Carl Davies, chief operating officer at The House Crowd, explains why secured property loans can help investors ride out the Covid-19 storm…
“Unprecedented” seems somewhat of an understatement for what is currently happening to the economy. The government-imposed lockdown is intended to save lives and reduce the burden on our NHS. It is all about “flattening the curve”. But in doing this we have also created an ‘economic chasm’ and for once it is not property that is the root cause.
On the contrary, this is time for property – and property investments – to come to the aid of beleaguered investors and bridge the chasm that other asset classes might struggle to achieve. How? We are in the middle of a recession that will not see a return to any semblance of normality until at least September 2020.
Universal Credit claims have risen by over one million in the last few weeks, even with the furlough provisions in place. Demand will be hit in the short term and ratings agency Fitch has downgraded UK debt to AA-. However, Fitch also estimates that growth next year (2021) will bounce back to three per cent if the UK can begin to unwind the measures to tackle the health crisis in the second half of 2020. So, the fundamentals that excited us all after the election of December 2019 still remain.
At The House Crowd, we saw new borrower enquiries for both bridging and development loans accelerate significantly in late 2019 and early 2020. Since the lockdown, developers being the speculators they are, are cautiously optimistic about the opportunities ahead. So much so that enquiries have risen steadily through late March and early April, somewhat counter intuitively. When we come out of the other side of this crisis, there will still be a housing shortage.
Demand will still exceed supply. When this happens the laws of economics still prevail. In a recent survey, realtors Knight Frank said that although many house sales will be lost this year, it expects the upturn seen in early 2020 to continue, with volumes next year expected to be 18 per cent above the level seen in 2019.
Gross development values on current projects should therefore hold firm and – providing valuations were prudent and based on today’s numbers – projects in progress now should still sell at the planned prices. If peer-to-peer investors and borrowers work together and recognise that delays are inevitable and projects are not penalised, securitised debt products in property will perform in line with expectations.
Should any developers unfortunately fall by the wayside, then lenders can either step in and finish the projects or sell them on, therefore safeguarding investors’ capital. This absence of a safety cushion, together with the more volatile and liquid nature of global equity markets, meant that investors in these assets have been severely hit. Hopefully, many investors were well diversified. It is not only current projects that should be secure but also future projects.
As long as they are well curated with realistic valuations and a clear credible exit strategy, run by experienced developers with an excellent track record and carefully monitored by experienced lenders, then they should provide excellent secure returns for investors in senior debt. This return can be even better if they are wrapped within an Innovative Finance ISA and returns compounded. It may be possible to P2P property lending to then fill the chasm, not just bridge it.