Proplend founder and chief executive Brian Bartaby talks to Andrew Saunders about the property market, ISA opportunities and his fears of “another Lendy”.
IF PRESSED, MOST entrepreneurs will admit that starting up involves the painful discovery that they know less about what they are doing than they thought. By contrast, Brian Bartaby’s start-up experience was finding out that he knew more about the business than he realised when he set up commercial property lending platform Proplend. “It wasn’t until I got into this that I realised I was already in the property finance industry, and that I understood it pretty well,” he says.
“I am not on a crusade and I don’t think that what I am doing is an amazing new asset class – I am just repositioning something that is already well established in property finance.” That “something” is commercial property loan syndication, and Proplend’s repositioning of it is all about bringing the benefits of structured finance to underserved groups of both borrowers and investors. Loan syndication – where what the borrower sees as a single loan is actually parcelled up into multiple tranches and spread out across groups of investors – has been a well-understood part of risk management in property finance for many years, he says.
“If you have a £1bn loan, you bring in one party for the senior debt, one for the junior and another for the mezzanine. Investors like it because it provides stable income for their balance sheets with a high level of protection.” So Proplend’s USP is that it apes that structure by splitting its loans into three tranches – A, B and C – each with progressively higher loan-to-value (LTV) ratios, higher risk and higher returns to match.
“We’re one of the only platforms that have followed the institutional model – we split loans into three set-in-stone LTV tranches.
“Higher risk investors in tranche C, lower risk ones in tranche A. We do that to attract as many different types of investor as we can.” Founded in 2013, Proplend specialises in sub £5m loans secured against commercial property, a market traditionally served by high street banks. The financial crisis and its aftermath resulted in those banks exiting the market.
“I was sitting at the coalface [in 2008] when the world came to an end, watching as the landscape suddenly changed,” Bartaby comments. And while big investors scrambled to move their money into the relatively safe haven of large commercial real estate debt funds, the smaller end of the market was left high and dry.
“The bit that nobody seemed to go towards was sub £5m commercial debt – that had been 95 per cent served by the high street banks. So I did some digging and discovered that around 25 per cent of all outstanding commercial real estate debt is sub £5m loans.” His other inspiration was the technology used by pioneering P2P consumer lenders such as Zopa to bring debt investment to a much wider audience.
“They were saying, ‘Put a few quid each into 100 loans on the platform and nothing will go wrong because you are diversified.’ But each loan was still unsecured – I thought you could put some property behind that and provide a better risk-adjusted rate of return.” Fast forward to today, and Proplend has funded £78m of loans and paid £6.4m in interest – all with only one loan running into arrears, one default and no losses to investors. Growth is steady and sustainable, which is just how Bartaby likes it.
“Over the past couple of years we’ve been growing at around eight per cent per month compound, and there are still plenty of good opportunities out there,” he explains. “We have no head-on competition from platforms at the moment – competition from the borrower side come from the likes of Shawbrook and Aldermore.
Our headline rates are higher, we can transact quicker and give the borrower a better experience.” Proplend lends against property assets via an opco/propco model – so if the asset is a hotel, for example, it must be held in a separate company (the propco) from the operating business that runs it (the opco).
“We want to lend to the company that owns the asset, then if something goes wrong I am very clear about what I can get my hands on, and I don’t have to deal with staff or trading,” Bartaby says. Many of Proplend’s borrowers are refinancing existing loans – “there is £45m of outstanding commercial real estate debt in the market that has to be refinanced at some point,” he says – and changes in the oncepopular buy-to-let market have helped Proplend win new investors as well. “When we started out our biggest competitor on the investor side – for those who had say £50,000 to invest – was buy to let,” he says.
“Quite a lot of people went down the route of buying cheap flats and leveraging them up on a buyto-let mortgage.” But a combination of modest returns and low capital growth, the effort of managing tenants and increasingly tighter regulation of buy-to-let lending has seen what he calls “buy-to-let refugees” choosing to fund debt on Proplend instead. “They were getting a five per cent return on equity with a lot of hassle, but we can give them a five per cent return on debt, from their laptops,” says Bartaby.
“The bit we didn’t see coming was what the government has done with regulation around buy to let. We had no idea about that but it has played unbelievably into our hands.” Helping both those “refugees” and regular punters make more tax-efficient investments, Proplend’s Innovative Finance ISA (IFISA) has been up and running since mid-2017.
Bartaby says that while ISA season does produce a spike in spring, they see steady inflows throughout the year, driven partly by customers transferring from other providers as promotional rates end. “We can always tell when a fixed-term deal is ending with another provider, as we get a wall of money coming in from them,” he reveals. And although some commentators have expressed disappointment at the take-up of IFISAs more widely, he reckons that a gradual change is preferable to a sudden glut of funds.
“The ISA could be incredibly scary – there is £270bn [in cash ISAs] earning one per cent and not covering inflation,” Bartaby states. “But if only two per cent of that were moved overnight into IFISAs, there isn’t enough lending across all the P2P platforms to absorb it. The moment that happened, credit underwriting would go out of the window, so I’d like to see a gradual chipping away rather than a wall of money that could overwhelm the platforms.”
He adds that some customers trying to transfer into Proplend from other IFISAs are experiencing delays due to that well-known P2P bugbear, patchy liquidity. “We have clients trying to transfer ISAs in from Funding Circle and they are having to wait a considerable time, because they have to sell the loans down first,” says Bartaby.
By contrast, Proplend’s secondary market “is ridiculously liquid,” he says. “The average time it takes us to sell a loan is 10 hours. We produce a good product and people like it, but it can work against us – we have had lenders who need money but who can’t sell on Funding Circle, cash out on our platform instead. But they generally come back to us eventually once the Funding Circle loans have sold.” Thanks to a relatively high minimum investment requirement of £1,000, Proplend investors tend to be older – average age is around 54 – and fairly well-heeled in comparison with many other P2P providers.
“They are not all high net worth but we do have smaller number of investors with a high average investment,” he adds. Consequently, he is not overly concerned that the new investor marketing restrictions coming into effect next month will have a negative impact on Proplend but suggests they may present challenges for the wider P2P sector. “I have no problem with the appropriateness test, but I do think that the 10 per cent rule is slightly condescending to investors and incredibly difficult for platforms,” he asserts.
“Do you have to ask your investors what their net worth is? I don’t think the Financial Conduct Authority has thought it through.” Proplend currently operates across England, from Newcastle to Dorset, the South East and across to Wales. His plans include building a larger network of business development teams in those regions, and ultimately north of the border too. “We want to do Scotland as well, but aside from the different legal documentation, I’d like boots on the ground,” Bartaby comments.
“We meet every borrower and visit every property – that’s important.” What about the state of the commercial property market – how is Brexit impacting the sector? “We’ve been late stage for a while – personally I think we’re already in a recession. A decision on Brexit is more important than the way that decision goes – there is a huge amount of overseas money sitting on the sidelines waiting for a decision on Brexit.” So even a “bad” Brexit could end up giving the market a boost, he says.
“If sterling goes off a bit, that money will come shooting in, because what was costing them, say, a million might only cost £800,000.” And while he has observed that some “amateur” investors in commercial property – highnet-worth people with a million or so to spend locally – have been frightened off by market conditions, many professional investors believe that now is the time to buy, but wisely. “One client has done over 200 commercial property transactions since the 2016 referendum – they are a long-term professional property investor and they are buying now, because everyone else is sitting and waiting.” What does worry him? “Another Lendy,” he says, referring of course to the P2P property platform which collapsed into administration in May.
“Another platform going down would have a bigger knock-on effect than the price of property falling, because people are used to the ups and downs of the property cycle.” Bartaby says that Proplend deliberately avoids Lendy-style residential development deals involving staged drawdowns, because they are fundamentally unsuited to P2P. “Drawdowns work if you are a balance sheet lender or a bank, but on a platform you have to fund the day-one sum and then fund each drawdown on the fly.
If something goes wrong on the development and there is a delay, the investors get pissed off and they stop funding the drawdowns. Then everyone’s in trouble – it’s horrible.” Despite these inherent risks, he notes that around 90 per cent of P2P property platforms are focused on the property development space. “So when someone asks ‘How are you different from Lendy?’ they have to say it’s because they are better, which is a hard thing to justify,” Bartaby adds.
“But we can say that we don’t do what Lendy did, and the reason why we don’t is exactly because of what happened to them.” It’s another example, he says, of how in-depth industry knowledge sets Proplend apart from the crowd. “Not many of them have the property experience that we do – we’re property first, then tech. We’re not just a bunch of techies who built a platform and decided to do property.”