Investors are struggling to understand the risks in property investment platforms, research has found.
Secured property lender Fitzrovia Finance polled the clients of 20 of the top UK schemes and found three quarters wrongly believed first charge secured loans were riskier than second charge mezzanine options, while seven per cent did not know which was riskier.
The study, carried out in June, also showed 18 per cent of retail investors felt some of the property investment platforms failed to clearly explain the level of risk involved in their investments, and that returns ranged from a modest 2.8 per cent to 15 per cent, reflecting a significant variance in risk and return.
Brad Bauman, Fitzrovia Finance’s chief executive officer, said: “The industry must strive to ensure that each opportunity promoted to private investors is clearly explained, the risks are transparent and the returns appropriate. This will help ensure that investors have the necessary information they need before deciding to invest.
“There are some ‘property’ investment opportunities being offered to private investors where, for example, the returns are 8 per cent or 14 per cent – or even higher. These will include a lot of features that represent higher levels of risk such as second charge loans or unsecured debt, and this must be clearly explained to investors.”
Property investment platforms facilitate investment in individual properties or a property portfolio, and often promise high returns.
They have started to sprout up in recent years in many guises including crowdfunding, P2P lending, real estate investment trusts and bonds, and their aim is often to provide retail investors with access to property investments.
One of the easiest ways to invest is through P2P lending, where investors lend money to borrowers, with the cash secured against residential and commercial properties or new-build developments.
Fitzrovia’s findings followed last month’s announcement that later this year the FCA will introduce new rules which will mean individuals will not be permitted to have more than 10 per cent of their assets in peer-to-peer investments, unless they have taken financial advice.
The rules are designed to prevent investors taking what the regulator considers excessive risk, and will require platforms to assess casual investors’ knowledge and experience of P2P before they allow them to invest.
There will also be a more explicit requirement to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise.
Christopher Woolard, executive director for strategy and competition at the FCA, said: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.
“For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”
By James Colasanti
Source: FT Adviser