Looking for a mortgage in a hurry? Tiny deposit? Not much idea where the capital for repayment is going to come from? There’s not much point darkening the door of a bank these days, as that’s precisely the sort of lending that got them into so much trouble. But there is a new type of lender in the market which is only too happy to consider such a proposition.
Grassroots microfinance websites – known as crowdfunding and peer-to-peer lending – are rushing headlong into the property market. Most focus on buy-to-let properties, but some have also begun to lend for development finance and to purchase commercial property.
They market themselves as a way for ordinary people with as little as £100 to get a toehold in Britain’s rapidly rising property market. While there is now a range of risk and reward to choose from, their advertised returns generally compare very favourably with most of the other options available to retail investors in today’s world of ultra-low interest rates.
And with bank lending constrained by tighter regulations and the legacy of caution left by the financial crisis, these new lenders report strong demand from borrowers.
Kersfield, a property developer based in southwest England, last month took out Britain’s largest property p2p loan of £10.8m from lender Wellesley. It will use the funds to convert a historic Bristol mansion into apartments and build new homes alongside it.
Wellesley has also backed two of Kersfield’s other projects. David Newton, a Kersfield partner, says his company turned to the lending platform because it is so hard for small developers to secure funding from the banks.
“The option of peer-to-peer finance was extremely attractive as it is quicker, more flexible and often with better commercial terms than traditional lenders,” he says. “We have also found banks unwilling to lend in regional cities despite there being strong residential markets.”
Such sites do not just lend on residential property – some are looking at the commercial market.
Daniel Miller set up US website Fundrise in 2010 and is now bringing it to the UK. His platform specialises in funding sub-$20m commercial property schemes in regeneration-focused areas of big cities. He thinks these “transitional neighbourhoods” are well suited to the grassroots lending model.
“The tangible, social and community aspect attracts people, particularly younger people, in up-and-coming areas,” he says.
But some of the more established lenders fear that a recent flurry of interest in the sector is drawing in new participants who take greater risks.
The most obvious divide is between p2p lenders, which invest through debt finance, and crowdfunders, which place investors’ funds into real estate projects as equity finance. Crowdfunders generally pair investors up with individual borrowers – so backers take a stake in a specific property, rather than in p2p lenders’ diversified portfolios of properties.
All this, p2p lenders argue, makes crowdfunders much riskier. Graham Wellesley, who founded the lender that provided Kersfield’s finance, warns that “there is concern within the [lending] industry that some of the investments [crowdfunders] back are quite speculative”.
“They are attracting unsophisticated investors with limited amounts of capital to high-risk investments,” he says, adding that he worries about the reputational damage this could one day inflict.
“If people did lose money, which in speculative investments they often do, it may give us the wrong profile,” he says.
Mike Roberts, managing director of crowdfunded housebuilder HAB, says he was wary of some platforms which did not sufficiently stress the risks. “We didn’t want to have people on our investor roll who thought this was an instant route to riches,” he says.
P2p platforms are urging the government to tighten the regulations. Earlier this year the Financial Conduct Authority brought p2p and crowdfunding under its regulatory gaze – though it did not differentiate between the two types of lender, which some in the industry say was unhelpful.
The FCA regulations require p2p and crowdfunders to offer investors clear information about the risks they are taking, and what safety nets are in place if they run into financial problems.
But the sites are still not part of the Financial Services Compensation Scheme, so the FCA has been accused of giving investors a false sense of security. In fact, investors are reliant on each company’s investmenjudgmentnt and have no financial recourse if their investment turns sour.
Christian Faes, who set up p2p platform LendInvest in May 2013, says there is “a rocky road ahead” for p2p and crowdfunding.
“Regulation is a good thing because it legitimises the asset class, but there is the potential for investors to be slightly misled in terms of the security of what they are investing in,” he says. “P2p is a bit of a fad and a lot of people are jumping on the bandwagon. It’s very easy to lend money. What’s difficult is getting it back. Some investors will be disappointed.”
John Goodall, chief executive of buy-to-let p2p lender Landbay, says it was vital to scrutinise the calibre of both borrower and property. “What looks like a nice house may not necessarily make a good mortgage,” he says. “The property is key but don’t forget the other half of it – the landlord.”
As well as those dangers, real estate is particularly susceptible to mortgage fraud, Mr Faes says. LendInvest uses the SIRA system set up by the major bankscross checkheck applicants and share data. But he says not all of the new breed of lending start-ups do likewise.
Landbay uses the major anti-fraud databases such as Experian and Equifax, which have access to a wide range of bank fraud data, Mr Goodall says.
But ultimately how borrowers perform may not become clear until another property market downturn hits. That would be the biggest catalyst in sorting the wheat from the chaff, according to Mr Miller.
“How do you differentiate [between different platforms] in a rising market when most deals are performing?” he asks. “Probably in a few years there will be a [property market] slowdown and some of those platforms will show that they have a robust model that survives. At some point there will be a shake-out.”
Grand financial designs
Television celebrity Kevin McCloud – best-known for his Channel 4 programme about self-builders, Grand Designs – turned to crowdfunding to raise finance for his housebuilding business, HAB.
Investors last year backed him with £1.9m through Crowdcube – one of the biggest crowdfunded investments ever made.
The money will be used to finance the growth of the business, which was originally set up in 2007 and develops custom-built homes. Through Crowdcube it now has 649 investors who have contributed between £100 and £150,000 each and collectively own a quarter of the equity in the business.
HAB has promised to pay them a dividend representing a 5 per cent yield on their investment by the end of 2016.
HAB managing director Mike Roberts says they turned to crowdfunding because its ethos matched well with HAB’s business philosophy. “We are about putting people at the heart of the development process, rather than using standardised designs,” he says.
They chose crowdfunding rather than p2p for the same reason – they welcomed having a wide range of new equity investors. “It felt more like a people’s business,” Mr Roberts says.
After landing the funding those investors have become more closely involved in the company, he added: “People have brought [development] sites to us, people are doing other funding deals with us, people are testing our new website for us. The plan is to interact more with our investors in the future, not less.”
Buy-to-let mortgages
One of the earliest property crowdfunders, the House Crowd, was set up two years ago. So far it has raised £5.2m to purchase 77 properties. It requires a minimum investment of £1,000 and offers fixed returns of up to 7.5 per cent.
Investors can pick which buy-to-let home they want to back. The deal is structured through a special purpose vehicle which purchases the property and channels the rental income back to investors. The House Crowd’s staff refurbish, let and manage the property.
By contrast, new kid on the block Landbay collectivises investors’ funds so that they are diversified across its portfolio of buy-to-let mortgage loans. It launched in May and has so far lent £1.2m, with plans to be lending £30m-£40m a year within the next couple of years.
Landbay promises borrowers a decision in principle within 48 hours of their application on loans of between £50,000 and £500,000 at up to 80 per cent of the value of the property, although it only rarely goes above 72 per cent, according to its chief executive John Goodall.
Mr Goodall argues that buy-to-let is at the conservative end of the investment spectrum. “It’s secured against property, it’s income-producing, and we only lend to experienced landlords and at relatively low loan-to-values (LTVs),” he says.
Commercial property
Large price tags and lot sizes mean that ordinary investors tend to use funds or real estate investment trusts to get exposure to commercial property. But some crowdfunding companies are starting to step into the market.
Fundrise, America’s first commercial real estate crowdfunder, has raised $38m since 2010 and faces competition from more than 100 other platforms.
It offers a minimum investment of $100, promises average returns of 12-14 per cent and maturities of 1-5 years, and allows investors to choose which individual buildings they back.
Fundrise is now going international. It is currently negotiating for an FCA licence and plans to launch in Britain next spring, while also pursuing plans to outposts in Germany, the Netherlands, France and Spain. Its first European investments will focus on London, co-founder Daniel Miller says.
It will face domestic competition from Relendex, which claims to be Britain’s first commercial property lending p2p site. It offers investors returns of up to 10 per cent annually. Borrowers can access up to £2m on fixed terms of between six months and five years, and Relendex boasts of “higher LTVs than traditional lenders”.
New construction
The £10.8m lent to developer Kersfield took Wellesley’s total loans since it was founded in November 2013 to £73m, secured against assets worth £116m.
Its founder Graham Wellesley decided to step into the sector because he saw how greatly small property entrepreneurs have come to need funding since the banks scaled back their SME lending. By the end of this year, he aims to be lending £50m a month.
“There’s a lack of loans of under £10m in the property sector,” Mr Wellesley says. As well as offering more freely available finance at cheaper rates than the major lenders, p2p lenders can also offer quicker decision-making, he asserts.
“The banks take three months or more to come to a decision, so from a developer’s point of view there’s uncertainty that they will be able to do the scheme they want to,” he says. “We can make a decision inside three weeks.”
Wellesley faces competition from start-up CrowdProperty, which has just launched. It offers gross returns of 5-11 per cent with a £500 minimum investment, and aims to raise £20m in its first year. It is offering new development finance and to refinance existing projects, with investors picking the projects they want to back. Borrowers can access up to 100 per cent loan-to-value at up to 11 per cent interest a year.
Bridging finance
LendInvest, which claims to be the world’s largest crowdfunding mortgage marketplace, has injected £121m into the UK mortgage market since it launched last May.
LendInvest is the offspring of funds management business Montello. Having started off by channelling investors’ cash into short-term bridging lending, founder Christian Faes first began to contemplate opening up to smaller retail investors around three years ago.
The result, LendInvest, takes cash from Montello investors alongside the funds it raises directly from small online investors.
It is now Britain’s fourth-largest p2p lender, offering average returns of 7.8 per cent and an average term length of six months at up to 75 per cent LTV.
It focuses on short-term loans, also known as bridging finance, which enable landlords to take advantage of the sale of homes at auctions.
Speed is a vital part of its success so far, according to Mr Faes. “We can provide funding within two weeks, whereas standard buy-to-let lending takes three to six months to put in place,” he says. “Many landlords buy at auctions where there is a 28-day completion period for the successful bidder.”