chairman of Relendex, explains why sophisticated investors always look beyond headline rates of return…
FOR MANY INVESTORS, the only thing that matters is the interest rate on an investment. But according to Paul Sonabend, executive chairman of Relendex, the smartest investors look beyond the headline rates.
Relendex attracts a mix of conservative investors who want to protect their capital and choose to invest in the senior part of first-charge property loans; and more adventurous investors, who are targeting returns of 10 per cent or more by investing in the junior parts.
“But while these junior loan parts come at a higher risk, this risk is mitigated by lenders creating portfolios diversified over our platform,” says Sonabend. “Financial Conduct Authority regulations coming into force this December will mean we will only have sophisticated investors. These are exactly the types of lenders who suit our platform as they understand the nature of our loans. For example, they will realise that most often when a loan goes into default it can be a great opportunity to make more money.”
Under the Relendex model, loans can default for several technical reasons which do not necessarily mean that they are impaired. The most common reason being a project taking longer than expected and not repaying on time.
“Upon default, the rate of return goes up by 50 per cent,” Sonabend explains. “So the conservative lender who was earning six per cent is now earning nine per cent, and the more adventurous lender who was earning 10 per cent is now earning 15 per cent.
“The reason the returns are higher is not because you are really putting your capital at greater risk,” he adds. “It’s very rare that lenders suffer capital losses.
“The single most important thing to understand about the industry is that your capital should rarely be at risk if underwriting is done properly. Relendex monitors and manages our loans. We take all necessary steps to recover our lenders’ capital together with interest due. In the first instance we apply pressure on the borrower resorting to repossessions if we have to.”
The key risk in peer-to-peer property lending, according to Sonabend, is liquidity. “You can never guarantee liquidity,” he says. “The smaller platform investor with a number of small parts should always be able to take out all, or part, of their investment by selling them on our active resale marketplace. Our larger investors understand that some of their loans may become illiquid until they reach maturity; that some will be extended; and some will be paying default interest for a period of time.”
However, even in the worstcase scenario of a receiver being appointed, that does not mean that lenders have suffered losses. To date, Relendex has not had to declare a loss on any loan, as even if the sale of the property does not cover the full loan, Relendex takes personal and other guarantees from all borrowers.
“Our sophisticated investors understand what they’re getting,” says Sonabend. “And they are very comfortable with the balance of risk and reward that’s on offer. We will continue to offer them the best possible returns, whilst doing our utmost to protect their capital.”