We protect investors by a stringent assessment of the lending risks with a lending decision only made by our experienced underwriters after an extensive due diligence process. We constantly review our risk framework to ensure that our lending is suitable in the current operating environment.
What are the risks and how do we manage them?
The risks associated with property lending are diverse with the main risks being:
We recommend investors diversify their funding across a range of loans to ensure they are not unduly exposed to any single borrower or property risk.
Property values can go up as well as down with economic cycles. A borrower may find it more difficult to repay a loan if the value of the property it is secured against has fallen. In such cases, if the loan exit strategy is reliant on the sale of the secured property then the sale proceeds would be less than expected, whereas for a refinance exit strategy potentially the maximum borrowing amount may reduce.
To manage market risk, Adelpha limits lending to no more than 75% of the property’s value and assesses the property’s marketability. To help with this assessment, an independent third party valuation is undertaken that is carefully assessed by our underwriters to ensure the security is acceptable for the proposed loan. The valuation is a comprehensive report on the property, which includes a commentary on the relevant local market, evidence of comparable recent sales and provides feedback on any specific concerns Adelpha may have about the property or local area.
Adelpha has a restricted panel of RICS registered valuers who must meet a number of requirements including having suitable local experience and adequate professional indemnity insurance. Their property valuations go through a quality control quality check and the valuation service provided by each valuer is regularly reviewed.
All the loans available through Adelpha’s co-funding platform are backed by security over property. However, as with any secured asset, there is a risk that the security is not properly executed making it unenforceable. To mitigate this risk Adelpha has diligent internal processes and works with a panel of carefully selected solicitors who have specialist property finance knowledge. An external legal counsel is engaged for every loan who also undertakes due diligence on the security, transaction and borrower.
All loans available through Adelpha’s co-funding platform are secured against property. In the event that a borrower fails to repay, Adelpha would seek to recover the outstanding loan by selling the property. The secured nature of the loan does not, however, mean that repayment of the loan is guaranteed because the loan outstanding may exceed the property net sale proceeds. Adelpha typically takes personal guarantees from the shareholders or directors to ensure the loan is fully repaid.
Adelpha performs due diligence and searches on a borrower, including credit agency, HM Treasury, financial sanctions and court registry searches. Borrowers are required to have a qualified solicitor to advise them in relation to the transaction. Under its due diligence, Adelpha performs a range of searches on the relevant law firm in each instance. The solicitor must confirm they have explained all of the loan obligations to the borrower and that they are understood.
Financial crime risk
Fraud is a constant threat with lending. Adelpha undertakes a comprehensive set of searches on all potential borrowers to mitigate the risk of a fraud being perpetrated by a borrower or their solicitor. Adelpha uses a number of enquiries, procedures and technologies to limit the risk of fraud such as credit rating agency searches and fraud detection systems.
The borrower personally meets with their solicitor and signs the loan documentation in front of them. This helps Adelpha get comfortable that the person that has been checked is actually the person who is signing all the documents. For some loans, we meet borrowers in person at their sites during the project to ensure that works are being carried out as expected.
Loan exit strategy
The loans available through Adelpha’s co-funding platform are typically up to a two year duration with repayment contingent on the borrower successfully completing on a planned exit route. Before Adelpha commits to a loan, the viability of the borrower’s payment schedule, including monthly interest payments, is assessed. The typical intended exit route is by sale of the security property or a refinancing.
Sometimes a borrower will require some flexibility with the loan repayment. The borrowers planned loan exit route can get delayed by a number of events such as a refinancing taking longer to organise, an approval of a planning application taking longer than expected, an unexpected issue with construction or refurbishment works, and a previously agreed sale of the security property failing to complete. In assessing whether an extension is appropriate, Adelpha’s underwriters assess the reason and evidence around the delay along with reviewing the exit strategy, project progress (if applicable) and property value. It is Adelpha’s policy to have a new independent property valuation performed. Adelpha does monitor the progress with the exit strategy constantly, until the loan is repaid.
A benefit of investing through Adelpha’s co-funding platform is that investors do not have to deal with a borrower directly. Adelpha undertakes all borrower dealings, however, if Adelpha was to fail, investors would not have direct access to borrowers to recover their money. Adelpha has wind down arrangements in place to ensure the loans and associated investment contracts are continued to be serviced. An investor's investment contract is with a Special Purpose Vehicle (SPV) which is ring fenced from the operating performance of Adelpha. The sole operating purpose of the SPV is to hold the property loans including the legal charge and any other security taken out. This security remains in force in the event of Adelpha becoming insolvent.
Please note that the products and any associated services mentioned above are available to sophisticated investors, high net worth individuals, limited companies and institutions. Adelpha is not covered by the Financial Services Compensation Scheme. We endeavour to reduce risks to investors. However, investing in any investment product places your capital at risk, and so does purchasing debt receivables through Adelpha. Your capital is at risk