Safe as houses
Peer-to-peer lenders have already made headway in consumer and business loans, could they help solve the housing crisis?
Housing is a perennial feature of any political manifesto and various governments, lobby groups and charities have tried but regularly failed to tackle the shortage of stock in the UK.
The government has even set itself an ambitious target to build one million homes by the end of this parliament by 2020. Ministers may well be regretting that number now, with the latest figures showing 189,650 homes were built between April 2015 and April 2016, below the 200,000 a year needed to hit one million.
Furthermore, that number is a conservative estimate compared to past reviews of the housing shortage. In 2004 a government-commissioned report by the then-Labour administration said 250,000 homes needed to be built a year. According to analysis from Aldermore, that means the UK must build 685 homes a day. However, over the past 12 years, UK house builders have met less than 70 per cent of this target, building an average of 475 homes a day.
Ultimately, the data shows that despite government initiatives such as Help to Buy or Build to Rent, the UK is just not building enough homes.
This is where peer-to-peer lenders are trying to step in. While the government may want property developers to build more, the sector struggles from a lack of capacity and finance.
The big names such as Taylor Wimpey or Barratt Homes can only stretch so far while smaller developers struggle for bank funds. Members of the National House Building Council cite banks’ reluctance to lend as a serious problem.
According to business loans comparison website Funding Options, bank loans to developers have halved from £34bn to £16bn in the past two years.
Even if the banks wanted to lend, they are facing tougher capital requirements from the Basel Committee which is reviewing the risk weightings used when it comes to lending to certain sectors such as house builders. Additionally, the European Banking Authority has recommended banks increase the reserves they hold against bank lending by 50 per cent. This could push up the costs of finance and reduce the number of loans approved.
While banks may be scaling back, P2P lending is trying to make up the shortfall.
According to the University of Cambridge and Nesta Alternative Finance Industry Report, P2P lending for property was the second most popular sector by volume in 2015, just behind business and consumer loans, raising £609m mainly for property developers.
This represents around 41 per cent of the total volume of P2P business loans in 2015.
Since 2013, 12 P2P platforms have launched specialising in property, development or building loans to the tune of £1.6bn by the end of November 2016, according to independent ratings agency 4th Way.
Combined, lenders have lost just £15,000 out of £1.6bn lent, representing 0.0009 per cent of loan value. Just one – Funding Secure – has losses of 0.02 per cent spread over three years, 4th Way data shows.
“There are a lot of P2P lending providers focused on secured property lending,” says Neil Faulkner, managing director of 4th Way. “Collectively, they give lenders near-instant diversification, high interest rates, and very attractive property security. It is an excellent time to be a lender and there are options for every budget.”
According to 4th Way, lending decisions are underpinned by underwriting processes including sensible maximum loans-to-value of 70 per cent to 80 per cent. The personnel are often former banking executives so they know what they are looking for when assessing a borrower.
“Most of these P2P lending opportunities are run by people who have a lot of prior experience in assessing these kinds of loans,” says Faulkner. “They are using traditional processes to assess borrowers combined with new technology to lower the costs of lending, and then passing the bulk of the rewards on to individual lenders.”
The proposition for borrowers is attractive as they can get smaller sized loans and lenders can get returns of up to 12 per cent. There is also arguably less risk as the lender has the security of the property if things go wrong.
Some platforms, such as Landbay, focus exclusively on funding buy-to-let loans for landlords.
“The buy-to-let market is statistically the lowest risk option within UK lending and we felt it was an appropriate market for retail investors who are looking for yield, but who are not ready for the volatility and higher risks of the development or bridging market,” says a Landbay spokesperson.
One way they say they are helping the housing market is by providing rental data for tenants and landlords. “We feed this data through to into our consumer-facing rent check tool where users can enter their postcode and number of bedrooms to see rental trends in their area,” the Landbay spokesperson adds. “Landlords can make sure that rents they are charging are in line with market trends, whilst tenants can see if what they’re paying is in line and can assess rents in new areas if they are looking to move.
“As demand for housing continues to outpace supply, the private rented sector is playing an increasingly important role in UK housing tenure. It is crucial that landlords and tenants alike are equipped with the tools they need to both provide and inhabit high quality, affordable housing.”
Lenders have mixed opinions on whether the best returns come from loans for mortgages or development. “Residential development isn’t income producing; you have to wait for a capital gain which isn’t always guaranteed,” says Brian Bartaby of Proplend, which focuses on commercial mortgages. “The buildings we finance have tenants and the rental income goes to the lenders.”
Other platforms such as Relendex provide bridging and development finance loans between £100,000 and £2m for terms ranging from six months to five years.
“You have to think about both the return on investment and the return of investment. There is a big opportunity for P2P platforms in the housing market,” says Michael Lynn, founder of Relendex.
Lynn says banks will reject applicants based on one blemish while P2P platforms are less rigid but still perform thorough due diligence. For example, Relendex’s due diligence system is designed by a former head of banking at the Rothschild Banking Group.
“The banks’ decision making process is very long-winded and their lending criteria is strict and unrealistic,” says Lynn. “Often traditional lenders have minimum lending amounts that start as high as £3m. When a builder or investor gets an opportunity to acquire or start building they don’t want to have to wait for the bank to make up its mind.
“We do the same due diligence as a traditional bank but we are more understanding of the borrower’s whole track record while making sure there is an exit plan. Borrowers may pay slightly more on a P2P platform but there is less chance of rejection and the application process is faster.”
Even institutional investors such as pension and investment funds are recognising the gap in the property market being left by banks. According to Nesta, 25 per cent of funding on P2P property platforms came from institutions in 2015.
P2P-focused funds such as P2P Global Investments have started shifting focus towards asset-backed strategies including property platforms.
LendInvest, which provides finance for buy-to-let, bridging and development, typically worth between £1m and £5m, says its loans have helped to fund the creation or renovation of 2,600 units in 120 towns and cities, or 200 constituencies around the UK.
“This is a section of the property development that is chronically underserved by the traditional lending market,” says a LendInvest spokesperson. “For many banks and building societies, returning to lending to these sorts of borrowers hasn’t happened for two main reasons: either they are unable to lend to them because of capital adequacy requirements, or the margins are too small for them to make it worthwhile.
“Back when housebuilding numbers across the country were high there were five times more SME builders operating than there are today.”
As well as building and bridging, the platform also has a focus on improving skills and launched the LendInvest Property Development Academy in September 2016.
The Academy consists of a two-day course that aims to teach aspiring developers how to manage project from sourcing the land, right through to getting contracts is place with all the suppliers, managing costs and getting the final product marketed and sold.
“The way we see it, the housing crisis won’t be solved until we get more people building more homes,” the spokesperson adds. “Not all of these people will be large-scale housebuilders – so the onus is on the ‘middle market’ and the government and industry needs to support them better to give them a step up.
“SME developers need help to reach three access points: access to land, access to finance and access to skills. It’s this last one that’s least well understood. About 25 per cent of the deal applications we get are for sound projects, but are submitted by people who lack the skills and know-how lenders need to feel comfortable with lending to them.”
However, one area that P2P platforms know they can’t control is government policy and many recognise even if they can fund landlords and developers, there needs to be land to build on and support for projects.
Chancellor Philip Hammond made some positive overtures in the Autumn Statement in November 2016, with the launch of a £2.3bn housing infrastructure fund to deliver up to 100,000 new homes by 2020-21 and an additional £1.4bn to deliver an additional 40,000 affordable homes over the same period.
There is also a long-awaited white paper set to be published on Monday, on improving the house building and buying process.
“We would welcome further initiatives to encourage developers to explore alternative finance as a first option to access funding through P2P platforms like Folk2Folk,” says Jane Dumeresque, chief executive of Folk2Folk, “We aim to support local councils and land-owners develop properties for local residents, especially as affordable housing is such an important issue for many local residents.”
P2P property platforms speak more positively than some of their banking partners when it comes to supporting the housing market. While they may not reach the same levels as bank lending, they recognise they can play a role, as Lynn explains: “If all the developers have viable schemes and there as enough land and brownfield sites and if the planning process was efficient, I think we could make a good impact.”