Frazer Fearnhead, founder and chief executive of The House Crowd, makes the case for including P2P property loans in your pension portfolio
IT HAS ONLY BEEN THREE years since peer-to-peer investments were granted ISA status, but now a new tax-free wrapper beckons: the Self-Invested Personal Pension, or SIPP.
The multi-billion-pound SIPP industry allows individuals to invest up to £1m within a pension portfolio over the course of a lifetime, where it will be sheltered from taxation until the investor reaches retirement. While most types of investment can be held within a SIPP, there is one notable exception: residential property.
Unless, that is, you open a SIPP with The House Crowd. “With our offering, the investor is not actually purchasing the property, they’re making loans to a third party developer,” explains Frazer Fearnhead, founder and chief executive of The House Crowd.
“Our SIPP provider has done a lot of due diligence on us and seen the sorts of developments that we do and they are comfortable allowing their clients to invest in those.”
The House Crowd’s SIPP customers choose the properties that they wish to lend to – these can be either residential homes or buildings that are still under development. Most of these loans have a term time of between 12 and 18 months, and target returns of between eight and 10 per cent. Alternatively, they can choose an auto-invest product which automatically diversifies capital over approximately 20 different development and bridging loans.
Once the loan matures, the interest and capital is returned to the SIPP pot, and it stays there until it is reinvested in the next suitable property.
For many pension savers, this is an ideal solution, as they can diversify their portfolios while also accessing the higher target returns that come with the property sector. But The House Crowd is adamant that its investors should use its SIPP as a diversification tool only, and not as a catch-all pension fund.
“We tend to attract older, more sophisticated investors, but we are constantly telling them not to put all their eggs in one basket,” says Fearnhead. “With the best will in the world something can always go wrong with a particular investment and it’s going to affect you a lot more severely if you’ve put all your money in one place.”
The House Crowd is committing to this message by expanding its existing auto-investing model to three separate products so that investors can choose their own level of risk and reward.
“We undertake full due diligence, even if the development is one an associated company is developing.” he says. “We do everything from checking the borrower’s background, evaluating the site, having a full RICS valuation, analysing the borrower’s exit strategy including the market liquidity and conducting feasibility studies. Our quantity surveyor will also analyse the construction costs down to the last nut and bolt.
“We employ a fund manager who checks the valuations, and these are signed off by both our lawyer and our chief finance officer before any money is drawn down by the developer. We then have fortnightly meetings to go over the progress of each development.”
Fearnhead believes that there is a place for property investments in pension funds, and he is clearly not alone.
“People should be given a choice for what they invest in with their pension as long as they are aware of the risks,” he says. The House Crowd’s growing catalogue of SIPP investors suggests that clients agree.