Peer-to-peer property lenders are facing their biggest test to date. Michael Lloyd reports…
The phrase ‘survival of the fittest’ has never been more pertinent than right now. The Covid-19 crisis has caused challenges for companies in a variety of sectors, including peer-to-peer property lending platforms. The pandemic has led to liquidity issues, difficulties with funding and the temporary closure of the property market, which is still struggling in some areas despite a gradual recovery.
P2P property lending platforms have all this to contend with and some will have to adapt to survive, whether it be via consolidation or restructuring, or by looking elsewhere for new funding options.
The property market has witnessed a boom since lockdown restrictions were lifted, but Covid-19 has left its mark. Valuers are being understandably cautious on bridging and development projects and this is generally a tough period for property lenders, with several either exiting or retracting from the market. Mortgage valuations are slow, loan-to-values (LTVs) are reducing, and valuations are often downgraded, making timely redemptions more difficult.
“Recovery is also hampered by the moratorium on eviction notices,” says Carl Davies, chief operating officer at The House Crowd.
“Equally, investors are showing more caution as the effects of the pandemic are as yet unclear.”
And even if the market is improving, this may be at a cost of future growth. According to HMRC, residential property transactions month in August, boosted by the stamp duty holiday and pent-up demand from the nationwide lockdown earlier in the year.
“Are people deciding now to save on stamp duty and is that eating into future potential transaction volume or is that reflective of low transaction volumes over recent years?” Mike Bristow, chief executive of CrowdProperty, speculates. “And furthermore, there are immense challenges of unemployment and how will that play out over the next few months.”
Meanwhile, the commercial market has encountered different challenges, with some parts performing well and others – such as office space – struggling. “Logistics, last mile delivery, supermarkets, convenience stores and pharmacies are doing well,” says Brian Bartaby, chief executive of P2P commercial property lender Proplend. “We have a varied loanbook across lots of asset classes.”
Some P2P property platforms have reported a slowdown of late, which can be attributed to Covid-19.
Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding, says “business is a little slow” at the platform and her team has been reviewing its loans. “We still have lots of interest and projects we’re doing,” she says. “We’re not funding the whole development, it’s taking longer funding parts of it. We’re double checking the runway.
“It’s taking a longer time to get projects funded because we’re currently not providing an underwriting facility.”
At present, a huge question for platforms is liquidity and how well-capitalised they are. Simply put, if platforms are not well-capitalised then any slowdown in activity means they will have to eat into their reserves.
“If reserves are slim then the cliff edge is quite close,” says The House Crowd’s Davies. “Hence the Financial Conduct Authority’s focus on capital adequacy and strengthened governance.”
Low capitalised, non-profitable platforms might decide to leave the sector while others may have very low costs or are so new that they were expecting to make losses for years to come anyway. For them, 2020 will merely slow their start-up phase.
Meanwhile, larger P2P property lenders include a mix of firms that are already profitable as well as those that are not, and those that are not still need to seek capital from investors in their own businesses until they have stabilised.
“With an unprecedented 20 per cent plus crash in the economy in the first six months – the worst recession in 300 years according to the Bank of England – it seems likely that downsizing will occur at some platforms and winding down at some others,” says Neil Faulkner, managing director at P2P analyst 4th Way. “If closures occur, more of them will be small platforms – but that is to be expected anyway because there are more of them.”
However, Filip Karadaghi, chief executive at buy-to-let and bridging lender LandlordInvest, believes there is no correlation between the size and finances of a company and claims that what matters is how well a platform is run. Last month, his platform broke even for 2020 without charging any additional fees, after spotting an opportunity to offer second charge lending to developers that have received loans under the coronavirus business interruption loan scheme (CBILS).
He now predicts a small profit for the year. “There’s no correlation between size and finance,” Karadaghi says. “There seem to be lots of companies solely focused on growth and a crisis actually shows who’s sustainable and who’s not.
“We’re very efficient, have never relied on raising money externally to fuel our growth and we’re focused on solid growth rather than high growth. At some point we’ll switch to high growth.”
Despite the size of a platform, being well-capitalised is essential and prepares businesses for unprecedented situations. Another lockdown, for instance, would mean that redemptions would become very difficult, as underlying borrowers cannot refinance or sell their underlying assets. This could have serious implications for P2P platforms which do not have adequate liquidity to survive. A lack of diversification could lead to platforms falling by the wayside.
Several have already stopped lending and if a lender is not well-capitalised, it is harder to bring money in.
“A number of lenders have paused lending and not just less capitalised ones, many well-capitalised lenders have too,” says Stuart Law, chief executive of Assetz Capital. “I think a number of lenders won’t work well through the current conditions.”
Therefore, some platforms must adapt to the crisis, undergo partnerships or consolidations, and diversify their funding lines. Platforms with a mixture of funding sources, such as retail, family offices, high-net-worth and institutional investors are better placed than those which rely on only a few sources of funding.
“Diversification is key in times like now,” says Yann Murciano, chief executive of Blend Network. “Platforms like ourselves that have a very diversified lender base are in a much better position.”
Retail lending itself is also very diversified and often proves better in a crisis than institutions who may pull out due to market uncertainty.
Lee Birkett, founder of JustUs, knows all too well of the dangers of relying solely on institutional backing – having experienced this in a previous business.
“Retail is the backbone of P2P,” he says. “Private investors provide liquidity. Those reliant on institutional funding can become stuck if their funding dries up.”
Another way to mitigate problems is to restructure to avoid administration. Alternative property development lender and former P2P platform Wellesley Finance has opted to restructure via a company voluntary arrangement, or CVA.
The platform is planning a restructure after facing liquidity issues due to the coronavirus and a changing regulatory environment that made it more difficult to raise funding through the issue of listed bonds on Euronext Dublin. Creditors have backed Wellesley’s CVA proposal, which will support a restructure where the property lender will no longer be open to retail investors.
Andrew Turnbull, director of Wellesley Finance, recently told Peer2Peer Finance News that the platform will be “much smaller”, creating a “much more simple, straightforward, less expensive business to run”. Turnbull predicts more alternative finance property lenders will consider restructures.
“My general view is that Covid-19 and regulatory changes within the market are bringing heavy costs to running these businesses,” he says. “There are greater headwinds than tailwinds. “We clearly have demonstrated there is an alternative to an administration.
“If another platform is in a similar position, they will be watching what has been done and will be considering a better outcome to the grim alternative of entering administration.”
Similarly, business advisory group Duff & Phelps, which has been advising Wellesley throughout this time, expects more companies in this sector to review their business models and adapt to survive.
“We expect that many platforms will be undertaking reviews of their business models and financial position to ensure that they can ride out the market disruptions caused by Covid-19,” says Geoff Bouchier, managing director, restructuring advisory at Duff & Phelps.
“In our experience, the sooner such steps are taken then the greater prospect of a successful restructure taking place and the threat of any insolvency avoided.”
However, some platforms may not require this as they have already benefited from the housing market bump. The annual growth rate of house prices climbed to 2.6 per cent in August, according to Zoopla, as demand continues to outweigh supply. And some platforms are busier than ever. Development finance has been identified as a key opportunity by platforms as, despite the pandemic, there remains a shortage of housing.
Furthermore, lower valuations can create an opportunity for property P2P lending platforms, which can provide the additional finance borrowers need.
“The market hasn’t recovered, we’re still getting more opportunities come through because of it,” says Simple Crowdfunding’s Poonwassie. “Additional finance is needed to be found because if LTVs are lower, the chances are that people are needing to find another layer of finance.
“For us that means we’re getting more enquiries come through because there are additional bits of finance to find and things are taking quite a long time to progress.”
P2P property lending platforms have been forced to deal with a market that is sluggish in some areas and improving in others. Diversification, consolidation and restructuring are all on the table for platforms struggling to adapt to the new normal.
But there are also opportunities available, whether it be providing additional finance to developers that require it during this time, or second charge loans to housebuilders that have received coronavirus business interruption loans. The pandemic has put P2P property lenders to the test, and only the most agile and robust players will survive.