The property market may be facing challenges, but peer-to-peer property lenders are seizing on opportunities. Michael Lloyd reports…
In ancient Greek folklore, the phoenix signifies new life when it rises from the ashes of what came before.
Peer-to-peer property lending platforms evoke this mythical phoenix. While the UK’s property market has flamed out over the past year, P2P property lenders have swooped in to show the old guard what can be done with a little innovation and an eye for opportunity.
While property sales have flagged and prices have remained stagnant, P2P property lending has been buoyant. Buyers have been determined to make the most of the stamp duty holiday before it ends, however when it does, there will likely be another slowdown in the housing market, even if it is only in the short-term.
In the meantime, there are a vast number of existing opportunities for P2P property platforms to show what they are made of. Unlike traditional banking institutions, they can adapt to the ongoing effects of the Covid-19 crisis. This is particularly evident when it comes to distressed properties.
A potential borrower can find an undervalued property at auction and use a P2P platform to buy it. While there are always opportunities for investing in distressed assets – even in good economic times – these increase during every downturn.
“There’s the opportunity in P2P for investing in distressed assets, properties that are undervalued,” says Terry Pritchard, director of Charter HCP, a commercial loan brokerage which plans on launching into the P2P space.
“The market will be horrible so be prepared for it, but it will come back, and investors can make money and do well out of it.
“Platforms need to adapt, you can lend through any crisis, you just need to adapt your lending policies. The difference this time from the last crisis is there’s liquidity in the market, we’re not short of money to lend, it’s just finding the opportunity to lend.”
Mike Bristow, chief executive of P2P property development lender CrowdProperty, says that his platform will assess these distressed assets like any other project and will support them if they match the platform’s criteria.
“We’re not as a business out there hunting for distressed assets,” he says. “Our borrowers may be out there looking for distressed and non-distressed assets.
“If it’s a good economic project, a site at a good price that makes the economics work, whether distressed or not, we will back it.”
Similarly, there are opportunities for platforms on the high street, where a number of shops have closed permanently due to Covid-19 and its subsequent lockdowns. For example, Mothercare entered into administration after failing to find a buyer that would allow it to continue trading, and blamed challenging high street conditions including high rents and the shift to online shopping.
Several P2P platforms have already spotted an opportunity to fund the conversion of high street shops into residential homes, especially given the recent easing of planning rules.
From September 2020, new legislation on permitted developments removed the requirement for planning permission when demolishing unused commercial properties to build residential homes in their place.
“There are platforms that specialise in funding conversions to residential,” says Filip Karadaghi, co-founder and chief executive of P2P bridging and buy-to-let lender LandlordInvest.
“I think they will get more enquiries as a result of this.”
However, Stuart Law, chief executive of P2P lending platform Assetz Capital, is mindful of inner city density and says that financing commercial to residential conversions in the suburbs of city centres would be more attractive.
“The high street equals density and with people and the virus it won’t be the most buoyant deal converting a town centre into residential homes,” he says.
“I can see in the high streets’ suburbs possibly, but demand is somewhat restricted in city centres where you have lots of competition.”
Neil Faulkner, managing director of P2P analysis firm 4th Way, warns that caution is needed. Even though there are opportunities here for P2P property platforms, many firms have failed to revive collapsed brands.
“In-person shopping is far from dead,” he says.
“P2P property platforms that carefully scrutinise the area, footfall and prospects, and set sensible loan-to-values (LTVs), can safely offer such loans to investors.”
He goes on to say that P2P platforms can service the high-quality property borrowers that are being seriously underserved due to the pandemic and Brexit concerns.
At the same time, banks are becoming more cautious about conducting property lending and will likely withdraw from servicing small- and medium-sized enterprises (SMEs) once government-backed lending schemes come to an end.
This all provides an opportunity for P2P property lenders to serve these borrowers.
Atuksha Poonwassie, managing director of P2P and equity crowdfunding platform Simple Crowdfunding, says that the Covid-19 crisis has prompted some platforms to partner with banks to provide mezzanine finance to property borrowers. This fills a gap in the market where borrowers are being left short of the funds they require after traditional lenders have tightened their criteria.
“There are lots of good things that have come out of Covid, so it’s just a case of tapping into that opportunity,” she says.
“There is still finance available, but lenders have changed their criteria, so borrowers are looking elsewhere to P2P and crowdfunding for additional layers of finance.”
But the prospect of a property slump after the stamp duty holiday ends has put platforms on high alert, ready to pounce when the next deal appears.
Several P2P property lenders have expressed to Peer2Peer Finance News that they can adapt to any predicted slowdown as there is such a strong need for property funding away from the banks.
The ongoing housing shortage means that more homebuilding needs to be financed and thus there is a place for SME developers, a group that have historically found it difficult to raise funds from mainstream lenders.
It also goes without saying that people still want to own their own home and the need to buy and move at different life stages will remain.
In addition, given the record low base rate, now is the perfect time for these platforms to be lending.
“Overall, P2P property lending will continue to demonstrate excellent risk-adjusted returns for quite some time,” says Neil Faulkner.
“The sector will continue to grow and take over market share. Potentially, at some point, the return investors receive will come down to better reflect the typically lower risks in this sector, but investors will have many years before their returns slip from being extraordinary to merely satisfactory.”
There is also an opportunity for P2P property platforms to tap into one of the biggest investment trends du jour – environmental, social and governance (ESG).
A number of platforms have already been supporting environmentally friendly and sustainable housebuilding and cite this as an area of growth.
For years, Assetz Capital has supported good quality offsite manufacturing of homes and CrowdProperty has backed sustainable modern methods of construction, and now Relendex is joining the party.
Last year, the platform partnered with developers who were cognisant of the issues around climate change and going forward it will work with independent trustees with proven environmental credentials to find a way to incentivise its developers to adopt best practices.
“In the short-term, suitable developments will be highlighted on our platform,” says Paul Sonabend, executive chair of Relendex.
“We hope that our lenders will accept a lower rate of return on these loans in the knowledge that our borrowers meet the highest ESG standards which adds to their costs, and therefore merit preferential finance rates.”
Despite the wider macroeconomic challenges impacting all businesses and industries, it seems certain that P2P property platforms will take every possible chance to innovate and grow.
This sector is set on stoking the flames of the beleaguered property market, spotting new possibilities, and producing inflation-beating yields for investors.