Peer to peer lending in property
PUBLISHED: 16:34 12 May 2014
Peer-to-peer lending has grown in popularity since it first emerged on the funding scene in 2010, says Angus Taylor of Bruton Knowles.
With banks tightening their borrowing conditions, businesses, particularly small and medium sized ones, have been turning to this alternative method of finance to fund their business ventures in their droves.
Now the funding craze looks set to fill a gap left by banks and institutional investors in the real estate market – but will it work?
Peer-to-peer lending, which matches wealthy investors with businesses or individuals in need of capital through online lending platforms such as Funding Circle, Ratesetter and Zopa, first started in Britain and has been widely adopted across the world.
Similar to crowdfunding, in which investors usually back a project or start-up business in return for an equity share or other ‘reward’, depending on the project and sum invested,peer-to-peer lending enables individuals to side step the banks and directly invest in businesses by way of a loan, which is then paid back with interest.
In the last three years, the peer-to-peer lending market in the UK has trebled in size and will be soon bypass the £1bn mark.
An independent benchmarking survey of UK alternative finance found that peer-to-peer consumer and business lending platforms are the largest form of alternative finance in the UK, with invoice trading the second largest form of finance for businesses.
According to the Peer-to-Peer Finance Association (P2PFA), peer-to-peer lending increased by 121 per cent during 2013, and by February 2014, £843.4 million had been lent out via the platforms, with £263.6 million loaned to businesses and £579.8 million to consumers. If peer-to-peer business lending continues to grow at its current rate, independent research has predicted that the industry will become worth £12 billion per year within a decade.
So far, the property market in the UK has been slow to jump on either the peer-to-peer or crowdfunding bandwagon, but it’s changing, slowly.
Kevin McCloud, presenter of television’s Grand Designs, used crowdfunding to raise £1.4m for his firm Hab Housing, which has built in Stroud and is currently developing in Oxford. It is proving increasingly popular in the residential buy-to-let market too, with investors joining up to purchase property assets.
Funding Circle, the UK’s leading peer-to-peer business lender, has announced that it has an extremely healthy pipeline of property finance deals that are about to be listed on its marketplace for its thousands of investors to lend on. Bruton Knowles is advising Funding Circle on the potential property investments, providing audits and valuations to ensure schemes are viable and to minimise the risk for the investors. We are currently valuing the first project in Liverpool.
For real estate projects, Funding Circle has capped its loan limit at £3m, which immediately cancels out large developments, which are inherently more risky. There are, however, risks still associated with peer-to-peer lending, no matter how big or small the project. The biggest risk for investors and borrowers in the UK had been the lack of regulation, though this has recently changed.
These changes came into effect on the 1st April resulting in peer-to-peer lenders now being policed by the Financial Conduct Authority (FCA). This should mean more rights and greater protection for those who use them. There are minimum capital requirements, rules to protect ‘client money’, and a requirement that steps are taken to make sure repayments on existing loans would continue to be collected if a lender went bust. Members of the P2PFA insist that they were already doing all of these things already.
However, peer-to-peer lending sites still aren’t covered by the Financial Services Compensation Scheme, which guarantees savings up to the value of £85,000, and there are no plans to change this.
Contact Angus Taylor for more information on peer to peer lending, call 01452 880000 or email email@example.com