How does peer-to-peer investing stack up against other routes into the property market? Hannah Smith reports
PROPERTY IS ONE OF the busiest segments of the peer-to-peer lending sector, with platforms for most types of property loans, from buy-to-let to bridging to development finance and soon, residential mortgages. In an increasingly crowded sector, how can investors choose the right platform? And is P2P lending really the best way to access property?
While some of the largest P2P platforms offer a mix of property and other types of lending, there are plenty of specialist, property-only platforms. Some lend against properties that are making rental returns, offering finance for commercial or residential buy-tolet mortgages, for example. Others finance property development or bridging loans, which are higher risk as the properties may not yet be generating an income, and investors have a higher chance of not getting all their capital back.
How the returns compare
The returns on offer vary because of the different specialties but, here are some actual returns from a handful of platforms last year:
- CrowdProperty investors earned an actual return rate of 8.02 per cent in 2018 on its development loans.
- Landbay’s fixed rate offering delivered a 3.49 per cent return after fees and bad debt, while its tracker returned 2.48 per cent plus Libor for lending to buy-to-let landlords in 2018.
- The House Crowd says its average interest rate was eight to nine per cent from its bridging loan portfolio in 2018.
- Proplend saw an average return last year of 8.03 per cent across all of its commercial property loans.
In comparison, the best performing investment trust in the UK residential sector was GCP Student Living Plc, which returned 7.3 per cent last year. The best performing real estate investment trust (REIT) by far in the UK commercial sector was the LXI REIT, returning 21.5 per cent last year compared to a negative average return of –1.75 per cent for the peer group.
The best open-ended fund in the Investment Association UK Direct Property sector last year was the Scottish Widows HIFML UK Property fund, returning 7.8 per cent against a sector average of 3.38 per cent.
Meanwhile, BondMason data shows that the average private landlord received just under eight per cent returns last year, while returns from investing in corporate landlords (including the UK’s largest listed residential property rental companies) were just over 12 per cent.
P2P vs REITs
P2P’s advantages over REITs include greater transparency and more freedom to choose underlying investments, explains Frazer Fearnhead, chief executive of P2P property platform The House Crowd. He also points to an important downside of REITs: fee structures which can eat into returns.
“REITs can have several layers of fees that are deducted before the investor receives their return and they have been criticised for lining the pockets of the institutions and intermediaries rather than benefiting investors,” he says.
“REITs’ main advantage is a high level of diversity, which mitigates risk, but with auto-invest products, P2P lending can also offer this.”
Another advantage of P2P property loans is that they typically operate on a first legal charge basis, meaning investors are at the front of the line to be repaid in the event a borrower defaults and property is repossessed.
P2P makes investors less susceptible to any fall in market values because it doesn’t invest for capital growth. But this is also one of its main drawbacks: it doesn’t offer investors exposure to rising property prices, surely one of the main reasons to invest in the sector? Fearnhead argues the fact it is not dependent on capital growth to deliver returns is actually a positive thing.
“The higher returns can be reinvested and compounded, which is a more certain way to build long-term value as opposed to speculative capital growth in the value of a property,” he states.
The ability to diversify widely without the hassle of owning properties makes P2P very attractive, adds Mike Bristow, chief executive and co-founder of P2P property lender CrowdProperty.
“For the same pot of cash to put a deposit down on a buy-to-let property, you can be in hundreds of loans,” he says. “That’s got to be less risk. Plus, owning a property is a lot of work. P2P platforms offer hands-free ways of participating in property.”
Lendy casts a shadow
Despite the sector’s selling points, there is still the risk that any individual P2P platform could fail. The recent collapse of Lendy cast a shadow over the sector and perhaps served as a sharp reminder to investors of the risks involved. The platform had offered bridging and development loans, tempting investors with the promise of 12 per cent annual returns. It fell into administration in May following months of speculation about mounting arrears and disputes with defaulted borrowers.
To minimise the risks of a platform collapse, investors should choose a P2P provider with a solid track record run by experienced people, and look closely at the rates on offer. “Disclosure and transparency are very important in terms of the type of lending they’re doing and the rates borrowers are paying, which is still the best indication of risk,” asserts John Goodall, chief executive of P2P buy-to-let lender Landbay. “A higher rate doesn’t necessarily make it a better proposition, as we have seen recently with a property platform failing. The higher the rate people are receiving, the higher the risk, that’s the back-of-the-envelope rule.”
In addition, investors should approach any P2P lending not as a liquid investment, but as a medium- to long-term investment, he adds.
The move into home loans
Countering some of the negative press around the failure of Lendy, innovation is happening in the space as some platforms look to tap into new areas of growth. For instance, following Financial Conduct Authority (FCA) rule changes, P2P platforms will be regulated under home finance rules. JustUs is one platform that is moving quickly to take advantage of this new opportunity by entering the residential mortgage market. It expects to see huge appetite among investors for P2P residential owner-occupied mortgages, despite some industry commentators suggesting these are unsuitable products for the P2P sector due to their very long duration.
Could other platforms follow in JustUs’s footsteps, and would this be a good thing for the sector? CrowdProperty’s Bristow thinks that more competition is better for borrowers. However, his view is that P2P platforms can better add value by specialising in complex property development projects.
Home loans, by contrast, are “vanilla finance” which need to be institutionally backed, so it isn’t necessarily a good fit for P2P lenders. “It’s relatively commoditised lending, you can do a lot of it on algorithm, and that means it suits large players with no cost of capital, it suits banks,” he comments.
Landbay’s Goodall says that investors must make sure they understand the underlying asset before they invest. “It’s a different asset class,” he asserts. “Rates are quite low, they’re long duration loans, we don’t feel they offer the same risk/return as buy to let, we view them as potentially slightly riskier. They’re generally higher loan-to-value at the point of origination and arrears on buy-to-let are around half that of residential mortgages. So choice is always a good thing but people really need to understand what they are investing in.”
As more property specialist platforms enter the marketplace, what does the future hold for the sector? Will there inevitably be some consolidation among the smaller players?
“Cream always rises to the top,” say Bristow. “I don’t think there’s necessarily going to be a big buying spree by people in the sector. I think there will be natural failures and I don’t mean failures like Lendy. I think there will be platforms out there that don’t deliver for various reasons.
“They’re not operating with the best practice. They don’t know the asset class that they’re lending against, and the capital will move away from those guys and go to the best.”
While there may be new market entrants, there are also those which are pulling back from the P2P property space. For example, direct lending investment manager BondMason announced in May it was winding down its P2P offering, preferring to focus on corporate listed landlords. Chief executive Stephen Findlay noted smaller ‘accidental landlords’ have been hit hard by recent tax and regulatory changes, causing many to either sell up or scale up and become a limited company. In P2P, meanwhile, an influx of institutional capital has reduced the returns on offer. Both of these trends make the larger, listed landlords look more attractive in comparison.
“I think the P2P model can and does work, but not for all operators,” says Findlay. “What we found was that the returns available in that space are continuing to decrease as more institutional capital is moving into the sector and, with our fees on top of the platform fee, we didn’t feel that the risk-adjusted return was commensurate with the risk our clients were taking.
“It was a difficult decision to make as a company but we thought it was better to make a mistake by coming out of the market too early than too late.”
The dynamics of the property market are shifting as regulatory changes begin to feed through into profits, and players enter and leave the space. But, despite the headwinds, investors’ appetite for property appears undiminished, whichever route into the market they choose.