P2P lending offers an attractive entry point into property investment
Yann Murciano (pictured) is chief executive of BLEND Network, an appointed representative of Resolution Compliance
For investors the current turbulent economic environment has made the trade-off between risk and return somewhat more challenging that it has been for a few years. Volatility in the equity markets at the end of last year saw stocks ricochet from record highs to post their biggest fall since 2008 – with the FTSE-100 ending down 12.5% at the end of December 2018. And while stocks bounced back in the first quarter, many are understandably wary.
In such a climate, it’s not surprising that investors are turning to asset classes that might be considered somewhat more stable such as property or bonds. Yet buying property remains expensive and buy-to-let investment is a far less attractive option than it once was.
This is where P2P lending platforms may offer a solution. Less costly than buy-to-let investment, I believe P2P property platforms provide the perfect entry into bricks and mortar investment while offering highly attractive returns.
Buy-to-let investors under pressure
Traditional routes into property investment are being squeezed as never before. The stamp duty surcharge on additional properties introduced in 2016 has made investing in a buy-to-let portfolio more expensive.
Meanwhile, some landlords now face an uphill battle getting mortgages at all, thanks to tighter lending restrictions ushered in by the Prudential Regulation Authority (PRA) at the start of 2017. And this month sees another tranche of mortgage interest tax relief disappear driving up costs once more for buy-to-let investors.
All of this has led to an 80% fall in new lending on buy-to-let properties in two years from £25bn to just £5bn. As a result, many investors spooked by the volatility in the equity markets and put off by the cost and increasing administration associated with buy-to-let investing have begun to look to alternatives such as P2P lending.
In their simplest form, P2P platforms connect those with money to invest with those looking to borrow, enabling investors to target solid returns without the rollercoaster volatility of the stock market, while benefiting from reduced transaction costs.
Additionally, P2P performance has proven to be robust with many of the largest P2P lenders delivering yields of around 4-5%. In 2015, P2P was approved to be included within the ISA wrapper, so interest earned through eligible P2P platforms can now be tax-free.
The rise of P2P, together with a decade of low interest rates has inspired many would-be savers to seek alternatives to traditional banks saving accounts to boost their income.
Lending is robust too. Last year, P2P lending volumes stood at £3bn, according to figures compiled the UK P2P Finance Association (P2PFA), while P2P lending to date now stands at £15bn and within this property-based P2P lending, in particular, is experiencing healthy demand.
Two main routes into P2P property investment
Property-backed P2P lending has become increasingly popular with investors because the loans are secured against bricks and mortar, reducing risk of capital loss, yet maintaining the healthy returns on offer.
There are two main ways to invest in property through a P2P lender.
The first, property crowdfunding is possibly the most familiar. It allows investors a fractional share of a property along with others over a lengthy period of time. Investors stand to make a profit as a property’s value rises over time, along with a share of potential profits from rent (which could be thought of as similar to a stock’s dividend). Of course, ownership also carries the risk of losses if property values drop, if there are void periods and owning a fraction of a property if things go wrong can create headaches in terms of determining the order in which multiple investors should be compensated.
Considered a simpler method, P2P property lenders advance money to property developers to either build small developments or refurbish old buildings into residential accommodation. The loans are for far shorter periods, so investors lose the potential for a windfall return on the longer-term investment in a buy-to-let property that is gaining in value each year. But the returns are generally more predictable and in some cases the investor, or some P2P platforms such as Blend Network, have the first charge on the loan should anything go wrong meaning the risk of significant losses is relatively small.
Investing outside of London offers greater rewards
We believe the biggest growth has recently been in this second area of lending to the broader residential space, which includes bridge funding, small family builders and developers of flats for sale to buy-to-let landlords.
Of course, all P2P property lending is not without risk. Investors should be aware that many platforms offer loans in higher risk assets and cities, which, as at least one recent high-profile case has shown, run a greater risk of default.
Property developers concentrating on prime, city-centre locations – sectors which generally have peaked in recent years, should in our opinion largely be avoided, while loans on high-value properties we believe should be assessed with caution. Moreover, in our experience, small builders who tend to operate in niche, higher-margin markets are less exposed to market volatility than London’s buy-to-let landlords.
We have developed a different model, which focuses on affordable housing, outside London, in less overbought regions where there is still the potential to secure robust returns. We have so far lent out some £6m, with an average return of close to 12% and had no defaults.
Essentially, P2P property investment can offer robust fixed yields, backed by physical property assets. With due diligence undertaken by the P2P platform and available to potential investors, loans are likely to be advanced to borrowers that have credible plans for their properties and pose little risk to investors while at the same time offering investors greater liquidity and more attractive returns than may be found in traditional property investments. That said, we always advise investors to do their own due diligence.