While we encourage brokers to assemble syndicates of private investors and family offices with limited investment experience, not all securities are suitable for non-professional lenders.
The following are examples of securities that require substantial expertise and standby resources in order to be successfully liquidated—without a shortfall—in the event of default:
- Construction loans
- Development sites (unless their value disregards planning permissions)
- Subdivisions
- Commercial buildings whose value depends on a going concern or anchor tenant (e.g. nightclubs, marinas, day-care centres, nursing homes, private hospitals, motels, hotels, service stations, shopping centres)
- Farms
- Loans with material PPSR elements, i.e. where a non-trivial portion of the security consists of book debts, stock, plant and equipment, boats, etc.
Such loans are best left to lenders who have the in-house resources and expertise to step in and take over quickly in the event of default. We do not believe this requirement can be avoided simply by lowering the LVR—a 40% LVR on a half-built 80-unit apartment project abandoned mid-construction can result in a 100% loss once holding costs, completion costs, council bonds, and a fire-sale discount are taken into account.
The optimal securities for non-professional lenders, and for syndicates of such lenders, are those that are easily valued and can be sold through a four-week auction marketing campaign. This includes straightforward commercial buildings that can be sold with or without their tenant (and where the value is unaffected), as well as houses and residential apartments. These assets behave almost like a commodity: they attract multiple buyers, have transparent pricing, and offer a relatively quick sale process even in distressed scenarios. They can also be realised by solicitors rather than receivers.
Accordingly, we will generally decline to act on loans where we consider the security too specialised for the lender’s circumstances.
