Hot property
Peer-to-peer property lenders have experienced stellar growth in recent years, but will tax and regulatory changes stop the sector in its tracks?
Property lending makes up a significant part of the peer-to-peer finance sector,
whether it be buy-to-let mortgages, bridging or property development funding.
But tougher regulations, extra charges and predictions of a slowdown in property
price growth mean that challenges lie ahead for lenders.
Deal volumes on P2P property platforms such as Landbay, LendInvest or Proplend
made up 37 per cent of loans in the business finance P2P category between 2014
and 2016, according to comparison website site Orca.
Data from Peer-to-Peer Finance Association members Landbay, which originates
buy-to-let loans, and LendInvest, which focuses on development finance and
bridging, shows that the platforms have seen lending soar over the past two years.
Between 2014 and 2016, cumulative lending on Landbay went from £1.7m to
£43.1m, equating to a mammoth 2,435 per cent increase, while LendInvest has gone
from £194m to £855m, up 338 per cent over the same period.
Brokers are regularly using these sorts of platforms as banks close their doors on
particular sectors and focus on larger loans. This harms the ability for smaller
developers and landlords to access finance through traditional lenders.
Paul Goodman, chairman of the National Association of Commercial Finance Brokers,
says property P2P lenders are increasingly looking like credible alternatives to the
high street.
“In the years after the financial crash, smaller developers felt strangled by an
inability to access finance as lenders tightened their belts,” he tells Peer-to-Peer
Finance News.
“Even if this is no longer the case, small- and medium-sized enterprise (SME) builders
have failed to shake off this ‘lock-out’ mindset – something which the government’s
housing white paper is seeking to redress.
“This environment has allowed innovative funders to spring up – giving SME
developers a route to finance alongside more ‘mainstream’ lenders.”
He cites quick access to finance and dedicated property managers as major benefits
that P2P platforms can offer, compared to banks.
“As a reflection of this, our brokers are seeing these platforms as much more
sustainable and mainstream, rather than ‘alternative’ or secondary solutions,” he
says.
Read more: UK housing market still under pressure, Landbay chief warns
John Goodall, chief executive of Landbay, says the flexibility of P2P platforms makes
them an attractive choice against mainstream banks.
“Typically, P2P platforms are fully technology enabled, allowing borrowers’
applications to be streamlined and generally processed faster than a traditional
alternative,” he says.
“At Landbay, for example, we launched an online application portal for our broker
partners who provide us with mortgage enquiries.
“We are also able to respond to changes in the market – both from a product and
regulatory perspective – within days, versus traditional lenders who often have
time-consuming legacy systems in place.
“Much of the buy-to-let market is broker-driven and we have worked hard to build
strong relationships with the key broker players in the specialist buy-to-let space.”
The Buy to Let Business, a brokerage focused on the sector, has used Landbay to
fund around £200,000 of loans.
“We appreciate the agility that P2P lenders such as Landbay possess,” explains
managing director Ying Tan.
“We find that they are well placed to react quickly and genuinely listen to our
feedback and suggestions. To have the chance to build strong relationships where
we are able to directly contribute to product development is extremely important to
us and helps to drive the sector forward.”
However, when it comes to pricing, P2P buy-to-let loans can be slightly more
expensive than other players in the market.
Landbay offers fixed-rate buy-to-let mortgages from 3.85 per cent, while another
P2P platform LandlordInvest has an initial rate of five per cent. In both cases a
borrower would need a 20 per cent deposit.
In comparison, Aldermore Bank currently has a two-year fix at 3.78 per cent for the
same loan-to-value.
Shaz Nawaz, of AA Accountants, which regularly helps clients use P2P for their
buy-to-let portfolios, recognises it can cost more to do a deal through P2P but gives
greater flexibility in terms of speed.
He uses platforms such as Funding Circle for his landlord clients, as he says the banks
do not seem interested in competing for the business.
“The main benefit is it seems to be quicker,” he explains.
“I went to one bank who said unless you have clients with 20 or more properties
they are not even interested.
“It is much quicker than going to the bank but I have found the amounts are limited
up to £250,000.
“I have found it is particularly good for clients who want to make a purchase, do it up,
and quickly sell it on.”
On the investor side, a benefit for P2P lenders is that there is security behind the
investment, says Filip Karadaghi, chief executive of buy-to-let platform
LandlordInvest.
“Secured lending is more appealing than unsecured, given the possibility to recover
capital in the event of default,” he affirms.
“Some investors might not realise the importance of the loan security until a default
occurs.”
However, challenges lie ahead for P2P property lenders due to weakness in the
wider market.
Estate agents, surveyors and house price indices are predicting broadly flat growth in
the property sector this year and many reported a slowdown in activity in the third
and fourth quarter of 2016.
LendInvest saw new originations fall from £115m in the first quarter of 2016 to
£79.22m in the final three months of the year.
P2P platforms focused on buy-to-let have had to deal with the additional impact of
extra stamp duty charges on buy-to-let properties, which was implemented in April
2016.
Many commentators believe the tax hike, coupled with the removal of other
incentives such as the scaling back of mortgage interest relief and the end of the
wear and tear allowance, will deter landlords and property investors.
Figures from the Council of Mortgage Lenders show that gross buy-to-let lending fell
20 per cent year-on-year in the final quarter of 2016, while over the year, almost
two-thirds of lending was channelled into remortgages for landlords.
This chimes with P2PFA figures for Landbay, which shows fewer loans were
originated in this period.
Landbay issued £282,820 worth of new lending in the third quarter and £193,800 in
the fourth quarter of 2016, compared with £16m in the first three months and
£5.3m in the second.
Other platforms have similarly reported a decline in demand, as the buy-to-let
clampdown has weighed on the sector.
LandlordInvest has reported that loan enquiries have dropped since the start of this
year, which Karadaghi also attributes to tougher affordability rules introduced by the
Prudential Regulation Authority (PRA).
“We have seen a substantial reduction in buy-to-let enquires both from direct
borrowers and from intermediaries,” he says.
Read more: SMEs strained by late council payments
“We believe that this reduction could be explained by the stamp duty changes along
with the PRA’s new affordability rules. Although the new rules do not affect us
directly, they are likely to have an impact on the overall buy-to-let market, damping
the demand for buy-to-let mortgages.
“There are many things that platform can do to attract more borrowers; criteria,
speed of financing, rates, another approach to underwriting etc. But at the end, each
borrower has their own reasons for approaching a lender or P2P platform.”
Amid the wider market challenges, P2P is slowly creeping into the mainstream, with
both Landbay and LendInvest signed up to the sector’s trade body, the Council of
Mortgage Lenders (CML).
The organisation recognises that these platforms have a role to play, but there are
doubts as to how big they can get.
“They will grow from very low to pretty low,” says Paul Smee, director general of the
CML.
A number of buy-to-let mortgage brokers and lenders have declined to comment to
Peer-to-Peer Finance News on the growing presence of P2P lenders in the sector.
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries,
suggested that the silence was due to the sector being too small and niche in
comparison with the main market.
“The P2P sector needs to get people with affinity and the skill-set to be able to drive
business across,” he says.
Read more: LendInvest extends its free property developers courses
“It needs people with good contacts who can leverage their own personal brand.”
He cited Landbay’s recent appointment of Paul Brett, who has worked for lenders
SPML, Borro and Masthaven, as intermediaries managing director as a good example
of someone who has moved across from the mainstream market that could help
increase awareness of P2P lending.
Another source said P2P lenders faced barriers due to the relative nascence of the
industry. The platforms have not had to cope with any major defaults to date, so
there is uncertainty over what would happen and if a platform would survive.
All P2P platforms say their due diligence is of the same standard as that of banks.
Landbay’s Goodall also highlights the difference between buy-to-let lending, where
the bank can become the receiver of rent, and mortgage lending where the property
needs to be sold. It is the latter that was a key driver of the 2008 financial crisis, as
property values had fallen so much that there was very little security for the banks if
they wanted to repossess and sell the property.
It seems unlikely that P2P lenders will enter the residential mortgage market any
time soon, with its lengthy loan terms and low interest rates.
“I think this will be the last area of property P2P that anyone enters,” says Brian
Bartaby, chief executive of commercial property P2P lender Proplend.
“While it may be seen as the most altruistic by helping people buy their own homes,
lending on owner-occupied mortgages falls into a different Financial Conduct
Authority regulation category.
“Banks are already very active and the rates are among the lowest, therefore this
would produce much less attractive returns.”
Despite some industry wariness, P2P property lending looks set to continue its
strong growth trajectory, in part due to the Innovative Finance ISA (IFISA).
Of eight IFISA providers on the market, two provide property loans – Landbay and
LandlordInvest – with CapitalStackers and Proplend also due to launch products.
“This is encouraging for the industry and for retail investors who want added
security in the form of asset-backed loans to property borrowers, wrapped in a
tax-efficient ISA product,” says a spokesperson for Orca.
But Brian Bartaby, chief executive of commercial property P2P lender Proplend,
emphasises that investors must consider the type of underlying loan in their IFISA.
“It is very important not to fall into a false sense of security just because a loan is
backed by property,” he comments.
“The loan needs to be properly underwritten with clear understanding of how the
interest will be paid and the loan exited.
“Not all property-backed loans are equal. Remember property development creates
a capital gain and not an income stream, which is important when looking to pay
interest to lenders.”
Read more: Funding Circle winds down property lending
Despite these headwinds, a spokesperson from comparison site Orca remains positive about the future of the sector.
“There is scope for growth on all fronts,” he says.
“The accessibility and efficiency offered by P2P property lenders, along with lower
interest rates, makes P2P appealing to borrowers seeking loans for property
purposes.
“P2P lenders employ a rigorous screening and vetting process, but use technology to
advance the process and streamline it so borrowers can be approved faster.”
While landlords and developers may be getting hit by increased regulatory scrutiny
and tough banking requirements, at least the door remains open to P2P platforms
for themselves and investors.
