Join the crowd

The risks and re­wards of in­vest­ing in prop­erty via peer-to-peer lend­ing and crowd­fund­ing plat­forms

Business Traveller - - OPINION - JOHN STEPEK EX­EC­U­TIVE ED­I­TOR OF MONEYWEEK MAG­A­ZINE

Fancy in­vest­ing in prop­erty, but don’t want to sink a hefty sum into a buy-to-let home or shop? Peer-to-peer (P2P) lend­ing and crowd­fund­ing of­fer a po­ten­tial so­lu­tion. For a low min­i­mum in­vest­ment, P2P plat­forms en­able you to lend money to in­di­vid­u­als for mort­gages or to prop­erty de­vel­op­ers for projects, while crowd­fund­ing sites of­fer the chance to club to­gether with oth­ers to in­vest in a rental prop­erty.

So how does it work and is it worth con­sid­er­ing? It’s a huge sec­tor, and I can only re­ally scratch the sur­face here, but the main thing to re­mem­ber is that there are plenty of risks, and no guar­an­tee you’ll get your orig­i­nal in­vest­ment back in­tact. If you do in­vest, make sure that it’s money you can af­ford to lock up for a while – some plat­forms of­fer early exit routes but, if you do have to pull out early, there’s the risk that you won’t get your money back promptly, or in full. Be­yond those points, the main thing to iden­tify in each case is: what risks you are tak­ing on, and are you be­ing of­fered a rea­son­able re­ward in re­turn?

BE­COM­ING A LENDER

One P2P op­tion is to lend money to in­di­vid­u­als or pro­fes­sional land­lords to buy res­i­den­tial or com­mer­cial prop­erty. Plat­forms that do this in­clude Land­bay and Pro­plend (where loans are se­cured against prop­erty).

Your main pit­fall here is “credit risk” – for ex­am­ple, the peo­ple you are lend­ing to may not be able to re­pay you. You can min­imise the like­li­hood of this by di­ver­si­fy­ing (in­vest­ing across a range of loans, which most plat­forms will do au­to­mat­i­cally for you) and by en­sur­ing that the rental in­come healthily cov­ers the mort­gage pay­ments. You should also check the plat­form’s his­tory of de­faults, although none of the com­pa­nies in this sec­tor have been through a full-blown prop­erty crash yet, so the fig­ures won’t re­flect a worst-case sce­nario.

In terms of re­turns, the loans are se­cured (against an as­set), which makes them less risky than many forms of lend­ing. So ex­pect the rates to be in the lowto-mid sin­gle dig­its. On that front, the “big pic­ture” risk you take on is in­ter­est rate and in­fla­tion risk. Lend­ing money to some­one at 5 per cent, say, sounds great right now. If in­ter­est rates rise, it’s not so ap­peal­ing.

When lend­ing money, you need to check where you are in the peck­ing or­der if things go wrong

FUND­ING DE­VEL­OP­ERS

With this model, you are lend­ing money to fund the de­vel­op­ment or ren­o­va­tion of a prop­erty. Names in this sec­tor in­clude As­setz Cap­i­tal and Lendy. Some­thing to watch out for here is “de­vel­op­ment risk”: will the prop­erty devel­oper man­age to stick to its plan and will its ex­pec­ta­tions be met? Clearly, many vari­ables can af­fect this – from the state of the econ­omy (will costs rise by more than ex­pected? What hap­pens if the econ­omy runs into trou­ble halfway through com­ple­tion?) to the com­pe­tence of the devel­oper (have they ac­counted for the com­plex­i­ties of the pro­ject and built in “give” for un­ex­pected hur­dles?).

You need to check where you are in the peck­ing or­der if things go wrong – in most cases, the de­vel­op­ers will have raised funds from a range of sources. Usu­ally, the bank will be at the front of the queue, and the first in line will have the first claim on the as­sets.

Do your re­search on the plat­form and the pro­ject. Does the devel­oper have a de­cent track record? Does the plat­form have a his­tory of back­ing suc­cess­ful projects? Over­all, this riskier form of lend­ing should of­fer the po­ten­tial for cor­re­spond­ingly higher re­turns.

BUY­ING A SHARE

An­other op­tion is to own a share of an in­di­vid­ual buy-to-let. Plat­forms in this sec­tor in­clude Prop­erty Part­ner (which also of­fers shares in com­mer­cial prop­erty) and UOWN. For buy­ing a share in the com­pany that owns the prop­erty, you get a share of rental pay­ments and cap­i­tal gains on sell­ing.

The “big pic­ture” risk here is that the buy-to­let boom looks to be over. The UK gov­ern­ment is strip­ping away the tax ad­van­tages that once made be­ing an am­a­teur land­lord so ap­peal­ing. As a re­sult, land­lords who can no longer make the sums add up are now sell­ing up. That sit­u­a­tion is only go­ing to con­tinue as the tax changes are phased in over the next few years.

Yet, even if I felt con­fi­dent about UK res­i­den­tial prop­erty as an in­vest­ment, I’m not sure I’d in­vest in this way. You sac­ri­fice a lot of the con­trol you have in own­ing an in­di­vid­ual buy-to-let, and also the abil­ity to “gear up” – use bor­rowed money to am­plify your re­turns. The fees are also rel­a­tively high – it’s like in­vest­ing in a buy-to-let, then adding a mid­dle-man be­tween you and the ten­ant. Those lay­ers of costs add up, mak­ing it hard to rec­om­mend this as a method of in­vest­ing in prop­erty.

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