Peer-to-peer property lending risk can be difficult to understand, but Brian Bartaby, founder and chief executive of Proplend, believes he has cracked the code
RISK is unavoidable in any investment, and most peer-to-peer property platforms have made it their mission to reduce the risk to their investors as much as possible. But Proplend takes a slightly different approach than others. For this platform, commercial property risk is as easy as (tranche) A, B, C.
Proplend created a three-step risk structure on behalf of its investors. The platform has split its loans into three loan-to-value (LTV) based structures. Tranche A offers loan investments up to 50 per cent of securing property value; tranche B is up to 65 per cent; and tranche C is up to 75 per cent.
“Risk is the likelihood of being repaid on an investment you’ve made,” explains Brian Bartaby, founder and chief executive of Proplend.
“Where you’re lending money and it’s secured against a property, the higher up the capital structure you sit, the more you should be rewarded for relatively higher risk you’re taking.
“We price risk with the borrower on the whole loan,” he continues. “The interest rate we agree is a reflection of who the borrower is, what the property is, where it is, who the tenants are – the usual metrics.
“If we’ve got somebody who’s a pension or ISA investor for instance, with quite a low-risk appetite, they can invest in tranche A of any loan and their investment is limited to 50 per cent of the property value. This value can fall by up to 50 per cent and their investment capital is still OK.
“Similarly, we have tranche B at 51-65 per cent LTV, and our top tranche C at 66-75 per cent. All tranches would be OK if the property fell by 25 per cent, but if the value fell by more, tranche C investors would take a loss first, before B and then A. An equity investor would of course take a loss before any of our debt investors.”
So far, Proplend’s system seems to be working out well for their investors. The platform has never listed a loan where the borrower has failed to repay capital in full and they haven’t had any investor losses.
And Bartaby says that Proplend’s investors are comfortable with the system should the first legal charge need to be enforced.
“They know exactly what level of risk they’re taking,” he says. “We can explain it very simply to them and they know what value buffer they have.”
Explaining risk in simple terms has often eluded P2P platforms but Bartaby is confident that Proplend has cracked the code.
“It’s difficult for P2P investors to actually get to the bottom of the risk that they are taking when they lend their money,” he says. “We took a different approach to the other platforms and our investors are very happy with it.
“We just decided that we were going to be open and transparent about it and share our formula so that everyone understands.
“People value this clarity and transparency.”
Click here for more information on Proplend.