Peer-to-peer property lenders have managed to find new opportunities amid the Covid-19 crisis, Michael Lloyd reports…
In the evening of 23 March, when Boris Johnson addressed the nation to announce a Covid-19-induced lockdown, executives of property-backed peer-to-peer lenders were waiting with bated breath to discover how this ‘new normal’ would affect them and the market in which they operate.
They knew that this announcement would bring the housing market to a sudden halt, with people unable to view properties and move home, and construction projects all but abandoned. They were right to be concerned.
Lockdown led to an unprecedent slump in housing transactions, while house prices dropped. According to the Nationwide house price index, annual house price growth slowed from 1.8 per cent in May to -0.1 per cent in June, the first time that annual house price growth was in negative territory since December 2012.
By the end of April, most major housebuilders were resuming building activities, and by mid-May, socially distanced property viewings were permitted.
Most remaining restrictions were lifted on 23 June, but regional lockdowns, consumer caution and financing issues have changed the face of the property sector – at least in the short term.
Read more: Property development during the pandemic
“During the initial stages of the pandemic and the lockdown everything kind of froze because there was so much uncertainty,” says Yann Murciano, chief executive of property-backed P2P lending platform Blend Network.
Platforms like Blend have adapted to the best of their ability and some have even been able to identify new opportunities amidst the crisis. Some have reviewed their business models and tightened their lending criteria, while many platforms threw their support behind small- and medium-sized enterprise (SME) property developers, carrying on lending and offering payment holidays during construction delays.
Despite the economic uncertainty, some property lenders thrived during the lockdown months.
By the end of June, CapitalStackers had repaid £1.4m to investors, while Blend Network returned more than £2m to its lenders after it achieved a record May, June and July.
Meanwhile, Nexa Finance recorded its busiest few months since its launch in August 2019, and CrowdProperty surpassed £80m lent to SME developers.
These platforms have filled the gap left by the more mainstream property lenders, as they pulled back or tightened their lending criteria.
In fact, some of these alternative property lenders believe it’s a safer market to operate in, especially in this uncertain time.
“In my view property is safer,” says Mike Bristow, chief executive of CrowdProperty.
“Property has enduring value, especially residential which is a secure asset class.”
But not all property-backed P2P lenders have been so optimistic about the new opportunities in the property market.
In March, Octopus Investments froze all transactions at its property-backed P2P lending platform, Octopus Choice, including investments and withdrawals. The platform said this was to protect investors after seeing a higher volume of lenders trying to sell down or liquidate their investments.
At the start of May, RateSetter – which originates some residential property development loans alongside unsecured consumer finance – halved interest rates for all investment accounts for the rest of the year, in response to the economic uncertainty caused by the coronavirus.
Buy-to-let and bridging lender LandlordInvest experienced a spike in the number of lenders looking to sell loans in its secondary market in March, and in response, the platform added a discount option so lenders could sell loan parts at up to 20 per cent below par value.
In March, Assetz Capital closed its platform to new retail money for a few months because of market uncertainty and in May it introduced a temporary fee of 0.9 per cent per annum for all of its investors to help plug a drop in its income due to the pandemic. This fee was extended in June, and the interest rates were cut on its three auto-invest accounts.
“It’s working to a great degree,” says Stuart Law, chief executive of Assetz Capital.
“We were expecting a big economic impact to arrive for the past few years, so in a way although it’s worse than we thought, we’re getting there and the team is resisting the reality of the virus and attempting to return as quickly as possible to business as usual.”
It is worth pointing out that the above-mentioned platforms tend to focus on residential property loans, which are relatively robust. Commercial properties are a different story.
Commercial property landlords have been badly affected by the temporary collapse of the retail and hospitality industries, as well as the remote working revolution which has seen the majority of companies working from home, rather than in offices. According to an August investor update, commercial property P2P lending platform Proplend saw its defaults rise in July with four loans in realisation due to exits through refinance or sales taking longer under current market conditions.
However, Proplend’s chief executive Brian Bartaby says his platform has plenty of good loans – some by luck and some by judgement – and the lender was proactive in talking with its at-risk borrowers early and throughout the crisis.
“Other platforms have stopped lending, closed their secondary markets, gated lenders withdrawing cash, added different fees to borrowers or lenders and halved interest rates for investors,” Bartaby says. “That’s not great. We haven’t and we kept on doing what we said we were doing.”
While there are still concerns about the commercial property sector, new opportunities are also beginning to emerge. Some industry stakeholders have pointed to the rising need for warehousing for online deliveries, which could create a new source of revenue for commercial property lenders. And the government could soon intervene with grants for the retail, hospitality and leisure sectors.
Trade associations have been in talks with ministers for a property bounce-back grant whereby the government would pay up to 50 per cent of the rent and service charges owed by businesses in these sectors for the six months between March and September. This could retroactively mitigate some of the losses experienced by commercial property platforms during an extraordinary and unpredictable period.
Overall, P2P property lending platforms have had to adapt as best they can, assessing the risks and how to mitigate them. The results of their strategies are already being seen. When lockdown restrictions were lifted on 4 July, those platforms that were able to weather the previous few months were rewarded with some much-needed good news.
Figures from Nationwide’s house price index for July showed the pent-up demand being unleashed into the marketplace. House prices rose by 1.7 per cent in July, following the 1.6 per cent fall in June, and annual house price growth recovered from -0.1 per cent the previous month to 1.5 per cent in July.
At least half a dozen platforms reported a rise in enquiries following the easing of restrictions.
“There has been a marked improvement in activity in the past three months with many buyers looking to buy new houses post lockdown,” says Neal Moy, head of property finance at RateSetter.
“The general sentiment is that this is a combination of the pent-up demand from earlier in the year, and people reassessing their housing requirements having been in lockdown or working from home.”
Property P2P lending platforms received another boost from the government with a cut in stamp duty. Chancellor Rishi Sunak raised the tax’s threshold on the purchase of homes up to £500,000 in England and Northern Ireland until 31 March 2021.
“That has certainly helped,” says Stuart Law. “The overall market is performing a lot better than it had been.”
Perhaps this is the time for property-backed P2P lenders to truly carve out their share of the property market. High street banks are busy with Covid-19 and distributing emergency loans to firms that need them.
An EY Item Club Interim Bank Lending Forecast has predicted bank lending to reach a 13-year high this year. With banks busy elsewhere, they may not have the money and lending appetite for as much property lending as they previously did and are likely to reduce their share of this market, to the benefit of P2P lending platforms.
“Banks will do some property lending, but it will be down significantly,” predicts Law.
“The opportunity to fund property will be a lot greater going forward and I think those that do will have a field day over the next few years.”
There will also be opportunities to acquire properties and loan portfolios at a significant discount, compared to pre-Covid-19 levels.
“There’s still a substantial opportunity in property,” says Atuksha Poonwassie, managing director of Simple Crowdfunding.
“I think P2P property lending will increase and the opportunities will rise substantially too.”
Permitted development changes were introduced by the government on 31 August, which make it easier to extend existing properties or knock down commercial properties and build residential homes in their place.
Making the planning process easier will be of great benefit to SME developers – and the P2P lending platforms that back them.
“We’re expecting a lot more sales and development to take place under permitted development,” says Poonwassie.
The pandemic has also brought upon the opportunity for platforms to recruit more investors. With stock market volatility and an all-time low base rate hitting the traditional savings and investment markets, P2P property lenders stand apart by offering stable, fixed returns.
Ultimately, pandemic or no pandemic, the country is still suffering from a housing crisis, with a huge undersupply of homes. The need for new housing is unlikely to go away any time soon, even if the property market experiences a few dips along the way. For property-backed platforms, the economic downturn represents a huge test. But for those platforms which are savvy enough to spot new opportunities in the market, the benefits are clear.
If platforms can maintain investor confidence, a strong credit policy and a steady flow of high-quality borrowers during the current economic crisis, the future of property lending will belong to the brave.