Commercial property: A brand new landscape
Commercial property represents a small but growing segment of the UK’s peer-to-peer lending market. Michael Lloyd explores the opportunities and challenges available…
The commercial property market has changed significantly during Covid. While many office spaces became redundant – at least temporarily – warehouse leases have soared. Meanwhile, an emerging trend for commercial-to-residential conversions is set to shake up the property market. And of course, peer-to-peer lending platforms are well placed to take advantage of these opportunities.
Platforms operating in the commercial space, such as Proplend, LandlordInvest and Relendex, have performed well during Covid, while lenders such as Simple Crowdfunding are now entering the space, have spotted the huge potential of this market.
According to the United Kingdom Warehousing Association’s 2021 report, the overall number of warehousing units has risen by 32 per cent rise between 2015 and 2021, and this is set to continue to increase.
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In the report, Savills cited research from Prologis which showed that for every extra £1bn spent online, a further 775,000 square feet of warehouse space is required to meet the new demand. This can only benefit P2P platforms operating in this area.
P2P commercial property platform Proplend reports that its current loanbook includes around 45 per cent of either industrial or mixed use industrial, which includes warehouses.
“The logistics market has been on fire and that hasn’t really changed from last year,” says William Matthews, head of commercial research at Knight Frank.
“Across pretty much all property sectors there has been an improvement this year. It’s been a bit like a rising tide, every sector this year has done better than the last when you talk about investment volumes.”
P2P lending platforms operating in the commercial property market report that they performed well during the pandemic.
LandlordInvest has not experienced issues on commercial loans, Relendex has not seen any problems it cannot work through and in October Proplend revealed that it had been operating profitably in the year to date after seeing strong demand from lenders and borrowers.
Furthermore, Simple Crowdfunding is expanding into the commercial property market for the first time and is currently looking at opportunities in this space, with two projects in the pipeline.
Adam Tyler, executive chairman at the Financial Intermediary and Broker Association, says the commercial property market has grown, as shown by an increase in membership of his trade association.
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“The commercial property market has really boomed over the last 20 months, so much so our membership has more than doubled,” he says.
“Lenders are reporting record months, so that’s both in bridging and development finance and commercial mortgages.
“There’s plenty of demand from customers and there’s plenty of lenders out there. We’ve just seen the market continue to grow and there’s no sign of that changing other than for retail and offices.”
Neil Faulkner, managing director and head of research at 4thWay, says that retail, hotels, care homes, leisure, and pubs and restaurants are the areas in P2P lending that are seeing a resurgence.
He also praises the sector for its ability to exploit opportunities.
“I think that P2P lending platforms are good at tapping into opportunities as soon as they become available,” he says.
“We’ve seen them immediately take advantage of office to residential conversions, of lending to owners of houses in multiple occupation properties, and of pubs and restaurants opening to replace those that had to close recently. The P2P lending industry has reacted without delay to changes in conditions.”
There are many opportunities in the commercial property space for P2P platforms, one of the most popular of which is commercial to residential conversions, for example altering shops into flats.
Many property platforms operate in this area, such as Invest & Fund, Blend Network and Simple Crowdfunding, to name a few.
And Relendex goes so far as to fund the conversion of churches into homes.
“Churches are solidly built and can be converted into good quality housing,” explains Paul Sonabend, executive chairman at Relendex.
“Commercial to residential conversions have been going on for the last 10 years and have been a strong market.”
Some platforms have reported a rise in enquiries in this space, which Atuksha Poonwassie, managing director of Simple Crowdfunding, says is partly due to planning changes.
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Earlier this year the government introduced permitted development changes to allow unused commercial buildings to be changed into homes through a simpler ‘prior approval’ process instead of a full planning application.
“There’s a lot of appetite for commercial to residential conversions, it’s not purely because of Covid,” says Poonwassie.
“I think there’s a couple of things. In terms of the overall cost structure, the profits do tend to be a little bit better for some projects we’ve seen for commercial to residential and because of the permitted development planning changes there are more opportunities like that available.”
Platform bosses have also highlighted the opportunities to be found in the development of care homes and supported living accommodation for ex-prisoners, elderly people and those with additional needs.
Assetz Exchange, which is part of the Assetz Group alongside P2P platform Assetz Capital, has financed the development of supported living apartment blocks.
LandlordInvest has funded some developments of care homes and has seen a rise in enquiries and transactions for these recently.
Poonwassie describes seeing a huge push in the social care or multi home environment space.
“There aren’t enough homes for people who need additional support, and it needs to be done properly,” she adds.
“That is a huge growth area and does tie in with the environmental, social and governance impact.”
Knight Frank’s Matthews sees the funding of developments for hotels and student accommodation as yet more opportunities within the commercial property space.
Property development investment provider Cogress funds the development of hotels, while Assetz Capital has previously financed purpose-built student accommodation (PBSA) and earlier this year alternative investment manager Pollen Street Capital and lender Downing revealed a £24.3m co-funded deal to construct two PBSA blocks.
Read more: P2P platforms offer support as share of SME new builds drops
“Interestingly student accommodation has been one of the beneficiaries of the pandemic in some ways,” says Matthews.
“There are good occupancy levels and investors have seen that as a stable sector and continue to see that.”
However, despite the opportunities available, few P2P platforms are solely focused on commercial property lending. This may have something to do with the difficulty in defining ‘commercial property’, with some branding anything not residential as commercial, and others taking a more narrow view of the sector, believing that a commercial property must be owned and/or occupied by an existing business.
As a result of this, some platform owners believe there is also an opportunity for newcomers to launch into the space.
“It’s a big area and there’s definitely market share to be captured by platforms,” says Filip Karadaghi, co-founder and chief executive of LandlordInvest.
4thWay’s Faulkner says that new entrants launching into the sector would need to be confident they can source loans without having to compete too tightly with other lenders.
“For example, existing lending businesses might convert to P2P lending without then heating up competition,” he adds.
“Commercial property remains more niche. Partly it’s because it’s harder to do and there’s less data available to help new P2P lending companies shape a good credit policy.
“It’s also harder to grow further, because competition with other specialist lenders has made it less attractive over the years, since its recovery from the 2008 financial crisis. By no means is it as hot as it was back then, but there is more caution, which means loan volumes are spread thinly across providers.”
Offices and retail may also present an opportunity for P2P platforms in future as Matthews predicts their recovery.
Knight Frank’s 2021 Active Capital Report predicted that cross-border real estate investment will reach record levels in 2022, with the office sector forecasted to be the focus of more than half of all major cross-border transactions.
“We’re very positive about offices,” he says.
“We don’t subscribe to the idea that offices are dead. There is an uptick in investment activity and occupational, they’re both increasing and have as we’ve gone through the year, but not quite to the same extent as logistics.
“Where we’re most optimistic is around high quality relatively new space that meets the criteria for attracting talent and people back to the office and is effective for when people want to collaborate.
“And we don’t buy into this whole ‘everything is moving online, there’s no way back’. There definitely is still a role for the high street, the challenge is regenerating and creating mixed use. We are optimistic. It’s not as black and white as people like to make out.”
The commercial property market is not all doom and gloom, and it is packed full of exciting opportunities for those lenders which are keen to get into the space.
From warehouse loans to development finance for supported living units, student accommodation, care homes and commercial to residential conversions – whatever the area, P2P property platforms are well-placed to exploit the opportunities and will continue doing just that.
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