Michael Lloyd explores the latest emerging trends in the peer-to-peer property sector, how regulation continues to affect platforms, and what the future holds in these uncertain times…
Property-backed peer-to-peer platforms may have only been around for a less than a decade, but loans secured against property have existed for hundreds of years. For many, this makes property P2P the perfect combination of the old and the new – offering a traditional financial service with a modern spin. However, times are changing – and fast.
A rapidly-changing regulatory environment and global economic uncertainty threatens the growth of the UK’s property market. And, in the middle of this, the sector is expected to evolve faster than ever before.
Towards the end of last year, the Financial Conduct Authority (FCA) announced that everyday investors could not put more than 10 per cent of their portfolio into P2P, as part of a range of new marketing restrictions. The regulator also strengthened rules relating to transparency and wind-down plans.
“It’s had a huge impact, but for the better,” says Andrew Holgate, chief executive of Equitivo.
“The changes are primarily to protect investors, but it has forced platforms to become more professional and more conservative.”
All P2P platforms now have to be fully transparent about their loan book and historic performance, as well as putting in place controls around risk management and valuations.
“The new rules are a big step in the right direction and should help to build a more mature industry,” says Charlie Taylor, head of Octopus Choice. Other platform leaders seem to agree.
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Yann Murciano, chief executive of Blend Network, believes the regulations have brought a lot more confidence and trust into the sector. He says that despite the new stricter rules, the market has a real appetite for P2P lending, particularly property-backed P2P lending.
“Within a volatile, late-cycle market environment, investors are looking for yield and they see P2P as offering a decent yield secured against physical property,” Murciano says.
Similarly, Filip Karadaghi, co-founder and chief executive of LandlordInvest, explains that regulation has not caused much meaningful change. In his view, the worst offenders had already collapsed and the remaining professional platforms already had a range of protections in place.
“I’m sure on a general level it will change as fewer retail investors will be likely to use the product,” he says.
Across the board, property-backed P2P lenders seem to be mulling the possibility that their investor base is likely to skew away from retail money in the future. Taylor argues a much greater proportion of P2P investment will go through financial advisers.
Meanwhile, Carl Davies, chief operating officer of The House Crowd, says that – although the regulation is overall positive – it has dulled the entrepreneur’s enthusiasm for this market. “These are not things which typically excite an entrepreneur,” he says.
“However, it has meant that everyone has to raise their game.”
And doing so is apparently no bad thing. Last year saw the devastating collapse of property-backed lender Lendy, leaving dozens of investors out of pocket. Unsurprisingly, Lendy’s failure dominated the headlines, and almost certainly damaged the reputation of the property-backed P2P sector as a whole – at least among risk-shy retail investors.
Davies points out that without certainty of retail funds, institutional lines will be needed to give borrowers confidence that platforms can deliver.
“These funds will be hard to find until the platform is well-proven,” he says. “Thus, a catch-22 situation exists.
“Apart from those platforms that have folded, many players are shying away from retail investors because of the additional regulations and/ or the hassle that inevitably arises from inexperienced investors experiencing delays on property related loans; especially higher risk loans such as property development rather than bridging loans.
“Smaller, less profitable platforms will need to be very well capitalised to survive.”
This means that, in order to survive, platforms must be prepared to innovate. For example, some P2P property platforms are focusing more on auto-invest products.
“The big advantage of auto invest is it gives diversification,” says David Genn, chief executive of Goji, the investment platform technology provider.
Meanwhile, The House Crowd’s Davies explains that investors will always want the ability to self-select, which is not a problem for sophisticated and high-net-worth investors. However, he adds that vulnerable and inexperienced investors need to be protected from themselves whilst still being given the opportunity to make the attractive returns that property investment can offer.
“Diversification is the key to this and auto-invest is the mechanism that delivers it,” Davies adds. “In my opinion it is the best way forward for investors.”
Holgate also believes there will be a general trend towards auto-invest.
“It seems the FCA would prefer this model,” he notes.
“They want to protect investors by encouraging diversity across risk levels.” Other types of innovation might come in the form of enhanced tech capabilities, or a pivot towards another type of business model altogether.
“Innovations are hard to come across,” says Holgate. “Perhaps there is better use of technology for data gathering to support due diligence and monitoring, but otherwise lending operations are pretty consistent.”
Over the past year, several platforms have opted to exit the retail investor market altogether.
Landbay and ThinCats have already pivoted towards an institutional investment model, and there has been speculation that some smaller platforms may be open to mergers or acquisitions.
“Other platforms have exited the market as well so I wouldn’t be surprised to see a few more do the same,” says Goji’s Genn.
“New regulation has raised the operating bar for these platforms which may well drive consolidation.”
Neal Moy, head of property finance at RateSetter, agrees that consolidation is inevitable, but he predicts that it may be a case of unsustainable platforms failing, rather than being taken over.
But despite the current uncertain economic climate, property-backed P2P platforms are forecasting a bright future.
Industry stakeholders such as Genn believe that P2P property platforms have made it easier for a new generation of investors to access a wide variety of property development loans and investment opportunities and this looks set to continue. “There’s a strong future for P2P property as it’s an asset class people want in their portfolio,” he says.
“As long as platforms continue to deliver strong customer service and strong underwriting, it’s a sector that will still stick around.”
Meanwhile, Murciano believes that P2P lenders are feeling a lot more secure and protected in the wake of the latest FCA rules, which hold platforms to a higher standard of compliance.
“Hopefully in the future we will see platforms being a lot more responsible in the way they assess risk and carry out their due diligence process, all for the benefit of lenders,” he says.
One thing that all platforms can agree on is that despite the many changes and challenges that the sector has lived through, there is more to come.
The coronavirus has introduced a wild card element to the sector – just weeks after the much lauded ‘Boris Bounce’ in the post-election property markets, leading to fears that property prices could drop again. While the majority of property-backed platforms cap their loan-to-value (LTV) at 75 per cent or less, these are unusual times and the threat of a new recession could result in a squeeze on the UK’s property market.
Any significant fall in valuation can put investor capital at risk, and platforms will no doubt be focused on protecting their investors, even while offering much-needed support to the property development industry.
But this is a challenge which property lending platforms are likely to embrace. After all, this is a sector which prides itself on seeking innovative solutions to complex financing problems, and prioritising risk management every step of the way.
“There are exciting times ahead,” says Davies. “We want to help solve the UK’s housing crisis, democratise property investment and offer the younger generations the chance to save for their future in products such as the Innovative Finance ISA.”
It remains to be seen how the P2P property sector will weather the challenge of the months ahead.
But these platforms’ commitment to the future puts them in a great place to use their innovation, technology, and expertise to bring an ancient investment class into the 21st century and beyond.