Is P2P the bad boy of bridging lending?



Peer-to-peer property lenders are on the defensive after a series of high-profile failures that proved disastrous for investors and triggered a regulatory crackdown. A sector born of the last financial crisis now wants to come out fighting into the pandemic.

Lendy, Funding Secure, Collateral and most recently Wellesley; despite its youth, or because of it, the UK P2P sector has been rocked by company collapses and millions of pounds of investments that have had to be written off, with at least some of them involving quite considerable amounts of bridging loans.

Stuart Law, CEO of Assetz Capital which specialises in P2P bridging lending, is not alone among lenders in being very keen to promote what he does as quite separate from all that unpleasantness.

“Wellesley isn’t a P2P firm, it ran bond investments. Lendy eventually got some FCA permissions but didn’t run a P2P company from what can be seen in the public domain. They have nothing to do with P2P, so they have nothing to say about P2P in my view,” he says.

But that isn’t quite true. Wellesley started life as a peer-to-peer property lender in 2013, didn’t stop accepting new money into its P2P product until May 2017, and only in 2019 said it would shift its whole focus to ISA-eligible listed mini-bonds, still invested in property developments.

Lendy did have an early business model where investors leant to Lendy which would then place the money with borrowers, but this was changed in 2015 when investors started funding loans directly in a P2P structure

Bridging loans were the dominant asset class at both firms. When RSM was appointed Lendy’s administrators in May 2019 it found the loan book, value of £152m, was entirely split between property bridging loans (£36m) and development finance loans (£116m), most of which have since been put into insolvency.

Josh Mendez, director of property at broker Rangewell, which has had around £45m worth of bridging loan approvals this year, including with P2P lenders, argues Lendy and Wellesley failed “not due to their peer-to-peer model, but because they had a concentrated loan book filled with high-risk projects”.

Cold comfort to investors who very much thought they were getting diversified P2P portfolios. At Lendy the expected recovery on the development finance and bridging loans are anything from 7p to 100p of investors’ capital, but mainly at the lower end. At Wellesley losses are expected to be 99p in the pound. All investors know is, to a greater or lesser extent, they have been badly burnt by P2P and bridging loans.

“The fall out from the collapses certainly shone an unwelcome light on the worst of P2P practices and P2P as an asset class which inevitably led to tighter FCA regulations and reduced investor confidence,” admits Mendez.

From December 2019 the Financial Conduct Authority (FCA) placed a limit on investments in P2P agreements for retail customers new to the sector of 10 per cent of investable assets. Platforms must also assess investors’ knowledge and experience of P2P investments, with the guidance generally leaning towards it only being right for fairly sophisticated investors. Both rules apply unless the retail customers have received regulated financial advice.

The move followed criticism of the FCA’s up until then fairly light-touch approach to regulating P2P lending, despite its own previously stated concerns, and as an important means of ensuring investors do not over-expose themselves to risk.

The FCA also added more explicit requirements to clarify what governance arrangements and controls P2P platforms need to have in place to support the outcomes they advertise, with a focus on credit risk assessment, risk management and fair valuation practices.

According to Assetz’s Law the new rules “might limit how much some people can invest or if they can, but it doesn’t change demand, people are still very interested in first charge property lending”. With the Bank of England base rate at 0.1 per cent, and talk even of negative interest rates, it is undoubtedly true there is demand for better yielding assets than government bonds or money in a savings account.

At issue is whether the answer to the question, “what risk/return instead?”, is P2P. Not according to BondMason, which recently announced the closure of its core P2P business, citing an anticipated downturn in returns “over the coming years”, in large part related to the economic impact of coronavirus.

Roxana Mohammadian-Molina, chief strategy officer at P2P lender Blend Network, is more sanguine: “I can only speak from our own point of view and what we see in the market, and we remain very positive on the outlook for P2P property lending,” she says.

Blend Network operates exclusively within the P2P property space, and all loans are secured against first charge so in the event the borrower cannot repay as lender it will step in and exercise its right to recover investor’s money by the sale of the property, if no other means are available.

“We believe this is the most secure part of the market,” says Mohammadian-Molina. Well-secured loans to borrowers who can be relied on to repay,  she adds, are what investors need to be seeking out: “P2P lending is an instrument, a tool, that gives investors access to a wide range of investment products. It is almost like a sandwich, what matters is what’s inside.”

Prior to coronavirus, investor appetite for the P2P property ‘sandwich’ was strong. New lending volumes rose by more than half to almost £850m during the first half of 2019 alone, according to a survey by lending data company Brismo and Link Asset Services, even amid the massive public relations dent to the sector caused by Lendy’s collapse during that time.

Broker Rangewell’s Mendez points out the latest GDP figures from the Office for National Statistics show productivity in the real estate sector has bucked the trend and continues to be extremely active. “All this activity needs lenders to lend, and with many mainstream lenders out of the picture more and more borrowers are turning to the P2P market,” he says.

As we move into a very different economic environment, however, where traditional lines on the need for office space and city centre retail and services outlets are being radically redrawn, investors will want to know how P2P property investing can balance the opportunities it offers in a low interest rate environment, with its risks.

“The worry for many investors right now is that volatility in property values will lead to higher default rates,” admits Mendez.

This is not just an issue P2P lenders are facing, he is quick to add. “We are seeing the same reaction from institutional lenders who are freezing or pulling lending lines, Covid and Covidphobia are affecting all asset classes and all types of property investors,” he says.

It will come down to what reliable investment opportunities peer-to-peer platforms can offer investors: “If it’s high yielding, diversified property we think the P2P lenders will move back into the market quicker than the institutional investors and will therefore have the pick of a lot of interesting opportunities, especially in the sub £5m market,” Mendez says.

P2P investors don’t – or at least shouldn’t – expect all of their bets to pay off. Catastrophic failures like Lendy and Wellesley have though alerted them to the fact that, if not done properly, online investment platforms can cost them everything. What matters for most investors is the return they earn after losses – their return on a risk-adjusted basis. It will become an increasingly important measure of how well diversified P2P lenders’ books were going into the pandemic, and the strength of their business models coming out.

“Lenders that can demonstrate their lending book has ridden out the storm, and show a robust internal system and collateral selection, will become even more attractive to investors looking for returns in what will remain a very low interest rate environment,” says Mendez.

Ultimately past failures, and future successes, in P2P property lending are all about the due diligence done on the deals by lenders, not corner-cutting, buck passing to the end investor.

“Some platforms saw themselves as the ‘ebay for property loans’, the completely wrong approach,” Blend Network’s Mohammadian-Molina says.

“I strongly believe our main job at P2P property lending platforms is to do a strong due diligence to ensure the quality of loans is maintained, and defaults are kept low. This is the key to the P2P property lending market.”