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Peer closely – but carefully – at peer-to-peer property investments

The interest rates on peer-to-peer property investments may look appealing, but investors should tread carefully.

Whether you’re selling your house or buying wine, cutting out the middleman can help you secure a better deal. Peer-to-peer (P2P) lending works on this principle too. By bringing together investors and borrowers, a P2P platform can offer each party terms they wouldn’t have been able to access readily through a more traditional financial institution. For the investor, who lends the money, it’s the prospect of a higher return; for the borrower, it’s the potential for a cheaper rate, a faster application process (hours rather than days in the case of P2P business lending) and a higher probability of getting a loan.

A selective market for borrowers
For those seeking to invest directly in property, borrowing from a P2P is an option, but it’s a selective market. It doesn’t generally cater to people buying houses to live in, nor for investors who want a long-term mortgage (although some platforms, including Landbay and LendInvest offer buy-to-let mortgages with terms of up to 30 years). On the more standard buy-to-let products the rates aren’t especially low. Landbay offers a two-year fixed product at 3.09% for up to 75% loan-to-value (LTV), but it’s possible to secure rates of 1.59% and 1.73% from Post Office Money and Virgin Money respectively.

But go more niche and the P2P lenders come into their own. For instance, LendInvest’s five-year fixed rate of 3.19% at 65% (LTV) for buy-to-letters who are limited companies is very competitive in that market. It is possible to go lower with Keystone’s 2.99% rate, but this comes with a 2% fee, double the fee charged by LendInvest.

However, the primary focus for the P2P platforms is short-term lending, especially for bridging and development finance. For example, on its residential bridging products, LendInvest offers rates from 0.55% a month for up to 18 months on properties with an LTV of 50% or less. It is possible to edge below these rates – specialist lender Precise Mortgages offers bridging from 0.49% – but with other factors such as fees and terms also important, the P2P platforms look appealing.

Choose your risk level when lending
These platforms rely on investors to fund their lending, so this is another way to gain access to the property market. The returns of the property-backed loans you are financing will be linked to the fortunes of the housing market.

It’s possible to select the level of risk you can tolerate. Some platforms will allocate your money to a selection of loans while others allow you to select those you want based on factors such as the interest rate and LTV. Minimum investments of £1,000 are standard, although it is possible to start with just £100 with Landbay. Given the breadth of risk, rates vary. LendInvest quotes a target annual return of 4%-7%, while Landbay flags up an annualised projected return of up to 3.54%.

Importantly, however, these rates are far from guaranteed. Any defaults will erode the return and investors’ capital is at risk. Sarah Coles of fund platform Hargreaves Lansdown points out that just because your investment is secured against the properties backing the loans, it doesn’t mean you would get all your money back in the event of a forced sale.

How will P2P fare in a downturn?
Note too that P2P platforms have yet to experience a severe downturn, while they’re also not covered by the Financial Services Compensation Scheme (FSCS).

There are already signs that the market is getting tougher. Demand for loans has fallen. At the end of May, property platform Lendy went into administration. This left more than 20,000 of Lendy’s individual investors exploring legal action to recover the £165m plus they had invested. A catalogue of errors may lie behind Lendy’s spiral into administration, but the Financial Conduct Authority (FCA), the City regulator, is keen to ensure that investors don’t fall victim to the overambitious marketing claims of P2P lenders.

It is also introducing a cap on the amount they can allocate to P2P arrangements. To avoid overexposure to risk, this is set at 10% of investable assets where the investor hasn’t taken financial advice. Platforms will also have to “assess investors’ knowledge and experience”, says the FCA.

Expect a shake-out
The upshot, according to Matt Hopkins of accountancy group BDO, is not that the P2P market is a bubble about to burst, but that there is likely to be a shake-out over the next few years as tougher conditions lead to consolidation in the number of platforms. We may end up with a handful of larger platforms alongside a few niche ones. In the meantime, given the recent turbulence in the sector and the uncertain macroeconomic outlook, investors should tread extremely carefully.

By: Sam Barrett

Source: Money Week

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Breaking down the lending barriers

Peer-to-peer lending may not be a familiar part of an adviser’s arsenal, but interest in the area is on the rise and the industry’s overall growth rates add weight to its suggestion that it is moving into the mainstream.

However, a recent paper by the FCA that has suggested consumers are at risk of harm shows there is work to be done to convince more advisers of its merits.

At its heart, P2P is a way of for consumers to lend money to companies and individuals – via platforms, which either set interest rates themselves (the most common method, as Table 1 shows) or allow consumers to do so.

The attraction is that these rates are typically substantially higher than can be found elsewhere. But as always, the greater yields come at the expense of higher risk of default, and P2P is not covered by the Financial Services Compensation Scheme.

For intermediaries, such lending might provide a useful option when catering for clients with short-term time horizons, such as one to three years, in cases where equities pose too much of a risk to capital and cash is unable to match inflation.

The sector’s relative infancy has meant the number of advisers dipping their toes in remains fairly small. But providers say they are starting to see a notable uptick in intermediaries using P2P for client recommendations.

“A few years ago very few financial advisers were using [P2P]. But we’ve now got 1,100 advisers registered on the platform, and adding more and more every day,” says Sam Handfield-Jones, chief product officer at Octopus, who adds his company’s loan book has grown to in excess of £250m.

“They range from advisers having 10, 20, 40, 50 clients on [the platform], through to advisers using it to solve really specific problems or one or two clients, so it’s still massively varied as to how it’s used.”

Nathan Mead-Wellings, director at London-based advice firm Finura Partners, says more clients are starting to broach the subject. “There is an interest among the higher net worth to get into the lending space where they have reasonable knowledge of asset-backed lending in particular,” he says.

“Familiarity with larger platforms such as Ratesetter is also filtering down. These clients are often prepared to view these as high-risk investments and are aware that they lack FSCS protection.”

Growth and responsibility

Growth in the sector has certainly been eye-catching. Data compiled by the UK Peer2Peer Finance Association shows cumulative lending had risen to nearly £9bn in the first quarter of 2018, a jump of more than 50 per cent from the second quarter of 2017. Almost two-thirds of this lending was shared between two providers – Funding Circle and Zopa, the longest running P2P platform.

Greater regulation is inevitable in any new sector that starts to gain popularity with consumers. Back in 2016, FCA chief executive Andrew Bailey remarked of P2P: “It’s a fast-moving, evolving industry. Some of the directions in which it’s going are posing some quite big challenges in terms of transparency and fairness.

“Those are the things that we’ll be considering when it comes to the point of proposing and making rules. We always try to balance innovation and competition against having a fair and transparent environment.”

Two years later, in July 2018, the watchdog subsequently unveiled a 156-page consultation paper in a bid to address potential problems in the space.

The regulator identified poor business practices, particularly on some P2P platforms. These related to “disclosure of information to clients, charging structures, wind-down arrangements and record keeping”, it said.

The report also highlighted a number of potential and ongoing harms that may impact investors, such as poor quality or unsuitable products, poor treatment of customers, and high prices.

Gonçalo de Vasconcelos, chief executive at crowdfunding platform SyndicateRoom, says the real surprise was a proposed clampdown on promotional activity by P2P providers.

Investors in the space could now face the same kind of marketing restrictions that already apply to the investment-based crowdfunding sector. These require providers to ensure they only target their promotions at advisers or sophisticated/wealthy investors, or else those who certify they will not invest more than 10 per cent of their assets in “readily realisable” securities.

Mr de Vasconcelos says: “The changes to the P2P sector were mostly unnecessary and slightly over the top. The unintended consequence, or perhaps intended, is that everyday investors see P2P as this spooky, dangerous thing that it isn’t – just look at the track record of the main P2P platforms for more than 10 years now.”

But some say this track record is rightly treated with scepticism.

Mr Mead-Wellings says: “It can be hard to run due diligence on the different platforms and understand the default rates/profitability and so on, but mostly [the issue] is that few have been tested in a downturn. It would be interesting to see what the average credit profile of their borrowers and lenders is.”

Mr Handfield-Jones adds: “Advisers are where they should be, cautious about adopting new things. They have an obligation to protect their clients’ money and the sector is 11 to 12 years old – so it’s still new.”

Mr Vasconcelos concedes the example of an adviser who took an interest in one of his company’s products, but ultimately would not show it to clients because it lacked a three-year track record.

He says: “It’s not worth them running the risk due to regulatory reasons. The two main barriers for advisers to get involved are lack of knowledge and being risk-adverse. The most sophisticated advisers are on it, but it’s still a very small percentage of the market.”

The task for providers is to assess how the industry can evolve in an adviser-friendly way.

Medical attraction

Another obstacle to more advisers and consumers embracing the asset class is accessibility. Mr Handfield-Jones says encouraging more self-invested personal pension providers to permit P2P investments is one of Octopus’s key aims.

Just two providers are currently on board, and regulators’ growing suspicion of unregulated investments held within Sipps may mean others are reluctant to take the plunge. But Mr Handfield-Jones notes those in the decumulation phase often seek to access parts of their money on a number of different time horizons, a preference he says can chime with P2P.

He explains: “An adviser will rarely recommend equity exposure on a sub three-year time horizon, yet if you’re buying multi-asset funds and selling them down to fund income in decumulation, you’re effectively buying equities and selling them down on a sub-three year. But because it’s wrapped up in the multi-asset fund it’s not so obvious.

“When you’re talking about portfolio construction, decumulation and income drawdown, maintaining that capital within your Sipp wrapper is an important part of that and will be the big switch to [push P2P lending into the] mainstream.”

Providers also claim advisers may end up using P2P to support client objectives in relation to their businesses.

Mr Handfield-Jones says he has seen a sharp rise in medical workers, such as doctors and dentists, who fund private work through a limited company, investing the business’s capital into P2P.

“They don’t want to take out the dividends and pay dividend tax, but if you’ve got a company bank account with a high street bank you’re going to be earning negative interest. So the idea of putting your balance sheet to work a bit harder is quite appealing,” he says.

As ever, ensuring that all clients’ eggs are not in one basket will be paramount in such situations.

Losing interest

One initiative that was previously predicted as a game changer for P2P was the Innovative Finance Isa. Introduced in April 2016, the IFISA enabled peer-to-peer lending to be accessed in a tax-efficient wrapper for the first time. Rates on offer from such propositions extended all the way up to 13 per cent, suggesting the risks involved in P2P may be greater than some claim.

Take-up rates began at very low levels, but £290m was invested during the 2017-18 tax year, a sharp uptick on the £36m invested in the Isa’s first 12 months of existence.

Mr Handfield-Jones says: “The first year was a little bit underwhelming. The year just gone has been much stronger, and we expect this year to be double or triple what we did last year.”

He adds the first-year results could largely be attributed to the lack of providers in the market. Low savings rates remain the most obvious way in which providers can attract investors, especially as cash Isas can be transferred without the need for new funds to be committed. But consumer’s love affair with cash, regardless of its suitability, is proving difficult to change.

“You’re seeing solid adoption, but in the context of seeing £40bn into cash Isas it’s still a drop in the ocean. And that’s where the opportunity is – you’re talking about hundreds of millions of pounds of lost interest in the UK,” Mr Handfield-Jones adds.

That is a problem faced by the investment industry more generally. But with lending platforms having yet to experience real hardship, the question of whether P2P is a suitable replacement may not be answered until the next economic downturn.

Source: FT Adviser