According to EuroCape, typical lending rates charged by banks for loans of this nature are 12-18 per cent a year in the UK and higher in South Africa due to historically high base rates and a less competitive market. Margins are also high in countries that have recently joined the EU because secured finance is a new concept.
EuroCape Property Finance 1 was established last year and arrangements were made to provide security for each loan in the form of a first mortgage charge. This means that in the event of repossession, the ownership of the land would revert to EuroCape, enabling the fund to recoup its money through a sale.
The original fund made initial loans at a typical rate of 1.5 per cent a month and if maintained, it will be able to pay the annual returns and 12 per cent bonus. Eurocape II will initially lend alongside and on the same terms as he first fund and will run until October 2012 with target return of 9.85 per cent a year and a potential end of term bonus of 12 per cent.
EuroCape will obtain an independent valuation for each site and will consider factors such planning permission. Sale potential will also be assessed and this will involve a site visit by one of the investment board or its advisers. The cost of this due diligence is met by the borrower but does not obligate EuroCape to lend. The maximum loan will be 80 per cent loan-to-valuation as EuroCape believes it will benefit from any improvements to the land financed through a developer’s own money in the event of repossession.
This is an innovative product that provides investors with an investment opportunity that has so far been dominated by banks. However, despite the efforts to minimise risk by providing security for the loans, some of the developers could be smaller players that will find it difficult to make a profit and this may put off some Sipp and SSAS investors.