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  • Peer to Peer Lending

    Property development finance an unsuitable asset class for P2P



    In every industry, especially property investments of all kinds, there will will be participants who mess it up for the others. There are plenty of property funds, listed ones as well, being run by so called 'professionals' who paid over the top for shopping centers which are now worth pennies on the £.

    It's a real shame that off the back of a few platforms the whole P2P industry is being tarred by the same brush.

    I genuinely believe in the P2P concept for many different asset classes, when done correctly empower individual investors and give them access to an asset class, which to date has been exclusively the domain of institutions.

    The other benefit is that as the borrower and the lender are directly connected, there is much less fee leakage and both parties can end up better off. Well thats the theory!

    BUT - here is why I don't believe that property development finance is a suitable asset class to be funded by a P2P platform.

    Property development loans are drawn partly on day 1 to buy the site and then monthly drawdowns as the development / refurbishment progresses.

    The traditional bank funding method was to agree how much was required to fund the whole development and legally document that. The borrower would then pay an interest fee on the drawn funds and a "non utilisation fee" (usually minimal) on the agreed but non drawn funds.

    This meant that the developer knew that sufficient funds were available to complete the development (assuming they kept to their budget).

    With P2P platforms, the platform funds the loan required to purchase the site and then funds the drawdowns "on the fly". This is where developers are running into trouble, as if for whatever reason the monthly drawdowns are unable to be successfully funded when they are required.

    The developer is then unable to pay the contractor, the contractor cannot pay the subbies and the development grinds to a halt. This helps no one, especially the investors who funded the development to date.

    And have you ever tried to refinance or sell a half finished development, not very easy.

    I don't understand why a developer would start a project without 100% certainty that the funds were available for me to finish the project.

    For this reason, and partly as I am lazy and didn't want to have to deal with monthly drawdowns, is why when I set up Proplend I decided to specifically focus on commercial real estate debt.

    Commercial real estate debt is a long term institutional asset class which offers regular and stable interest with high levels of capital protection. The important bit here is that there is no requirement for a capital uplift in the value of the property and that there is an existing legally documented rental income stream from which to make interest payments to the investors.

    Residential property developments return a capital gain not an ongoing income stream.

    And for what its worth, commercial real estate debt should be a lower risk investment than residential development debt and therefore generally returns lower interest rate returns. Which I would argue are better risk adjusted returns.

    So I still fundamentally believe that P2P platforms provide an important source of funding for borrowers, especially where the high street banks have pulled back (property funding is very expensive for Banks due to capital adequacy requirements as Metro Bank found out) and can offer investors, in a long term low interest rate environment, attractive rates of risk adjusted returns.

    You just need to think about what you are investing in and don't be drawn in by high headline returns alone.

    Brian Bartaby - Proplend Founder and CEO

    The views above are my own and not a representation of Proplend or any other platform. Investors' capital is at risk.

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    Proplend Borrower Team
     
    T: 0203 637 8418 |  http://www.proplend.com
    15 Little Green, Richmond, TW9 1QH

    Hi Brian,

    Thank you for such a thorough explanation.  Very helpful.

    What would happen if the developer could not raise "follow on" money to complete the development?  Why wouldn't they revert to standard bank finance?

    The other thing is that, I understand, the developer can spend the money how they like, and there is little accountability?

    I am led to believe some developers pay themselves big monthly management fees to project manage, so there's not a huge incentive to them to push forwards, as they are earning out of it while having little/no skin in the game.

    Finally, I am always skeptical of where it appears too easy to raise money ...

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    That's the problem - getting a new lender to step into a part finished site is almost impossible and it certaintly won't be from standard bank finance and trying to sell a part finished site is not easy. Or it is easy but prob not at the level required to cover the o/s debt. If I am taking on a half finished site, I want a REALLY good deal.

    Monthly drawdowns are released to pay for work done in arrears, so each month a bank appointed QS turns up on site and agrees with the developer that they have spent the monies that they say they have and that say 10,000 bricks are on site or 10 fitted bathrooms etc. The QS reports back to the lender and then the lender releases the funds to the borrower who in turns pays his invoices / contractors etc.

    Any decent lender shouldnt allow developers to take big management fees throughout the term of the loan, they are the equity in the deal not an employee or cost.

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    Proplend Borrower Team
     
    T: 0203 637 8418 |  http://www.proplend.com
    15 Little Green, Richmond, TW9 1QH


    Apologies if I confused you - I was talking about crowdfunded developers taking management fees, so there is no "lender" to go to and monitor how the funds are being deployed?

    With a crowdfunded developer, who decides what the money is spent on?  Are you saying they go back to the crowdfunding platform for monthly drawdowns and that a QS is involved there?

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    So if the developer 'crowdfunded' the development - I would assume that they will be 'crowdfunding' the equity portion and then still use some sort of debt (bank or possibly P2P platform) to fund the balance. But if the developer has 100% crowdfunded the costs, then yes its very hard once the monies have been raised to control where / how they are spent.

    I hope that answers your question. 

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    Proplend Borrower Team
     
    T: 0203 637 8418 |  http://www.proplend.com
    15 Little Green, Richmond, TW9 1QH


    P2P lenders aren't really crowdfunding, essentially crowdfunding is exactly what it says it is, hundreds of non-sophisticated investors contributions- aggregated together - and that's all the platform does, it's a fundraising page.

    Most P2P lenders (the successful ones, I know a lot of them have failed etc) operate in the same way as any lender, they have exactly the same credit and underwriting teams that work with the QS and the client to structure the drawdowns against a proposed build schedule, it's all mapped out on day one, and they work with a monitoring QS throughout the build to completion - the cost of which is accounted for in the borrowing from the start. P2P lenders sit in the alternative space, so these are developers who may have the experience, but they lack the capital to go down the traditional route.

    Most successful P2P lenders (again caveat here - a lot don't and that's why they run into problems as mentioned above)  will have a blend of their own funds or a warehouse facility with someone + their platform, and when agreeing to go into a scheme, they will have enough capital ring-fenced to fund all the future tranches, it isn't just a case of funding day 1, and then fingers crossed the can fund the next tranche. The majority will have a small group of HNWI who have already pre-agreed to buy into everything that fits certain criteria, so there is very little difference between them and a traditional lender - aside from the option to take on investors being part of the business model.

    Just playing devils advocate though - agree with everyone's points above! 

    There are enough rouge P2P lenders out there who just act like a "crowdfunding site" to give the whole sector a bad name unfortunatley, as they will buy into schemes and then be unable to raise the money to complete them -  and plenty more will go bust in the coming months and years I'm sure.

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