The prospect of additional regulation in the P2P residential development finance sector is a challenge that platforms are ready to take on. Michael Lloyd reports.
Peer-to-peer residential development finance platforms are used to fighting. This is a sector which has been forced to defend its reputation in the wake of some high-profile platform collapses, to adapt to a once-in-a-lifetime pandemic, and to survive an economic downturn. Now, residential development lenders are facing the threat of additional regulation.
Following feedback to its call for input on consumer investments, the Financial Conduct Authority (FCA) published proposals to strengthen its financial promotion rules for high-risk investments, including P2P lending. And one part of its discussion paper specifically mentioned P2P property.
The FCA noted similarities between P2P agreements – using the example of a property development loan – and speculative illiquid securities (SISs) and raised the question of whether this should impact the marketing of such products to retail investors.
“Where a P2P agreement has similar features to a SIS (for example where it is a loan to a property developer) there is the possibility for arbitrage,” the FCA said.
“In other words, a property developer could still seek retail investment through a P2P platform instead of issuing a mini bond, and this P2P agreement could still be mass marketed.
“We are seeking views on whether (and why) you think the existing requirements for P2P platforms are adequate to protect retail investors from the risks of P2P agreements which share features with SISs.
“Or should the mass marketing ban be extended to P2P agreements which have the relevant features of a SIS, and if so, what evidence of harm to consumers is there? We also want to hear about the potential impact of any change in this area, in particular how many consumers and P2P agreements might be affected, and what this change would cost firms and borrowers.”
One platform head says that on first reading, it looks like the City regulator is “posing a risk to property development” investment.
This could well be the case given how many P2P residential development platforms are open to restricted investors.
New research from Peer2Peer Finance News has found that out of the 19 P2P platforms that conduct residential development finance (or a form of this such as development top-up or exit finance), more than two thirds have minimum investments of £1,000 or lower and within this, seven (38.9 per cent) require minimum investments of £100 or less.
This suggests that a huge proportion of P2P platforms in this space are open to investment from restricted investors and thus could be eligible for the FCA’s proposed marketing ban.
David Turner, co-founder and director of property lender Invest & Fund, welcomes the FCA’s decision to explore tightening rules in the sector as long as this is not a “knee-jerk reaction”.
“Invest & Fund welcomes the FCA’s decision to explore the tightening of rules on financial promotions relating to P2P lending, amongst other products, as this only enhances the standing of the sector,” he says.
“However, it is key that any proposals are not overkill, are not knee-jerk, are not ‘blanket’ and deal only with proportionately addressing any specific isolated marketing weaknesses, rather than unnecessarily stifling access to high-quality asset-backed investments from what is a growing and increasingly important alternative to the banks.
“The continued development of our sector is dependent upon broadening and deepening the lender base, but this needs to be done in a safe and suitable manner, with appropriate protection for retail participants rather than blanket bans.”
Turner adds that while the FCA sees similarities between P2P loans and non-readily realisable securities, investors in Invest & Fund have seen liquidity in the platform’s secondary market.
Mike Bristow, chief executive of CrowdProperty, says his platform is formulating its response along with some others and highlights the security within his investors’ loans.
“It’s for the whole industry to reply,” he says.
“Our property development loans are first charge secured against UK property assets at modest loan-to-value levels. Security is the critical element of safety.
“That’s different to unsecured consumer or small- and medium-sized enterprise (SME) lending. The safety is the first charge security and the underwriting processes.”
Jatin Ondhia, chief executive of Shojin Property Partners, says he understands why the FCA might want to block restricted investors from high-risk investments, although these same investors can still go to Bitcoin or other unregulated investments.
“Once the industry behaves, they can start opening it up,” he says.
“But if I’m a sensible restricted investor, why should I not be allowed to put some money into real estate but can invest into Bitcoin?
“While the FCA is clamping down within the regulated space, it is a shame that they don’t look at the unregulated space where many unscrupulous firms are raising money privately from investors without carrying out appropriate due diligence on their projects nor checking investor suitability. These investment issuers are rampant on social media, yet they fly below the FCA’s radar as they are not regulated.”
Additional regulation could be another blow to P2P residential development finance, after platforms faced the challenges of Covid-19.
The pandemic halted some developments, dented supply chains and wreaked havoc with building schedules.
But by and large, platforms in this space have adapted and continue on an upward trajectory this year.
EasyMoney became profitable in 2020, achieving an operating profit of £57,184 last year and Folk2Folk has said it is on course to achieve a £1m profit for its 2020 financial year.
Assetz Capital delivered finance under the coronavirus business interruption loan scheme (CBILS) to SME housebuilders, while LandlordInvest conducted more second charge lending, which generates higher revenues, including second charge lending for CBILS loans.
This year, Kuflink reached its £100m lending milestone, CapitalStackers hit £100m in investment and Bristow has said that CrowdProperty is on the right path to meet its £400m lending milestone per year by 2024.
Peer2Peer Finance News research has found that the average returns in the P2P residential development finance sector are still healthy and comfortably beating inflation. Out of the 18 platforms in the space that provided data on returns, the average annualised return is a massive 8.89 per cent.
As well as adapting, P2P residential development finance platforms are seeing various opportunities in the market.
These include high density residential schemes such as purpose-built student accommodation, private rented schemes, co-living, senior living and commercial to residential conversions.
Conversions like this are aided by new rules in England that require a simpler ‘prior approval’ process instead of a full planning application, while still being subject to high standards.
Stuart Law, chief executive of Assetz Capital, says he sees a huge opportunity to fund eco homes, defined as those that have a minimal environmental impact.
“I don’t think the big housebuilders will do a special job of eco homes, they’re very cautious because it will cost a lot of money, but SME housebuilders see a lot of opportunity here, a lot of people want sustainable homes,” he says.
“Eco homes are the future and I think we’ll see more and more homes demolished and replaced by eco homes.”
The pandemic has even created some new opportunities for P2P platforms. For instance, several property developers have been turning to P2P in the absence of traditional funding lines. Many SME building projects that were mothballed over the last year and a half are now being resurrected.
Arya Taware, managing director of FutureBricks, says her platform is now working on a number of projects of this kind where other finance providers appear less interested in their complexity.
“These projects are now being resurrected with many in various stages of development, some with much shorter remaining periods before planning lapses and others with very different build costs from 18 months ago,” she says.
“These projects really need an in-depth understanding of the issues and the ability to work with the developers throughout the build.”
As well as spotting opportunities, platforms are planning to launch new products to support their growth.
FutureBricks has been planning its Innovative Finance ISA (IFISA) for the past few months and is readying its launch for the third or fourth quarter this year.
Similarly, CapitalStackers is redeveloping its platform and anticipates launching its IFISA near the end of the year. It is also updating its website to make the user journey easier and more enjoyable.
“The redevelopment includes a significantly enhanced secondary market to enable loan participations to be traded freely between investors,” says Steve Robson, managing director of CapitalStackers.
P2P residential development finance platforms are also working on other innovations.
LandlordInvest is looking at ground-up developments, Folk2Folk is planning to launch a bridging loan product later this year and Kuflink is examining the term loan market.
“We’re toying with a few products,” says Narinder Khattoare, chief executive of Kuflink.
“We’ve been looking at term loans and may offer them in the foreseeable future. A number of lenders in the bridging space entered into offering term loan buy-to-let products and it’s definitely something we’re interested in.”
Furthermore, due to the ongoing housing shortage and imbalance of supply and demand combined with the easing of lockdown restrictions and reopening of the economy, platforms are confident for the future.
“There is undoubtedly a pent-up demand for property from all sectors of the market, from renters, student accommodations, first-time buyers, right up to movers and improvers,” says Taware.
“We believe that the whole chain of reliance across the property market is starting to show positive signs of movement.”
After surviving Covid’s blows, P2P residential development finance platforms have raised concerns about additional regulation in this space.
But for now, these platforms are continuing to adapt and innovate, producing inflation-beating returns, preparing for pent-up demand and bracing for the sector’s next challenge, whatever that may be.