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  • Peer to Peer Lending

    Debating crowdfunding/P2P lending from a property perspective

    Thank you to the Property Investor Show for sharing this article that they commissioned ahead of the P2P Lending Debate at the Spring Show.

    It comes at an important landmark in the history of P2P lending as the Chancellor revealed in yesterday's budget that P2P loans can now be included in the new ISA allowance.

    Alternative finance - Crowdfunding for property by Ros Renshaw

    Since the credit crunch, there has increasing noise about crowdfunding, or peer-to-peer lending. A debate at the Property Investor Show will provide invaluable information about this online marketplace

    Crowdfunding primarily started as a way of getting singers and rock groups into a financially viable position whereby they could record albums. Investors received little in return beyond free CDs.

    However, the idea cottoned on: if a neighbour’s son wanted funds to open a restaurant, then friends and family pitched in, attracted by the idea of free lunches if the venture proved successful.

    It then became increasingly more commercial and the rewards became financial, as crowdfunding platforms sprung up online, introducing investors to business opportunities and allowing people to pool their money to support businesses, organisations and individuals. And all without a bank in sight.

    Funding Circle, for example, launched in 2010 because of two key problems: businesses were struggling to access finance and people were getting a poor return on their money. It has so far attracted over 72,000 people who have joined to lend money to businesses – so far, a total of nearly £235m.

    For a number of small businesses, particularly start-ups, crowdfunding has been almost the only way to raise money in recent years. It is not just that crowdfunding is a source of money – it is a quick source, with funds typically made available within two to four weeks.

    With banks notoriously reluctant, and slow, to lend to business ventures, the UK crowdfunding market is now worth millions – and growing.

    According to think-tank Nesta, the alternative finance market, which includes all types of crowdfunding, grew by 91% last year from £492m in 2012 to £939m in 2013. Nesta thinks the market could grow to be worth over £12bn a year.

    City regulator the Financial Conduct Authority says that securities-based crowdfunding, a type which allows people to buy shares or debt securities in a company, raised £28m last year for growing businesses, an increase of around 600% compared to 2012. Examples of securities-based crowdfunding include Crowdcube, which allows people to invest in start-up business in return for shares.

    Another type of crowdfunding, which is loan-based and also known as peer-to-peer lending, raised £480m in 2013, an increase of around 150% on the previous year.

    Examples of loan-based crowdfunding include Assetz Capital, Zopa and Funding Circle. Investors place money on their platforms, to be lent to borrowers, and receive interest in return over the loan term.

    Crowdfunding is very much a child of our technological times: everything is done online.

    Businesses that want to raise money via crowdfunding apply to the platforms online, and provided they meet that platform’s criteria, their requirements are posted up, complete with a timescale for investors to express their interest.

    Until quite recently, property investment businesses were not major users of crowdfunding – but that is changing, with the likes of LendInvest, Crowdahouse, the House Crowd, Crowd Funded Property, Property Moose, and the latest, Crowdproperty and LaunchPad.

    LendInvest, which was spun out of bridging lender Montello last year, exists specifically for residential and commercial mortgages, and has so far completed nearly £28m worth of loans, secured against properties worth nearly £44m.

    LendInvest is also responsible for what is thought to be the largest crowdfunding loan in the world to date – £4.1m for a development of flats in Croydon, headed by Martin Skinner, of Inspired Asset Management, who said he had no qualms using crowdfunding: “What we needed was to move quickly, and traditional lenders are too slow. Without the funding from LendInvest, we would not have been able to complete our purchase in time.”

    Those who backed Skinner through LendInvest have been offered 12% annualised interest.

    Others offer rewards that put traditional bank saving accounts in the shade. Manchester-based House Crowd advertises some attractive sounding rewards – 6% for those who want to see a combination of income and capital growth, and 7.5% for those wanting income only.

    Simon Zutshi, of Crowdproperty, is a seasoned property investor who has long believed in the concept of using other people’s money. He says that crowdfunding was the obvious next step for the property investment industry.

    Jonathan DeCarteret, who is behind another new venture, LaunchPad, has ambitious plans to attract property investors from around the world to fund residential and commercial developments in London, China, Dubai and the US.

    Simple concept

    Property crowdfunding can be very simple: the property in question is advertised and people (ie, the crowd) pledge their support. If sufficient funds are raised, the property can be bought and the rewards – rental income or the gain after refurbishment and sale – distributed after costs.

    Unlike much crowdfunding, property offers a very special attraction: the investors get ownership of actual bricks and mortar. So, while there is no guarantee that the venture will succeed, investors do actually have a solid asset.

    That is a comfort factor that many crowdfunders do not have – if, for example, they have merely invested in someone’s talent, ideas or a business plan. It is small wonder that, since 70% of new ventures fail within their first few years, the former City regulator, the Financial Services Authority, warned that no one should invest in crowdfunding unless they were prepared to lose all their money.

    Property prices can, and do, go down as well as up – and indeed, the rises and the crashes can be spectacular. However, property crowdfunders can spread their risk along with other investors. And because they act as part of a group, they can build up a larger portfolio than if there was just one investor.

    Also, crowdfunders interested in property can buy into the sector when, as solo investors, this would be impossible: £5,000 is typically all you need, according to Crowdahouse. Housecrowd quotes £1,000 and Property Moose sets the bar at just £500.

    The biggest challenge for investors is bound to be trust: can you trust someone who has taken your money not to disappear with it into the sunset? Until now, this issue has not been helped by the fact that crowdfunding has been almost entirely unregulated in the UK. This changes in April, with new rules being brought in by the Financial Conduct Authority.

    However, while most crowdfunding will be covered, some will not be, and nor will people who lose out through crowdfunding be able to lodge claims for compensation, and so it will still be a case of ‘investor beware’.

    Different types of crowdfunding

    The FCA has identified five different types of crowdfunding, of which the first two are being regulated. The FCA also stresses that its new rules are being brought in to protect consumers who invest in crowdfunding platforms, and not to stifle what it calls ‘innovative’ method of funding.

    o Loan-based (or peer-to-peer lending): lending money to individuals or businesses in the hope of a financial return, such as interest payments. The FCA says that most crowdfunding (90%) is currently through peer-to-peer platforms.

    o Investment-based: investing directly or indirectly in new or existing businesses by buying shares or debt securities, or units in an unregulated collective investment scheme. Investment-based crowdfunding is considered by the FCA to be higher risk than peer-to-peer lending.

    o Donation-based: gifting money to enterprises or organisations people want to support.

    o Reward-based: for example, supporting a band and receiving a CD.

    o Exempt activities: this woolly definition, according to the FCA, covers “investing or lending money using organisations that do need to be authorised or investments that do not need to be regulated”.

    New rules

    The new rules will affect peer-to-peer crowdfunding platforms, where people make loans in exchange for interest payments and the ability to get their original loans back.

    First, consumers will have to receive explanations of the key features of the loans, plus an assessment of the creditworthiness of the borrowers seeking funds. Platforms will not be allowed to play down any risks or warnings. Promotions must be fair, clear and not misleading.

    The crowdfunding platforms will need plans in place to ensure that loan repayments continue even if the company raising the funds collapse. There will also be a 14-day cooling-off period.

    More rules are to be phased in over time to ensure that firms running crowdfunding loan-based platforms have sufficient capital of their own. This, says the FCA, is important, as consumers who lend money through these firms cannot claim through the Financial Services Compensation Scheme.

    Investment-based crowdfunding is already regulated, but new rules will also kick in here: these investments can only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses. In other words, investors must be sophisticated and wealthy.

    Importantly, they will not be able to invest more than 10% of their available assets, excluding their home, pensions and life cover.

    Christopher Woolard, the FCA’s director of policy, risk and research, says:

    “Consumers need to be clear on what they’re getting into and what the risks of crowdfunding are. Our rules provide this clarity.”

    Crowdfunding platforms

    One of the features of the crowdfunding scene is that new platforms have to raise money in order to launch – and are turning to crowdfunding to do it.

    Simon Zutshi has done exactly this, and so has James Cadbury (of the chocolate family) in launching Property Moose.

    Cadbury used Crowdcube to raise £170,000 in 11 days from 109 investors. The new platform will concentrate on acquiring buy-to-let residential properties, including auction lots plus new-builds, and Cadbury says: “We will put properties on our portal and allow investors to put in anything from £500 upwards into that property. “For example, if we had a £100,000 property, then if 100 people invested £1,000 we could buy it and each would own 1% and earn from 1% of the capital growth. Once we have a property we will get a tenant in there for one to five years.” As well as viewing prospective properties to invest in online, people can also track their portfolio’s progress.

    Zutshi went to BankToTheFuture to pitch, successfully, for funds to start up Crowd Property Ltd. In his offering, he said: “Banks simply do not understand property investing and are not lending for profitable property deals.”

    Zutshi, who is taking part in the debate at the Property Investor Show, raised £159,556 from 22 investors. Simon Dixon, CEO of BankToTheFuture, said: “A while ago, I said that every single financial product will be reinvented into a crowd-based product. Financial services and banking is being reinvented as we speak.”

    Pros and cons

    According to John Corey of Chelsea Private Equity – who will be chairing the debate – there are plenty of arguments both for and against crowdfunding – and some of the perceived advantages could actually be disadvantages.

    For example, the public effectively do their own underwriting and trading. Is this good or bad? As Corey points out, it is an inviting feature for investors – but they do not have the expertise of City professionals, do not do multiple trades on a daily basis, and are unused to due diligence.

    Corey, an American who now lives and works in London, also says that crowdfunding started out as something that appealed to friends and family. The difficulty now is that it could appeal to “friends, family and fools – and that is where it starts to break down potentially”.

    He also makes the point that crowdfunding will not be for everyone. For businesses wanting to raise funds, the very open and transparent nature of crowdfunding, which involves a public pitch, could be an issue. Anyone seeking to crowdfund will have to make their plans public, allowing competitors to see what they are doing.

    The biggest issue for property investors, says Corey, is motivation. Most buy-to-let investors are entrepreneurs, suggesting they do not want a slice of the action but the action itself. As he puts it: “Do you want a piece of a large pie? Or do you want the whole of a small pie that you baked yourself?”

    However, against this, he says there is definitely an appetite for passive, shared ownership in property, and that crowdfunding is a way of offering just this type of investment cheaply.

    “I think our debate will be interesting, because it will pick up on a lot of subtleties,” he says.

    Case study 1

    Seasoned property investor Frazer Fearnhead began the House Crowd in March 2012, inviting investments from £1,000. The idea was for investors to club together to buy distressed or repossessed properties, do them up, rent them out – and sell them once their value had gone up by a certain amount.

    Investors are promised a fixed return of 6% per annum, and a pro rata share of 50% of the profit made when the property is sold. The other 50% is how the business makes its money.

    Two years on, how is the business going? There are, he says, 412 investors who between them have raised £3.4m and bought 50 properties outright.

    There are, he says, advantages to crowdfunding. These include much lower costs to get on the property investment ladder; using Fearnhead’s own experience to get the best deals; hassle-free, since all the properties are managed by Fearnhead’s own team; bypassing banks and no small print; and good liquidity – he says that if an investor wants to quit, their shares are easily sold to new or existing crowdfunders.

    However, he too acknowledges that there are disadvantages: the decision to sell a property can be cumbersome, as it requires a 51% majority vote. Until now, properties have been sold to a formula – if they achieve 25% above their post-refurbishment value, they are put on the market. However, now it is the investors who decide whether to hang on to a property in the hope of further appreciation, or to sell it now.

    He also admits that a dedicated property investor will make more money on their own – provided they want all the work that goes with it.

    House Crowd is also evolving. It started off with small, cheap properties in unloved parts of Greater Manchester, where yield rather than capital growth was what mattered. However, the last purchase is a four-bedroom property and Fearnhead is now planning to take the business national.

    Fearnhead intends to be in the audience at the crowdfunding debate.

    Case study 2

    Simon Zutshi is a well-known name in property investment circles, having been investing for over 15 years and been financially independent since the age of just 32, thanks to his investments.

    His own buy-to-let portfolio consists of around 30 properties, but in the last few years he has become increasingly interested in larger projects – for example, developments such as one in Redcar where a commercial property is being converted into 20 flats, or a former pub in Oxford with redevelopment potential.

    “With all my current projects, I probably have around 100-plus end products,” he says. “Until now I have been using bridging finance, but it is expensive, while banks are inflexible. It is a challenge for property investors such as myself that we often want to do things that banks don’t understand.”

    Zutshi already works with other private investors, pooling funds, and this is what has sparked his interest in crowdfunding. He went to BankToTheFuture not so much because he needed the funds to launch his platform but because he wanted to experience how crowdfunding worked first-hand.

    He plans, by the Property Investor Show, to have his platform up and running and offering deals to investors.

    There will be two basic propositions. One will be in property development where a typical deal would be a property in need of refurbishment that could be either sold on at a profit after 12 months or refinanced. Typically, he says, an investor would earn 10% interest per annum rolled up and paid at the end of the project.

    “We will have very tight criteria as to what we will accept, but we might well fund something that a bank wouldn’t,” says Zutshi.

    His second proposition will be a refinancing project. “It might well already be one of our properties, but it will have been refurbished and let out, so there will be less risk. This would pay interest at 6% per year, but paid on a monthly basis.”

    Such refinancing projects would attract lending at up to 75% LTV over a two or three-year term.

    How will his own business make money? By charging a 5% arrangement fee.

    Zutshi has already obtained a credit licence but believes his new enterprise may not need FCA authorisation, since his business will essentially be offering buy-to-let loans which, unlike ordinary domestic mortgages, are not regulated.

    However, Zutshi emphasises: “Our focus will be on protecting the interests of our clients. If any of our borrowers fail to make a payment, we will step in to make the payments and complete the project ourselves.”

    * The debate on crowdfunding at the Property Investor Show will take place on Friday 11th April between 11.00 and 12.00 and will be chaired by John Corey. The panel is due to consist of representatives from LendInvest and Funding Circle, plus Simon Zutshi, and Jonathan DeCarteret of LaunchPad.

    Register for your free ticket to the Property Investor Show >>> here.

    [Image: house.png]Related content:

    P2P loans can now be included in ISAs

    Property Tribes launches new P2P Lending Tribe powered by Assetz Capital

    P2P lending from a property perspective with Stuart Law

    The House Crowd

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com

    Hi Nick, great to see such a detailed look at the industry's genesis. We've found that the P2P property lending market has grown very quickly since we launched Assetz Capital a year ago, as other platforms have come on board with different property offerings and confidence in the industry increases. In that time we've funded BTL mortgages, development loans, bridging loans... all secured on tangible assets. For me, this is what makes property P2P lending attractive - that brick and mortar security.

    It's definitely a key time for the industry - the combination of FCA regulation and ISA inclusion shows just how seriously the Government is taking all this. There's more to come though, so watch this space!


    Stuart Law
    CEO, Assetz Capital

    What do others think of the article? Are there any specific questions you would like me to ask the panel members?


    John Corey 

    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.


    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    I would like you to ask the panel members if they might provide a lending solution for those who are with MX/NRAM/UKAR to provide a product to mortgage away from these lenders. Smile

    Perhaps a short term 5 year product to get away from these lenders and have five years to find another solution?

    (26-03-2014 11:59 AM)Vanessa Warwick Wrote:  I would like you to ask the panel members if they might provide a lending solution for those who are with MX/NRAM/UKAR to provide a product to mortgage away from these lenders. Smile

    Perhaps a short term 5 year product to get away from these lenders and have five years to find another solution?

    Good question.

    For this to work, the borrowers would have to be happy lending to the borrower. The borrower would have to be happy paying what is more than 1.75% above base as many MX loans are trackers with the specific margin.

    Will many savers want to fund a high LTV loan with a low return?

    (26-03-2014 01:17 PM)daniel_booth Wrote:  A question - Simon Zutshi says if a borrower defaults he will step in and make the payment himself.

    What if there are mass defaults the next time a big crisis hits, seems he'd have to keep a huge reserve fund.

    What are the terms of the guarantee?

    Another great question. I also fail to see how Simon can run a CrowdFunding site (the reason he raised funding) and not fall under the FCA regulations for CrowdFunding.

    Ignoring my above question, I am not sure that Simon's platform would even legally be able to make such a claim.

    Assuming that the FCA approved such a business model, the capital to provide a backstop would have to be safe and secure so that the funds are ready when the market takes a dip.

    (26-03-2014 01:17 PM)daniel_booth Wrote:  Would some form of insurance not be a better option?

    Insurance might be better if it was cost effective. An insurance company would legally have to have the capital to back such a policy. Like re-insurance for the rest of the insurance sector.

    The premiums would be set to cover the risk of the insurance. How they would price that might require a specialist like Lloyds.

    John Corey 

    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.


    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    A question - Simon Zutshi says if a borrower defaults he will step in and make the payment himself.

    What if there are mass defaults the next time a big crisis hits, seems he'd have to keep a huge reserve fund.

    What are the terms of the guarantee?

    Would some form of insurance not be a better option?
    Risk in P2P lending is a major issue that needs clarification. Small investors must feel confident that their money is not going to disappear!!

    Andy Holgate of Assetz Capital shares his views in this short video bite:


    Interesting news!

    ​Business Insider says figures from the P2PFA, the industry association for online lenders, show that Landbay saw a huge drop in lending in the third quarter of this year - it lent just £283,000 in that period compared to £5.3m in the second quarter and £16.7m lent in the first quarter of 2016.

    Landbay is a peer-to-peer PropTech firm which is only two years old; it allows people to lend and provide mortgages for buy to let landlords. Investors receive a monthly return based on the mortgage repayments. 

    Full/source story


    That can not be right? nearly £300k thats just one good mortgage.

    With LandBay minimum loan of £70k that is just 4 mortgage completions, based on there minimum.

    That supprised me though we dont use LandBay much. Better options are often avaliable - P2P is great for investors but got to have a upside for the borrowers.

    Criteria like "The property value exceeds £100,000" may as well read "we dont do the north" and with other lenders with no income "You have a minimum income of £30,000 pa" is not competative. Put on the rates on top of that its a rare choice.



    YOU CAN REACH ME AT BESPOKE FINANCE for HMO Mortgages, Cheap Life Insurance and Limited Company Buy-to-Let on 08009202001

    Landbay claims to have 243 mortgages with an aggregate value of £42.9m (176,543 each) secured against property valued at £63.7m (67.3% LTV) and an average 171.75% rental cover at the pay rate of the loans

    and zero defaults / arrears

    Average borrowing rates 5.13% + 0.88% annual fee = 6.01%  fixed and 4.55% + 0.61% annual fee = 5.16% tracker


    Not really sure of its place in the market


    From time to time I receive emails from Ablrate touting the latest offers that it is offering through it's lending platform

    There aren't many that are secured on 'property' as they seem to be aimed at borrowers securing loans against planes, shipping containers and other assets.

    But today's is a property play and it has some features that people might be able to comment on

    The loan is for £330k and will be made to a finance company which is "standing behind the loan" and is, in turn, "securing it with a 2nd charge against against a £3,900,000 (current value) residential property that has a Gross Development Value of £5,400,000. There is also a Personal Guarantee with the guarantor having a £3 million net worth."

    The property to which the 2nd charge will be attached has an "outstanding debt of £2,500,000. The mortgage holder is entering into a 'Deed of Priority' with the finance company which will be assigned to Ablrate Lenders. This deed does two things:

    1. It restricts the amount of money the first charge holder can claim in default to £2.5 million (so interest and fees in default cannot roll up and affect the 2nd charge) and;

    2. It restricts the first charge holder from selling the property for anything less than the combined debt of their company and the finance company. So the minimum the property could be sold for is £2.83 million. The valuations will be in the documents section, the minimum valuation has been made at £3.95 million in its current condition.

    Subject to sufficient bids being received and acceptance by the borrower, the loan interest will be 14%, will be for 12 months"