Lay of the land
The property market is facing uncertain times, but this is when peer-to-peer lenders can prove their mettle, as Marc Shoffman reports…
PROPERTY LENDING IS one of the most diverse areas of peer-to-peer lending. Platforms are offering everything from property development loans, to bridging facilities and buy-to-let mortgages, while there are even some P2P lenders considering entry into owner-occupied residential mortgages.
The property market has faced some challenges in recent years. Extra stamp duty charges on additional properties have been introduced, several buy-to-let tax perks have been rolled back and Brexit uncertainty has weighed on demand, particularly in London and the South East.
This has caused sales and house prices to slow, with investors, property professionals and homeowners alike displaying caution amid an uncertain macroeconomic climate.
It is the ‘B’ word that now presents the most immediate challenge, both for P2P property lenders and the wider market, due to the risk of an economic downturn as a result of leaving the EU.
Predictions of the Brexit fallout have ranged from the Bank of England warning of a drastic 30 per cent drop in house prices to more temperate warnings of price growth slowing and purchases and development stalling.
Estate agents such as Savills have warned that many buyers and sellers are holding back due to Brexit, which can affect price growth and transactions, while a survey by the Royal Chartered Institute of Chartered Surveyors last month found members rank Brexit uncertainty as the biggest challenge facing the market.
Despite market jitters, the UK is faced with a chronic housing shortage, which creates a need for development and investment.
This is where many P2P property lenders see an opportunity.
“First and foremost, there is chronic housing undersupply in the UK,” explains Mike Bristow, chief executive of CrowdProperty.
“We are building far fewer than the 300,000 homes the government estimates we need to satisfy demand growth.
“Furthermore, the government identifies small- and medium-sized developers developing smaller parcels of land as a crucial part of the solution, as larger parcels of land are built out and become scarcer by definition.
“Traditional lending institutions either won’t lend or make it very hard to borrow for small property professionals.”
Of course, P2P platforms will not be immune to uncertainty and an economic downturn.
Alternative finance research firm Intelligent Partnership predicts there could be consolidation in the P2P property sector.
“If the pundits are correct, residential property is likely to dip somewhat post-Brexit,” explains John Schaffer of Intelligent Partnership.
“I imagine the amount of property-focused P2P platforms will consolidate somewhat.
“However, Bank of England Governor Mark Carney’s prediction of a 30 per cent dip in the UK property market may be a little exaggerated.
“People like to invest in assets they understand, and real estate investment will continue to have an audience.
“P2P property platforms allow investors to gain exposure to property investment without the need to purchase a property themselves.”
P2P lenders highlight that the impact will vary depending on where money is being lent.
“I think that we will see a tale of two markets in P2P property lending, in the same manner that we have a two-speed property market in the UK – London versus the rest of the country,” explains Roxana Mohammadian-Molina, chief strategy officer at P2P property development lender Blend Network.
“On the one hand, P2P property platforms with a London focus will inevitably feel the pain as the market enters into a period of protracted slowdown.
“On the other hand, P2P property platforms who look beyond London will be able to capitalise on the ongoing strong demand and shortage of supply for more affordable homes.
“The UK suffers from a structural lack of affordable houses and this will not change, with or without Brexit, with or without a deal.”
CrowdProperty’s Bristow agrees that “geographic diversification” is an important strategy.
“This spreads market risk as different geographic markets are driven by different micro and macro factors at different times, but this also naturally spreads the types of projects we offer in terms of stock, demographics, tenures and exit strategy,” he says.
“Institutional investors have a deep understanding of the different property debt risk-adjusted returns, but I believe that the majority of retail investors assume that all property lending involves the same level of risk. It doesn’t.”
Schaffer of Intelligent Partnership adds that the risk profile of different P2P loans can vary significantly.
“A bridging loan is likely to have more risk attached to it than a buy-to-let project, even if the tax regime surrounding buy-to-let has become less favourable of late,” he says.
“Bridging loans, in particular, are likely to have greater risk attached to them in a downturn, as property assets may be difficult to sell.”
Property will not be the only area of P2P to suffer if there is a downturn, as consumer and business lending could also be hit by a lack of confidence.
In fact, property lenders may come out looking better than their rivals as they provide an underlying security that everyone understands.
Mohammadian-Molina says having property as security against the loan gives lenders comfort and peace of mind in the case that things go wrong.
“The platform will be able to step in and exercise its first-charge rights in order to try and recover lenders’ money,” she explains
“This obviously isn’t the case with consumer loans or even small business loans that may be secured against a debenture on the business, but if the business goes bust having a debenture doesn’t mean much.
“In a market with uncertainties like we are seeing right now due to Brexit, investors are looking for safe haven assets and investments, and property P2P loans offer fixed returns on loans secured against property.”
There is, however, always the risk that the underlying assets can’t be sold.
“No lending is ‘as safe as houses’,” says Brian Bartaby, chief executive of P2P property lender Proplend.
“Securing a loan with a property only goes some way to reduce some of that investment risk, in that the proceeds of a sale will go towards loan redemption and a low loan-to-value (LTV) means there is more of a cushion in times of recession.
“An empty property with no income may struggle to sell in a recession but an income-producing property should be easier to sell.
“Take, for example, a commercial property with stable lease rental income. If the property value falls, the income yield rises. In the current long-term, low-interest rate environment, this yield increase will be attractive to fixed income investors.”
Some types of property lending may be lower risk than others.
P2P buy-to-let lender Landbay says its type of loans may be less affected by a downturn as there is less reliance on having to sell an asset.
“If there is a material fall in house prices, which one assume goes in hand with a downturn, anything in property sales is likely to fare worse,” John Goodall, chief executive of Landbay, says.
“If properties become harder to sell, the risk of default increases.
“If you are lending in an area like buy-to-let, the sort of lending you are doing is not reliant on sale, we are reliant on demand for a rental property.
“If you look at recent data, fewer people will buy in a downturn and demand for renting increases.”
Goodall adds that it is “dangerous” for investors to lump all property lending together as a single asset class, which may become more apparent in a downturn.
Due diligence is key, both at a platform and investor level.
This will be different depending on the platform and type of security.
Bartaby says investors should look at how sustainable the repayments seem for a borrower, while Mohammadian-Molina says the LTV a lender takes in development lending is important, as is an understanding of the actual project and the exit strategy.
“Obviously lenders themselves might not have time to do all of this, so they need to make sure the platform they choose to invest with does all these steps as part of their underwriting process,” she says.
However, good understanding of a project or LTV may offer little comfort to investors if the asset cannot be sold.
“If the property market completely crashes, then LTVs will matter little,” Schaffer adds. “However, I believe the dip in the UK property market is exaggerated.
“With LTVs, it’s important to scrutinise whether an independent body has assessed what the LTV rate actually is.”
Investors can, of course, prepare themselves for dips in returns and the wider P2P market.
“Investors should aim to have good diversification in their portfolio of loans, by region, type of lending and type of property,” Schaffer says.
“Liquidity is also a consideration. There is potentially less flexible liquidity with property P2P loans.”
Beyond checking the underwriting and LTVs, Bristow says there is no substitute for track record and expertise.
“For a marketplace platform to list lending opportunities to investors, it’s not as simple as originating loans,” he explains.
“It’s assessing those loans expertly and making excellent underwriting decisions in advance of listing them on the platform.
“Expertise, security, track record and many of the other factors must come together to ensure high-quality lending opportunities are presented.
“Building a long-term, trusted brand through excellence is how a long-term, sustainable business is created, serving the interests of all parties involved – lenders, borrowers and the shareholders of the platform.”
This is a sentiment backed by other platforms. In uncertain times, specialists may become more important in the property market as investors need to separate the wheat from the chaff.
This article featured in the April issue of Peer2Peer Finance News, now available to read online.