Property is an incredibly popular investment asset, but can it maintain its shine in the peer-to-peer lending sector after high-profile platform failures? Marc Shoffman reports
PROPERTY IS ONE OF THE fastest growing facets of the peer-to-peer lending sector, drawing its appeal from the nation’s love of bricks and mortar.
Andrew Holgate, chief executive of fintech consultancy Equitivo, says it is seen as a safe asset that provides capital growth and income, while lending through P2P helps overcome the need to directly buy, maintain and manage a property.
“You are investing in a loan against the property where the loan is much smaller than the value of the property,” he explains.
“Investors are reliant on the income stream the property generates. There is no risk of ownership, except in rare circumstances, so there is generally no risk that you will be paying for things like repairs.
“However, what you don’t get is a share in the increase of the property value; that all sits with the property owner.”
Of course, there is still a risk that things can go wrong. Investors are still uncertain how much of their money they will be able to recoup from property loans funded through the collapsed Collateral platform while Lendy clocked up mounting arrears for months before entering into administration in May 2019. This shows there are risks in P2P property lending, as with any investment.
Platforms may market themselves as secure due to the underlying asset, but there is no guarantee that a property can be sold if loans go bad or how long a recovery will take. However, there are more prosperous platforms in the market than failed ones and most investors are enjoying inflation-beating returns. So what should investors look out for when assessing P2P property lending opportunities?
There are P2P platforms for most types of property loans, from buy-to-let to bridging to development finance.
Uma Rajah, co-founder of prime development finance lender CapitalRise, says there are certain risk factors that may make some types of loans less appealing to those with less investment experience or knowledge.
“Different types of property loans carry differing risks, terms and rates of return,” she explains.
“For example, investing in buy-to-let loans might provide a regular income but a relatively low return, whilst investing in development loans can provide a higher return but may only pay out at maturity.”
Holgate highlights a particular risk in managing the liquidity for a development loan, especially if it is issued in tranches.
“As an example, a facility might be £5m in order to allow a property to be developed,” he says.
“However, only £1m is drawn on day one with the rest being drawn over a period as the build progresses.
“The P2P lender has two options, to ringfence £5m on day one to ensure funds are there, or don’t ringfence the funds but plan forwards for how the drawdowns will be funded.
“Option one is expensive, as unless the borrower is prepared to pay the full interest on all the £5m then the platform has to sit on a pot of cash that isn’t earning any income.
“Option two then looks more favourable but here is the risk. If they take a gamble that they can raise the funds as they are required but then are unable to, the borrower can’t complete the development.”
Holgate says this gamble puts investors at risk, as if they are unable to fund future drawdowns and the project stalls mid-build then the investor could be exposed to losses.
This, according to Mike Bristow, of development finance P2P lender CrowdProperty, is where good management comes in, as well as healthy demand from investors. The platform has surveyors who monitor each stage of the process and will only release funds once each step is complete, while rolling up interest so the loan and investors are paid at the end of the term or if the borrower repays early.
“Property expertise is absolutely critical,” explains Mike Bristow, chief executive of CrowdProperty. “That might sound obvious but expertise is light in a number of platforms. By expertise, it needs to be hands-on experience of doing exactly what is being lent against – it’s only then that risk is fully understood and can be actively managed through the loan lifecycle.
“Deep expertise over decades of experience through multiple cycles needs to be at the heart of the business and especially the founding team, as that creates and embeds the property culture from customer services through to the investment committee and everything in between.”
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He says the underlying property should be covered by a first charge security that is valued based on both the loan-to-value at the start of the project and the loan-to-gross development value – which is what it should be worth once complete.
“These metrics are very important to understand at the loan level and at the platform level, defining the resilience of the loan book. If statistics pages do not show this, questions should be asked,” he says. Beyond security, Rajah says it is also worth asking what is at stake for the actual P2P platform if an investment goes sour. Many platforms will put money into loans alongside investors.
“If management are willing to put their money where their mouth is and invest alongside the crowd, that’s a strong demonstration of confidence and integrity,” she says. It is all very well ensuring that investors know how P2P platforms will fund and manage a new loan, but the performance of the platform’s loanbook can also provide a good indication of its health.
From December 2019, as part of the Financial Conduct Authority’s (FCA) review of the P2P sector, all platforms will have to make their default and performance data more accessible. “As a minimum, when considering a P2P investment platform, investors should ensure the platform’s underlying loanbook only focuses on high-quality real estate and has no late repayments or defaults,” Rajah says.
“Once they can confirm that a platform’s lending track record is good, they should be looking for full due diligence behind each of the investments on offer, and the more detailed the better.”
Holgate says investors should ask or be told what a P2P platform’s recovery processes are, who they use to help them and what their success rate is on recovering funds from previous bad loans. Another issue on the FCA’s review list that will give an idea of the risk for individual investors is pricing. Its review said investors should be able to access data on the rates and fees borrowers are paying, although it has not set out how this should be displayed. Many platforms agree with and already back this level of transparency.
“We offer full transparency on any spread between investor and borrower rates in our investor terms and conditions and think it’s very important for investors to understand this,” Rajah says.
“The rates we charge borrowers and returns we offer investors always correlate with the determined level of risk associated with any opportunity.”
Brian Bartaby, founder of commercial property P2P lender Proplend, says an investor has no way of understanding the risk they are taking if they don’t know what rate the borrower is paying.
“Some platforms are paying their lenders five per cent, which a lender will assume is a lower risk investment, but the platform then lends that out at 20 per cent – that’s not a low risk investment,” he states. “Platforms must be more transparent.
“We show our lenders who the borrower is, what the property is, who the tenants are and how much rent they are paying so they can make an informed decision.” All this due diligence and transparency is key, but how does the time and effort compare with other forms of property investing such as buy-to-let or investment funds?
P2P investors can get returns ranging from three to 12 per cent depending on the type of loan being backed.
In comparison, the average buy-to-let yield is between four and five per cent, according to estate agents Your Move.
Investors in property funds have seen returns of 2.5 per cent over one year and 13.2 per cent over three, according to Investment Association data.
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Bartaby says the biggest weapon P2P lending has over other types of property investment is control.
“Once you have invested in a fund or syndicate then the asset or fund manager is the one making the investment decisions,” he explains.
“With a P2P platform you can either set some lending criteria in an auto-lend product or pick and choose the projects yourself.”
Bristow adds that the tax system is more punitive for direct property investment as second home buyers now have to pay extra stamp duty and have seen allowances scaled back.
Meanwhile, Rajah explains that property funds tend to charge higher fees and offer lower returns, while providing less detail on the underlying assets.
P2P property lending is a broad church, with the onus on investors to do their own due diligence and choose the platforms – and risk level – most suitable for their requirements. However, if you are willing to put the effort in and build a balanced portfolio, it can open the door to decent returns.