P2P platforms allow investors to target solid returns without the roller-coaster volatility of the stockmarket, argues Roxana Mohammadian-Molina.
The current turbulent economic environment has made the trade-off between risk and return seemingly less favorable. The volatility of equity markets has seen them ricochet from their worst performance since 2008 - with the FTSE 100 ending down 12.5% at the end of 2018 – only to bounce back in January.
For many investors, the volatility of equity markets is proving too much and they are looking to re-balance their portfolios, based on more secure assets, with more secure yields.
Alternative finance options, such as peer-to-peer lending (P2P), offer this opportunity with property-based P2P lending experiencing robust demand. That being said, investors should be aware that many platforms offer loans in higher-risk assets and cities, which is why we have developed a different model, which focuses on affordable housing in less overbought regions where there is still potential to secure robust returns.
In such a climate, it’s not surprising that investors consider stable asset classes such as property or bonds, with the promise of more stable returns. Yet buying property remains expensive and fractional ownership is difficult, while corporate bond markets lack liquidity, and quantitative easing has distorted returns in government bond markets.
Retail investors have historically been slow to consider such asset classes, as returns are traditionally more difficult to benchmark, and they can be less liquid than the likes of equities.
However, alternative finance options, such as P2P lending, are helping to overcome these hurdles. According to Moneywise, in 2016, people in the UK invested £3 billion through P2P lending platforms and total lending facilitated by P2P Finance Association platforms passed £10 billion during the third quarter of 2018.
In their simplest forms, P2P platforms connect those who have money to invest with those looking to borrow, enabling investors to target solid returns without the rollercoaster volatility of the stockmarket, while benefiting from reduced transaction costs.
Many of the largest P2P lenders delivered a FTSE-beating return in 2018, with most yielding around 4% to 5%. In 2015, P2P was approved to be included within the Isa wrapper, so interest earned through eligible P2P platforms can now be tax-free. The rise of P2P, together with a decade of low interest rates, has inspired many would-be savers to become income-seeking investors.
Property-backed P2P lending has been increasing in popularity with investors because the loans are secured on bricks and mortar, reducing risk, yet maintaining the healthy returns on offer.
We believe that the biggest growth has been in lending within the broader residential space, which includes bridge funding, small family builders and developers of flats for sale, buy-to-let landlords, or direct buy-to-let mortgage providers, as well as to commercial real estate lenders.
However, shadows overhang a number of areas. For example, changes to both tax and stamp duty has caused demand for traditional buy-to-let assets to cool in recent years. According to Bank of England figures, just 12.7% of mortgages in the final three months of 2017 went to buy-to-let borrowers, the lowest level since 2013 – a trend that looks set to continue.
Property developers concentrating on prime, city-centre locations – sectors that have peaked in recent years – should, in our opinion, largely be avoided.
Small builders who tend to operate in niche, higher-margin markets are less exposed to market volatility than, say, London’s buy-to-let landlords.
Some niche platforms do not focus on any of these areas but rather target small- to medium-sized affordable housing developers, away from London and the South East, which are more acutely exposed to the repercussions of Brexit, with supply rising yet sales dropping, valuations going up and yields decreasing.
From the point of view of retail investors, P2P property investment offers robust fixed yields, backed by physical property assets.
While investors will always be wise to take a long-term view on property, this type of investment offers greater liquidity than traditional property investment, but retains targeted attractive returns.
Roxana Mohammadian-Molina is chief strategy officer of BLEND Network.
Your capital is at risk if you lend to businesses. P2P lending is not covered by the Financial Services Compensation Scheme. Investments are illiquid (the inability to sell assets quickly or without substantial loss in value). Past performance is not a reliable indicator of future results. Blend Loan Network Limited is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (FRN. 574048).