This article examines developments in and around peer-to-peer lending and property investment from a UK perspective.

"Peer-to-peer lending platforms have been around for a while, part of a broader trend of non-banking channels that arose particularly in the aftermath of the 2008 financial crisis when conventional lending sources were squeezed. These platforms, enabled by new internet channels and ideas about connecting borrowers and lenders, have mushroomed. They have certain risks, however, which need to be understood by both parties. The development of P2P lending highlights the continued fecundity of financial markets around the world. 

The editors of this news service are pleased to accept this article from James Newbery, investment director at British Pearl, a property investment platform. We hope the article stimulates debate and we invite readers to respond, if they wish, by emailing the editor at tom.burroughes@wealthbriefing.com. This publication does not necessarily endorse all views of guest contributors."

Recent changes to regulation and tax have challenged traditional property investing. Coupled with a low-interest environment, this has prompted some investors to turn to new and alternative methods of property investing - such as peer-to-peer and online investment platforms - which are attractive thanks to their ease of use and competitive returns. 

Despite their growing popularity, recent scepticism surrounding the risk potential and credibility of such platforms has prompted wariness from some investors. As the market matures, however, developments and innovations in these platforms are mitigating some of the commonly associated risks of P2P, whilst allowing investors to enjoy the flexibility, choice and potential of these strands of alternative property investing. 

Property investment options for HNW
Property investment, both commercial and residential, has remained consistently popular among the mass affluent and high net worth investors. Research from the Global Investment Intentions Survey 2019, published by INERV, showed that more than half of global investors plan to increase their exposure to real estate in 2019.

Despite this, recent regulatory and fiscal changes have presented some areas of property investment with challenges. Buy-to-let, one of the more traditional investment options, has suffered blows from the introduction of new legislation. A 3 per cent surcharge on stamp-duty for second homes and higher taxes on buy-to-lets has meant that some would-be investors are deterred, viewing these changes as a “barrier to investment”. It may come as no surprise therefore that the number of buy-to-let mortgage approvals for house purchases dropped by 27 per cent in 2017, according to data from the Shawbrook Bank. 

Each property investment model retains its own balance of risk and reward. Property bonds for example, offer a way for investors to seek value from the early stages of development projects. Investors offer their capital as a loan to the development company in exchange for a fixed rate of interest over a set period of time. Investors benefit from a layer of protection as, once the bonds are issued, they are secured against the physical asset of the property. Another option for investors are Real Estate Investment Trusts, offering long-term, reliable income, sourced from rents paid to the owners of commercial or residential properties.

While these tried and tested investment options have remained attractive for some time, in the current low interest rate environment, many investors are on the hunt for more compelling yields, and are considering alternative ways to invest their money. 

P2P has a place for HNW
It is against this backdrop that property P2P lending has risen to prominence. P2P covers many different models, but the basic premise is that it connects borrowers directly to investors, allowing investors to profit from the repayments on the loans. Recent research from Connection Capital has found that a quarter of high net worth investors are now allocating at least one fifth of their wealth into alternative assets such as P2P lending. While the P2P industry is booming, property P2P has particularly proven popular, with a third of total P2P loans made in 2017 being property backed 

Recent criticism of P2P has centred around its high potential for defaults. The classic model for property P2P platforms is as an intermediary between lenders and borrowers. The loan repayment is subject to the performance of a third party, as a result exposing the full credit counterparty risk of a borrower who is independent of the platform provider. Awareness of the default risk for this model is growing, such concerns have precipitated a response from the FCA, with further regulation of this market expected later this year.

Building an agile, balanced portfolio, managing risk
Not all property-backed investment platforms operate this model. Some have developed strategies which enable them to deliver attractive returns, while reducing exposure to defaults. Some platforms offer the opportunity to invest in either or both share and loan investments, enabling investors to run portfolios that are agile, diversified and tailored to their personal risk appetite. Debt investors benefit from a fixed monthly interest, while equity investors gain a monthly rental income, and the potential to benefit from any capital appreciation upon sale of the property. 

Some platforms, like British Pearl, hold properties in separate SPVs (Special Purpose Vehicle), which means that should one investment lose value, there is no contagion across an investor’s other individual investments. Essentially, the lender is only exposed to the credit/counterparty risk of that vehicle, which is managed by the alternative investment fund manager.

While some wealth managers have struggled to see what role they can play in P2P property investment, given that the client can go direct to the platform, in today’s challenging investment environment for traditional asset classes, advisors should consider a range of sophisticated alternative strategies to reduce correlation within portfolios and improve overall risk-adjusted returns for their clients.