For property developers that focus on low cost housing, funding such projects can often pose significant problems. Banks, by and large, will not engage with smaller property developers and will typically not consider loans below £3m for developments. Often this will delay projects or even lead them to fail. However, such property developers are benefitting from alternative lenders, particularly peer-to-peer (P2P) lending platforms, such as our own, that are attracting investors seeking compelling risk and reward opportunities. This has become even more important recently as volatile equity markets have led to the second largest transfer on record of investments out of stocks and into bonds and cash with investors last month making their lowest allocation to shares since March 2009 .
With investors seeking safety in asset classes that might be considered somewhat more stable, more money is becoming available to property developers. Where once investors might have sought to put funds into bricks and mortar through buy-to-let, this is now a far less attractive option than in the past. Meanwhile Real Estate Investment Trusts (REITs) are to some extent at the mercy of wider stock market fluctuations. As a result, many investors are turning to P2P lending platforms. Less costly than buy-to-let investment, P2P property platforms aim to provide the perfect entry into bricks and mortar investment, offering robust returns while also providing funds for property developers to carry out projects that otherwise might not be undertaken.
Securing traditional finance is challenging for developers or investors
From a property developer perspective, one of the more traditional routes into bricks and mortar has always been through buy-to-let. But recent years have seen developers squeezed as never before. The stamp duty surcharge on additional properties introduced in 2016 made investing in a buy-to-let portfolio more expensive. Some developers also now face a struggle to get mortgages at all, thanks to tighter lending restrictions ushered in by the Prudential Regulation Authority (PRA) at the start of 2017. Meanwhile, another tranche of mortgage interest tax relief disappeared in April driving up costs again 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 .
For investors, the main way to benefit from property has traditionally been through Real Estate Investment Trusts (REITs). REITs provide a largely reliable income from rents paid to commercial property owners from tenants on long term leases of 20 years or more. Listed on the stock exchange, REITs produce a steady income in the form of an annual dividends, but yields are relatively low, at around 3.5 – 4% on average . In a downturn, REITs, which often used debt instead of calling on investors for more funds, can become over-leveraged as property values fall. This increases the loan to value of their debts relative to the Net Asset Value of the property portfolio, ultimately harming its ability to service or repay debt and continue to provide returns for investors.
Two main routes into P2P property investment
Property P2P platforms connect investors who are targeting solid returns uncorrelated to the performance of equity markets with, in particular, property developers and small businesses that have struggled to obtain finance from the banks. For property developers, P2P platforms can offer the best chance to build a property portfolio because it enables them to access finance when traditional lenders are not actively lending. The first half of 2018 saw £22.5bn in newly originated loans to property developers of all sizes. But 61% of this was targeted London and the South East. And there continues to be a shortage of lenders financing transactions of single properties in specific regional locations .
This has been a problem we have seen repeatedly. Many banks won’t consider advancing loans below £3m to property developers leaving many struggling to find finance. But P2P platforms, such as our own, offer loans of £150,000 to £3m to property developers. Meanwhile, for investors many of the largest P2P lenders deliver yields of around 3 – 8% . Also, if the platform has the requisite permissions, they can be held in a form of an ISA, the Innovative Finance ISA (IFISA), introduced in 2015, as well as held in a SIPP or SSAS.
It is because property-backed P2P lending is secured against bricks and mortar, reducing risk, yet maintaining the healthy returns on offer, that it has become popular with investors. There are two ways to invest. The first, property crowdfunding, allows investors to take a fractional share of a property. Investors profit as a property’s value rises over time and receive an income from a share of any profits from rent.
The second property P2P lending model that has emerged sees lenders working with property developers to help finance either small developments or refurbish commercial premises into residential accommodation. The loans are for shorter periods, so investors lose the potential of a windfall return on a longer-term investment, but the returns are generally more predictable and the risk of default lower due to the enhanced due diligence done on the borrowers and the existing security on the loans, which in our case is always a first-charge on the property. In our case we focus on providing loans to small- and medium–sized developers which target accessible and low-cost housing, outside London, where valuations are less stretched, and, so far, we have managed to secure average returns of 11.38% for the lenders on our platform .
This is where P2P lenders have come into their own and we expect P2P platforms to work with developers to increase their lending reach as investors and developers alike see the substantial potential benefits of partnering together.
Stay tuned and keep an eye on www.blendnetwork.com for more deals to come in very soon.