Peer-to-peer lenders are leading the eco-housing revolution. Michael Lloyd explores the opportunities in ethical property investing, and what the future may bring…
More than 500 Extinction Rebellion protestors were arrested during the group’s two-week protest in London over the summer. Climate activists blocked roads and bridges while some members even threw paint at banks and glued themselves to a McDonald’s restaurant.
Whether you agree with their methods or not, they have certainly brought the issue of climate change to the forefront of people’s minds.
Peer-to-peer property lending platforms have also been doing their part to raise awareness of environmental issues by offering ethical investments to climate-conscious investors.
According to a recent study by metals exchange traded commodities provider Global Palladium Fund, nearly half (47 per cent) of retail investors plan to invest more of their cash in companies and funds at the forefront of the green revolution.
And in June, The Investor Index – an annual report authored by communications firm AML Group and research agency The Nursery Research and Planning – revealed that millennial investors are more likely to consider environmental, social, and governance (ESG) products. 27 per cent of younger investors now include responsible investments in their portfolio, compared to only four per cent of investors aged 55 and older.
“Ethical P2P property investing is in its infancy but is primed for strong growth in the years ahead as lenders and platforms seek to embed ESG criteria in their loan origination activities,” says John Cronin, an analyst at brokerage Goodbody.
Neil Faulkner, managing director of P2P ratings and research firm 4th Way, says that alternative lenders have always been interested in ethical investments, and predicts that the shift to sustainability will continue.
“We’ve seen resistance from investors in lending to claims-chaser type firms,” Faulkner says.
“A high proportion of investors are also attracted to P2P lending companies’ better and fairer treatment of borrowers.
“My view is that while the shift to sustainability will continue to be far too slow for our planet, it will continue to accelerate rapidly, offering considerably more opportunities for P2P lending platforms and investors in the immediate future.”
The main way in which P2P property lending platforms offer ethical investments is by funding the development of greener, sustainable housebuilding to build new properties. These are often described as ‘eco homes’ and are designed to be energy efficient and have a minimal impact on the environment.
These homes are usually created through modern methods of construction, using materials such as timber instead of bricks. Often, these properties are built offsite with precision engineering that cuts out much of the wasted energy, for example, through various ways of preventing warm air leaking out of the house.
Several P2P property platforms already operate in this area, including Assetz Capital, JustUs, CrowdProperty and Crowdstacker.
“You wouldn’t build cars in a muddy field, they’re built in factories,” says Stuart Law, chief executive of Assetz Capital.
“Brick onto brick in a muddy field is very stupid and leads to poor energy efficiency, while factory built is brilliant with precision engineering.”
Typically, traditional lenders are more hesitant about funding the development of eco homes through offsite construction, so the consensus among industry stakeholders is that there is a huge opportunity for P2P platforms to step in and lead the way.
“The old-school lenders will catch up soon but there’s an opportunity for forward-focused platforms like us in this area,” says Lee Birkett, founder and chief executive of JustUs.
Law believes that P2P platforms can tap into this opportunity by aiding the many small- and medium-sized enterprise (SME) developers who see the benefits of offsite construction while national housebuilders lag behind and “don’t really understand it”.
He says that valuers need to start raising their valuations of eco homes to mirror the savings on the energy costs they produce, and this will lead to a rise in finance for their development, while government legislation over the next few years should force the housebuilding industry to move in this direction.
“I think the future is coming, it’s all about climate change, the government is behind it and there are plenty of ahead-of-the-curve SME housebuilders that are doing it,” Law says.
“We understand it and are supportive of it, we are funding lots of these developments, but we know the risks and wouldn’t fund everything.
“We think P2P is definitely leading the way on this.”
Karteek Patel, chief executive of Crowdstacker, says he has seen a shift towards the importance of ethical building choices in construction projects, driven by buyer demand.
“In our experience raising money for property developments we can certainly see a shift towards the importance of ethical building choices in all aspects of a building project, from choice of materials to how new buildings will function, and also how the actual build process itself impacts communities and the surrounding environment,” he says.
“To our mind this is being driven by house purchaser preference. People want efficient homes not just because they are ethically superior but because they tend to be cheaper to run.”
Besides greener housebuilding for eco homes, there are other ways in which P2P property platforms can offer ethical investment opportunities.
One such way is Assetz Exchange’s funding of supported living properties for ex-prisoners, autistic people, those with learning difficulties and others, to address a shortage in these facilities.
Chief executive Law says that the platform has seen a rise in demand in this area from both borrowers and investors due to the social and economic benefits available. He explains that ethical property developments that are leased to corporate and charity tenants can also provide a more stable source of returns than short-term six-month tenancies on flats and houses.
“It’s definitely an area of growing opportunity for us,” Law says.
“Our investors recognise the potential for attractive rates of return while making a positive social impact, while our borrowers are motivated to develop suitable properties for those that need live-in care or specialist support.”
Over the past couple of years, several companies have pioneered new ways to help borrowers and investors benefit from the ethical investing trend in the property market.
In November 2020, Rito Haldar and Aswin Parameswaran – who are behind P2P platform Unbolted – launched OnStep Homes. This is a P2P finance-backed shared ownership scheme that launched to offer people a way to invest in residential property while supporting first-time buyers.
The platform supports people seeking to purchase a property without a mortgage and with a deposit of just five per cent of the property value. It acts as an equity loan and the rest of the money is then funded through P2P finance to form a shared equity mortgage.
Bruce Davis, managing director of Abundance, says that his crowd bonds platform finances retrofit loans to improve the energy efficiency of a home. This is done through a series of measures, such as replacing a gas boiler with a heat pump or hydrogen boiler, to reduce the energy consumption or switching the energy supply to a renewable source.
“The bulk of eco homes investment would be retrofit and not new build, the problem has been the number of public sector-led schemes for retrofit that have been a bit stop/start in the way they have been implemented so you haven’t seen much progress,” says Davis.
“We’re at the stage of development that wind farm technology was at 10, 15 years ago. Engineers need to get their heads around the problem and create efficiencies, there’s a huge opportunity for the UK.”
As one of the earliest champions of eco housing investments, Abundance has an acute awareness of the challenges for ethical property lending.
Abundance used to fund the development of eco homes and social housing but stopped when the Financial Conduct Authority (FCA) introduced a permanent mini-bond marketing ban in January.
“Abundance eco homes’ development funding came to a blinding halt when speculative illiquid securities rules came in,” Davis says.
“I think we have something to offer to housebuilders, whether offering green or affordable housing, and certainly from an investment perspective we believe it’s a good investment to have on your portfolio, but the FCA has taken the view that the structure used and type of risk is not appropriate when using a bond and is currently reviewing the status of it on the P2P side too.”
If the rules were to be introduced in the P2P sector, this would also stop P2P platforms from offering development loans, something industry stakeholders have repeatedly spoken out against.
As well as the threat of additional regulation, P2P property lending platforms have faced the twin problems of Brexit and Covid leading to a shortage in construction labour and materials, as well as rising costs of building materials due to inflation.
Assetz Capital’s Law says that these shortages and rising inflation have slowed down the building of houses, making it more difficult to predict when developments finish. This may ultimately lead to fewer homes being built.
He says that eco housebuilding has been particularly impacted, with fewer workers and rising material costs. Timber prices alone have increased by at least 50 per cent. However, he is still optimistic about the future of eco property building.
“I would hazard a guess that in the medium-term eco homes will be absolutely fine, as it takes less manpower to build an eco-home than a traditional home,” Law says.
“Traditional builders are more exposed to labour shortages than those building eco homes. I think eco homes will do better on a relative basis.”
Despite obstacles to overcome, P2P property lending platforms are clearly committed to ethical investments, whether through greener housebuilding, helping first-time buyers onto the property ladder or retrofit loans.
Extinction Rebellion activists may argue that change is not moving quickly enough, but P2P property lending platforms are rising to the challenge and creating a roadmap for other climate-conscious property lenders to follow.