Warren: “Not all P2P is high-risk investment”
Much of peer-to-peer lending represents a medium-risk investment, and Folk2Folk certainly sits towards the lower end of the risk scale, the company’s managing director has said.
Roy Warren (pictured), believes that P2P has a role when it comes to diversifying a sophisticated investor portfolio, with opportunities to suit various investment appetites.
His comments come months after the Financial Conduct Authority (FCA) passed a rule requiring all P2P platforms to display a warning on their websites which describes P2P investments as “high risk”.
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“We now have to use this risk warning because the FCA has grouped P2P lending in with higher risk investments such as crypto assets, but we don’t feel that we belong there,” says Warren.
“We really do respect the need for appropriate risk warnings, and it’s paramount that people understand the true risk of each investment, but we are actually conservative lenders.”
Folk2Folk lends money to business owners and property developers, with all loans secured against UK land or property. The platform typically has a maximum loan-to-value of 60 per cent on any property security, which means that the property’s value would have to fall by at least 40 per cent before eating into the capital investment.
Read more: Q&A with Folk2Folk’s Roy Warren
“With all the downturns we’ve seen in recent decades, we’ve never seen property prices fall by more than 25 per cent,” adds Warren. “It’s difficult to imagine that property prices will fall by 40 per cent, although there are always exceptional circumstances.
“The highest-risk transactions are development sites where you could see a significant fall.”
When it comes to property development loans, Folk2Folk doesn’t use the standard gross development value, which predicts a potential sale price for the completed property. Instead, the platform assesses the development based on its value at the time of the loan application. This helps to reduce a key risk in property development financing – the risk that the development will not be completed.
This conservative approach to risk modelling has helped Folk2Folk maintain a record of zero investor losses, while growing steadily to become the largest P2P lender in the UK with cumulative lending of more than £600m.
After delivering steady annual returns of 6.5 per cent to investors every year since its inception, the company has recently increased its starting interest rate to eight per cent, with some loan investments expected to offer double-digit returns.
While Folk2Folk – like all regulated firms – must still carry a visible risk warning on its website, Warren believes that in reality, Folk2Folk errs more towards the medium-low side of the risk spectrum.
“There are no guarantees with loans, apart from our security,” he explains. “So we’re certainly riskier than a high street bank, but we’re not that far off it.
“Our lending criteria wouldn’t be much different to that of Lloyd’s Bank or NatWest, but of course we would never compare ourselves to them.
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“As long as it’s understood that liquidity is not guaranteed via our secondary market, we are not high risk,” Warren adds. “However, we are prudent, secured lenders with a minimum investment of £20,000 which places us as a niche player rather than mass market.
“P2P lending is not totally safe and within the P2P marketplace there is still much diversity in risk models and structures, but I think a medium risk label would be more appropriate for us.”
This is why it is so important for potential investors to educate themselves about the market and ensure that they understand every risk involved before they decide to invest.
