How will the property downturn impact P2P lending?
Investing in property-backed peer-to-peer lending can be a brilliant way to access the housing market without actually having to buy your own property.
P2P property lending platforms offer competitive returns to investors who are willing to fund a range of housing projects, from property developments and refurbishments, to buy-to-let portfolios and commercial lettings.
Each year, P2P lending platforms help to fund thousands of building projects which would otherwise not be able to get off the ground. This is particularly vital during the ongoing housing crisis. The government has yet to meet its own target of building 300,000 new homes per year for a variety of reasons. Lack of mainstream funding is a key factor in this housing shortage.
Read more: Property IFISAs: Backing bricks and mortar
The rising base rate has put pressure on banks to pull back on their lending, and to hike the interest rates that they are offering to approved borrowers. As a result, more and more property developers are turning to alternative lenders such as P2P platforms to meet their funding needs.
Over the past few years, the P2P property lending market has grown substantially, to become the largest segment of the UK P2P sector. Any diversified P2P investment portfolio will likely include some exposure to the property market.
So it is understandable that some P2P investors could look at the current state of the UK property market and register some concern.
By the end of 2022, data from the Bank of England, HMRC and Halifax House Price Index was showing signs of a weakening property market. The number of home sales has been decreasing; the number of mortgage approvals is down; and house price growth is slowing.
For those investors who remember the impact of the global financial crisis, these are worrying signs. But how does this property downturn impact P2P investors?
While P2P property investments are exposed to the UK property market, there are a number of safety rails in place to protect investors from big losses. For a start, all P2P property platforms will require security from a developer in the form of a first or second charge against the property. This means that if the borrower is unable to repay their loan, the platform has the right to sell the property in order to recoup investor capital.
Secondly, every P2P funding offer comes with conditions attached. The platform will make an offer to the borrower based on the loan-to-value (LTV) of an existing property, or the loan-to-gross development value (LTGDV) of a development or site.
This is similar to the way that banks make mortgage offers, except alternative lenders tend to work with much lower LTVs. While a bank may offer to cover up to 95 per cent of the value of a property that a customer wishes to buy; P2P lenders will rarely offer more than 65 per cent of the total value of the property or development. This means that the property will need to lose more than 35 per cent of its value before the underlying security of the property is at risk.
It is worth noting that during the global financial crisis, UK property prices fell by ‘just’ 20 per cent. If a crash of this magnitude was to happen again, a 65 per cent LTV or LTGDV should be able to insulate the average P2P property investor from capital losses.
Furthermore, P2P platforms take their jobs as risk managers very seriously. Before any new loan is approved, countless checks are carried out against the borrower, the borrower’s suppliers, the site, and the local market. While it is true that many alternative lenders work with borrowers who have been rejected by the banks; this does not mean that these borrowers aren’t creditworthy. Most platforms will approve just a tiny portion of the loan applications which reach their desks, and only after an intense due diligence process has been carried out.
After the loan has been approved and funded, P2P platforms will continue to monitor the project and ensure that the developer is meeting pre-set milestones. This is the reason why you may have noticed that many P2P property platforms have quantity surveyors and other property experts in their management team. Any loan losses reflect poorly on the platform, so it is in their best interest to ensure that each loan is being managed as actively as possible, to ensure the best outcome for investors.
Of course, it is always possible that a property development project doesn’t work. In this case, investors may not earn the interest that they were expecting to earn, and there may be a bit of a wait before the property can be sold and the capital investment can be returned. However, it is worth noting that the largest P2P property lenders in the UK – CrowdProperty, EasyMoney and Kuflink – have all maintained a track record of zero investor losses.
When choosing a new P2P property investment, it is important to read the small print so that you understand your risk position. Make sure you are aware of the LTV or LTGDV of every project that your money is backing, and find out what security is being offered in return for the loan.
Look too at the platform’s track record of defaults and returns, as well as the expertise of the management team and board. And if you have any other questions, contact the platform directly and ask them. They should be responsive and able to answer any queries. And if they aren’t, there are plenty more P2P property platforms out there to choose from.