What is the outlook for retail-funded development finance? Hannah Gannage-Stewart finds out
Property development finance has become one of the most popular products in the peer-to-peer lending sector. It was traditionally the preserve of institutional and high-net-worth investors, before it became available to retail investors via P2P platforms.
Many everyday investors have now benefitted from stellar returns by backing development projects.
However, Assetz Capital’s decision to freeze withdrawals from its instant access accounts in November left some industry commentators questioning the P2P development finance model. Should retail investors be backing higher-risk development projects and are instant access accounts an inherent risk when the loan is structured across staggered drawdowns?
Assetz took the decision to freeze withdrawals for fear that outflows may outpace new investment, leaving development loans under-funded. The following month, the lender pulled out of the retail market altogether.
Assetz Capital’s chief executive Stuart Law then sparked fierce controversy among the industry when he questioned the future of P2P development finance.
He predicted that the Financial Conduct Authority (FCA) is likely to resurface plans to ban the marketing of P2P development loans, having shelved the proposal last year.
Speaking to Peer2Peer Finance News in January, Law said it was a “very dangerous” time for the industry, as many platforms have retail-backed development finance loans as a large part of their businesses.
“Generally, when things go into [FCA] consultation papers, they don’t come out,” he said. “It was a huge amount of lobbying to get it delayed as a decision. However, the writing is on the wall. My personal belief is development funding will get severely restricted or cancelled as a valid form of lending for P2P.”
Bosses of P2P development finance platforms were quick to convey their disagreement with Law’s comments. They argued that the sector plays a vital role in delivering much-needed finance to small housebuilders that they cannot get from traditional banks, while providing bumper returns to individual investors.
Furthermore, many of these platforms have good track records with zero losses to date and consistently see loan tranches filled quickly once they go live, indicating extremely strong demand for these products.
Some argue that the product is not necessarily high risk, if there is a strong team in place with extensive expertise in the property market, working with trusted developers.
CrowdProperty, which specialises in residential development finance, has been very open about its commitment to retail investors on its platform, as part of a diversified mix of funders.
“Marketplace lending as a sector was revolutionary in bringing lending opportunities direct to individuals, more efficiently and effectively matching the supply and demand of capital for the benefit of all,” the platform said in December. “CrowdProperty has proven the efficacy of this model in the property development space, with strong, consistent and transparent returns over many years since founding in 2013, reliably backing quality property developers taking on quality property projects worth over £625m.”
Conversely, Brian Bartaby at Proplend does not believe that P2P works with development funding and his platform has never done it for that reason. Instead, the firm focuses on more straightforward commercial property loans, which are paid in a lump sum, with no further drawdowns.
“Fundamentally, I have never believed that property development is the right asset product for P2P lending,” Bartaby explains. “On paper, it’s super-efficient. On paper it works, but more people have to keep funding it for it to work, and life doesn’t work that way.”
On top of this, Bartaby echoes Law’s concerns that the regulatory burden of incorporating retail investors is too high once a platform scales. As P2P lenders increasingly shift towards institutional investment to shore up their development funding commitments, it gets harder to truly meet the requirements of a pure P2P lender. It can be done, and many lenders do run mixed portfolios within the regulatory requirements, without letting borrowers down, but it’s an onerous task.
EasyMoney is one such lender. The platform has a substantial retail loan book, alongside institutional investment and the platform’s own money, which together enables it to honour property development funding without fear that a rush on withdrawals could bring the house of cards tumbling down.
However, chief executive Jason Ferrando admits that there is always a risk that investors will be spooked and rush on withdrawals. Likewise, he says the FCA’s required reporting around retail loan books is substantial, but the scale of the retail investment at EasyMoney makes it worthwhile.
The way EasyMoney enables retail withdrawals is to give investors access to a secondary market, where they can sell loan parts at a pound-for-pound value. As soon as the loan part has been bought, the investor gets their investment back, and funding for the loan itself remains secure.
However, like other platforms, Ferrando has seen a trend away from retail investment. “What we’ve seen happen is, as some of the smaller investors have withdrawn from the P2P market – whether it’s because of legislation, a downturn in the market or the fact that we’ve got to put these risk warnings up a bit more prominently – we’ve seen more high-net-worth money come into the sector.”
Meanwhile, EasyMoney is doing less development funding than it once did. Ferrando says around 70 per cent of the loan book was development loans but following the pandemic the platform has seen that reduce to nearer 20 per cent. He says the change is not by design, and EasyMoney is still looking to do development loans, but the market has naturally shifted.
At LandlordInvest, chief executive Filip Karadaghi said his platform has a limited number of development finance loans on its books but broadly agrees with Bartaby that the onerous regulation and management of the staggered drawdowns makes them unappealing.
“Even institutional lenders can just pull their investment one day, there is no guarantee,” he comments. “It’s exactly like retail investors may panic for whatever reason. Institutional investors may also panic for whatever reason and pull out their funding. So, it’s a tricky situation.
“I wouldn’t build a business just based on development finance, because the risk is just too great that your liquidity might dry up at any time and being stuck with a half-complete development is hugely inconvenient. Also just dealing with development finance is so much more time consuming, than it is with a bridging loan. I mean, in terms of time requirements it’s a crazy amount of time.”
For Kuflink’s head of products Paul Auger, the right balance of investment for a diversified portfolio of funders is key to sustaining a thriving P2P platform and continuing to fund property development.
“We’ve seen it so many times before that people build up to a certain level and then they say, ‘right, we don’t need P2P anymore now, because we’ve got institutional funding’,” he says.
“We don’t have that opinion at all. We want to be multichannel. So, we want to be funding deals via the platform, we want to be funding deals via high-net-worth individuals, institutional funding, pension funding, we want a whole range of diversified funders to us.”
That’s not to say Kuflink doesn’t see the benefit of institutional funding, which it is in the process of bringing on board, but at present all of its more than 7,000 active funders are via the platform, a mix of retail and high-net-worth individuals. What the lender doesn’t want to do is bring in institutional money at the exclusion of all else.
Auger admits that some institutional investors prefer a platform to prioritise them over retail, and that has been something Kuflink has had to negotiate round. He says it remains unwilling to drop retail, despite other P2P executives feeling the marketing is dropping away.
The firm takes a similarly pragmatic view on development funding. Auger is under no illusion that it can be difficult to fund property development via P2P, so he says Kuflink is careful to stay in its lane.
“We don’t really market for the really large deals,” he says. “People say they’re doing £7m deals, £10m deals. That’s not really our sweet spot, because I agree on that side of things, we may give ourselves a challenge to fund those deals on an ongoing basis. The size of deals that we do, our sweet spot, is up to £2m or £2.5m.”
Kuflink doesn’t rely purely on retail to fund these deals, it will line up high-net-worth funding to ensure the deals are funded to completion. Auger says they build head room into the fund too, over-funding it, and there are no instant access accounts, so there is no risk from a rush on withdrawals.
The shortest term a retail lender can invest on Kuflink is one year. Auger says there was a three-month product at one point, but the interest rate was not appealing enough to attract investment and the product was withdrawn.
For a number of lenders such as EasyMoney, Kuflink and CrowdProperty, confidence remains high that retail-backed development finance is here to stay, particularly alongside institutional funding.
For others, this is an area that no longer, if ever, fits into their business model. The diverging opinions perhaps point to a maturing marketplace, where platforms are evolving into new niches and choosing their own paths to success.