Institutional investors can tap affordable housing opportunities with marketplace lenders

The property sector could soon offer a raft of fresh investment opportunities to both wholesale and retail players in projects undertaken by small-scale developers.

These developers could be on track to play a greater role in the property sector, given ambitious housing targets from federal and state governments which will drive the launch of more infill projects.

Marketplace lenders can provide institutional investors with a convenient means of tapping these opportunities, offering portfolio diversification across a range of project loans and types of projects.

Small developers to offer new investment opportunities

In August, Australia’s national cabinet set a new target of building 1.2 million “new, well-located homes” for the five-year period starting from 1 July 2024.

Given the target specifically refers to “well-located homes”, industry experts expect the move to prompt the development of more in-fill housing in established urban areas with existing amenities and infrastructure.

The Victorian government’s new housing plan, for example, highlights the need for more in-fill housing to reduce sprawl.

“By unlocking new spaces to build homes across established suburbs, we’ll stop urban sprawl and boost housing supply in the places Victorians want to be – close to where they work or send their kids to school,” the plan said.

The push for in-fill housing will in turn create ample opportunities for smaller developers who are better suited to such projects by virtue of their capacity and flexibility.

Australia’s financial system may need to play catch up, however, in order to cater to an accompanying rise in demand for funds for small-scale housing projects.

Smaller developers have long struggled to obtain adequate finance from traditional financial institutions such as banks, hampering their ability to undertake projects that can help to expand Australia’s housing supply.

CrowdProperty’s recent survey of small-scale developers found that if anything it’s become more difficult for these players to access finance. When asked why they weren’t building more homes, the number one answer from these developers was access to debt capital.

The goal of marketplace lenders like CrowdProperty is to help small-scale developers overcome their financing pain points, by giving them access to funds sourced from professional, wholesale and retail investors.

This could provide a welter of new opportunities for institutional investors, amidst the nationwide push for an increase in well-situated home supply.

Diversification advantages for institutional investors

For institutional investors, small-scale development projects can offer pivotal advantages as an asset class, particularly when it comes to portfolio diversification.

Tony Zulli, chief operating officer and director, CrowdProperty Australia, said marketplace lenders enable investors to pick and choose specific projects to their liking, the volume of funds they wish to commit to each and the term of their investment. This gives them greater control over the diversification of their investment into the segment.

“Our investors have the option of committing smaller amounts to any given development, enabling them to diversify their funds across multiple projects of their choosing,” Zulli said. “This helps to de-risk their portfolios.

“They can invest in ten or more different projects if they want to. In the event that one project is delayed or requires intervention, that particular loan does not affect the performance of the other developments.”

Zulli further points out that this flexibility and control enables institutional investors to achieve portfolio diversification across a range of criteria.

“Investors can diversify across different investment terms — they can invest in loans ranging from six to 18 months, depending on the timing of each drawdown by the borrower.

“They can diversify into different types of property — from plain vanilla homes to specialist disability accommodation. Investors can also achieve geographic diversification - we offer projects in multiple states around Australia.”

Zulli says the diversification opportunities for institutional investors could be especially ripe given their low levels of exposure to small-scale property as an asset class.

“Most institutional investors, whether they’re fund managers, private debt fund managers, superannuation funds or the investment arms of family offices, generally have less exposure to this kind of specialist asset class,” he said.

“This is especially the case for the segment that funds small-scale developers with projects of $5 million or less.”

Specialised marketplace platforms offer certainty and security

In addition to providing institutional investors with a more convenient means of tapping new opportunities in the property sector, CrowdProperty also offers a high level of security and efficiency thanks to the specialist expertise of its team.

All projects offered by CrowdProperty are high-quality, directly originated property development that a team of industry veterans has already scrutinised and vetted in advance.

According to Zulli, this means institutional investors can be assured of the quality and security of projects, potentially saving time and money on due diligence.

“Before investors even get to looking at which projects to invest in, they need to be confident that projects have already undergone a detailed due diligence process,” Zulli said.

“Investors need to feel comfortable with the people and processes behind this, what type of security we provide on the assets. They’ll want to know about the valuation policy, which valuers we use, and how often we rotate.”

In the case of CrowdProperty, risk is further reduced by the nature of the debt offered to investors, all of which is first-mortgage security.

“If we were offering other forms of financing through the capital stack, whether it be second mortgages or some form of equity, institutional investors might not be allowed to engage in those forms of higher-risk lending,” Zulli said.

“The first-mortgage security provides institutional investors with the surety of taking precedence before second-mortgage holders or equity holders.”

In addition to greater certainty regarding the quality and security of prospective investments, Zulli says marketplace lenders can also help ensure these projects get up and running more quickly.

This is because the crowdfunding aspect of marketplace lenders gives them instant access to a vast range of direct investors.

Institutional investors can be confident that projects selected will quickly obtain the funds they require, enabling them to get off the ground much sooner to start generating returns.

“Because we take our funding out to the crowd, including both wholesale and retail investors, we can fill each project loan that we place on our platform more quickly,” Zulli said.

“Our sister company, CrowdProperty UK lists at least three brand new projects every Wednesday morning, and within 30 seconds to a minute they’re funded. This gives certainty to the institutional investor.”

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