UK Lending Fund Sees Opportunities in Housing

Jan 10 2011 | 9:10am ET

To explain the need for residential developments in the UK, Stuart Parfitt quotes an American—Mark Twain—who once said, ‘Buy land, they’re not making it anymore.’”

Parfitt is managing director of the Business Lending Group, a property lending and advisory group that specializes in providing loans to UK house builders. He spoke with FINalternatives about the company’s four-month old Business Lending Secured Income Fund, which is targeting 9.1% gross annual income.

North Americans, inundated with photos of empty houses and abandoned construction sites since the 2008 financial crisis, can be forgiven for not seeing opportunities in housing. But it’s different in the UK, says Parfitt.

“I think the issue you’ve got over there is you’ve got no pressure on land whereas, in the UK and particularly in London and the Southeast, we’ve got huge pressure on land...We’ve got very restrictive planning policies—we call them zoning policies—in the country generally but particularly London and the Southeast.”

Parfitt says housing stock is ageing, or simply considered unsuited to modern needs; moreover, much of the housing built immediately after the Second World War was “quite poor quality and banged up pretty quickly” and stands in need of replacement.

Added to this is the pressure from a growing population. According to UK government statistics, the current population of roughly 60 million should reach 71.3 million by 2033. Immigration remains healthy, especially immigration from the so-called ‘accession seven’ countries—the former Eastern Bloc countries that were last to join the European Union. Parfitt says the UK has also seen a steady flow of people from Spain and Portugal and, although the last 10 years has seen a reverse of the traditional flow of people from Ireland to the UK, Parfitt says that may change again given Ireland’s current economic woes.

The UK’s last government acknowledged these pressures on housing by setting an annual construction target of 240,000 new homes. The new government has done away with the formal target, says Parfitt, but that doesn’t mean the need for housing has disappeared.

Meeting this need has been complicated by the credit crunch. Funding residential development projects is a specialist sector, says Parfitt and “a lot of the funding was provided by specialist lending operations and those specialist lending operations were often subsidiaries of subsidiary teams of the main banks—sometimes overseas banks.” These banks, he says, have narrowed their activities in the UK quite considerably, leaving the field open to funds like the Business Lending Secured Income Fund.

The fund, as Parfitt says, is “very UK focused”—it’s not available to U.S. investors and although an overseas arm is planned, it’s not likely to be targeted at the U.S. market. The fund is available through Capital Platform, an independent UK alternative investment platform.

Minimum investment in the Business Lending Secured Income Fund is £25,000 and Parfitt is seeing interest from “individuals who are wealthier and getting very low returns on their cash in the bank; smaller SIPPs [Self-Invested Personal Pensions]…and smaller institutional funding —the institutional market is one we’re starting to open up, it’s only early days.”

The fund has no formal target amount. Parfitt says it’s a relatively new type of investment vehicle in the UK without many competitors. The Connaught Fund is similar, he says, and has raised “a bit over £100 million.”

“I think that’s probably about the limit you could go to—I think the fund would start to get a little inefficient after that. Or maybe we’d have to structure it in a different way and have a second series or something. That would be a nice target to think that we could get to that kind of level.”

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