Peer2Peer Finance News January 2022 by Alternative Credit Investor

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P2P PREDICTIONS

Industry experts share their hopes for 2022

COMMERCIAL PROPERTY LENDING

>> 16

How Covid has changed the commercial property market

P2P regulation veteran Dr Mark Davis on the democratisation of finance >> 22

ISSUE 64 | JANUARY 2022

Average IFISA returns pass 9pc for second year running INNOVATIVE FINANCE ISAs (IFISAs) returned an average of 9.01 per cent during 2021, showing that the peer-to-peer lending model can deliver inflation-beating returns during periods of prolonged economic and stock market turmoil. New research from Peer2Peer Finance News found that despite the departure of some high profile IFISA providers, the sector as a whole continues to deliver relatively stable annual returns via the IFISA tax wrapper. In 2020, the average annual return on IFISA accounts was 9.04 per cent. During the 2020/21 financial year, the average target return being offered across 32 IFISA accounts

was 8.72 per cent. In 2019, it was 8.45 per cent, and in 2018 it was 8.3 per cent. 77 firms have now been granted IFISA manager status by HMRC. However, of those 77, four are in administration (The House Crowd, FundingSecure, Reyker Securities and Business Loan Network) and four others have closed their

P2P lending business (RateSetter, Zopa, Landbay and Octopus), thus rendering their IFISA permissions redundant. A further three IFISA managers are not currently accepting new investors. LendingCrowd has been closed to all new investment since January 2021, while Guarantormyloan is not

currently taking on new lenders. Meanwhile, Funding Circle has paused all new IFISA investments since April 2020, while it focuses on offering government-backed loans during the pandemic. A Funding Circle representative told Peer2Peer Finance News that it would not be reviewing its retail investing business until the recovery loan scheme comes to an end in June. The Funding Circle IFISA is not expected to be available to new investors before then. At least 20 platforms have not launched their own IFISA product, despite holding authorisation. These include >> 4

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EDITOR’S LETTER

Published by Royal Crescent Publishing

Green Park House, 15 Stratton St, Mayfair, London W1J 8LQ info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@p2pfinancenews.co.uk Kathryn Gaw Contributing Editor kathryn@p2pfinancenews.co.uk Marc Shoffman Senior Reporter marc@p2pfinancenews.co.uk Michael Lloyd Senior Reporter michael@p2pfinancenews.co.uk PRODUCTION Tim Parker Art Director COMMERCIAL Tehmeena Khan Sales and Marketing Manager tehmeena@p2pfinancenews.co.uk SUBSCRIPTIONS AND DISTRIBUTION tehmeena@p2pfinancenews.co.uk Find our website at www.p2pfinancenews.co.uk Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. Peer2Peer Finance News has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

opa’s peer-to-peer exit has been described by some as the end of an era. But maybe it also represents an opportunity for the P2P sector. 16 years after Zopa introduced the world to the concept of ‘person to person’ lending, the industry has expanded and matured significantly. Our exclusive Innovative Finance ISA (IFISA) research found that for two years running, IFISAs have been paying out average returns of over nine per cent per year. That is a stunning achievement, especially when you remember the warning cries from March 2020 that Covid would spell the end for P2P. Instead, the pandemic has proved the efficacy of the P2P model during an economic downturn, and it appears to have inspired many platforms to innovate in a completely new way. Open banking adoption is up, blockchain technology is gaining traction, embedded finance is becoming more popular, and a cluster of platforms are publicly discussing the possibility of a public listing in the year ahead. These are not signs of a sector that is on its way out. Within days of Zopa announcing its closure, we were hearing reports of hundreds of former Zopa investors seeking to transfer their IFISA funds to other P2P lenders. Clearly, there is still plenty of demand for P2P products, and there are plenty of platforms for them to choose from – all with a stellar track record of delivering inflation-beating returns. Zopa may have left P2P, but its legacy is going absolutely nowhere. KATHRYN GAW CONTRIBUTING EDITOR, PEER2PEER FINANCE NEWS

We hope you’re enjoying the latest edition of Peer2Peer Finance News! We have now moved to a paid-for subscription model. If you would like to continue reading the magazine, please go to www.p2pfinancenews. co.uk/subscribe/ to find out about subscription options.

NEWS

cont. from page 1 the crowdfunding site Crowdcube, and challenger bank Monzo, as well as a number of asset management firms, financial advisers, and share-dealing sites. However, among the 20 firms with unused IFISA permissions, two – Peer Funding and WiseAlpha – told Peer2Peer Finance News that they plan to launch IFISAs in 2022. This leaves 46 authorised

IFISA providers currently offering the tax wrapper to their retail lenders. Among those 46 providers, 34 were able to share data on their returns. The average target returns for these 34 active IFISA providers across the whole of 2021 were between 7.22 per cent and 9.01 per cent, depending on the type of account chosen. Of the 34 IFISA

accounts which shared their 2021 returns, 13 were targeting doubledigit returns, up to a maximum value of 18 per cent per year. The lowest target return recorded for the year was 1.2 per cent. Over the course of 2021, several business P2P lenders reduced their rates by an average of one per cent, reflecting the competitive business lending environment

which has characterised the year. Meanwhile, most consumer lenders increased their lender returns by between one and two per cent. However, the majority of IFISA providers continued to offer the same or similar investor rates for 2021 as they did in 2020, despite a background of economic instability and stock market volatility.

Proptee pauses UK regulation plans over crypto uncertainty EUROPEAN PROPERTY investment platform Proptee has put plans to get regulated in the UK on hold. The platform, which lets investors use an app to buy shares in properties in exchange for receiving a portion of the monthly rent, will take deposits in euros and stablecoin cryptocurrencies USD Coin and the Proptee Euro digital currency. Benedek Toth, chief executive of Proptee, said the platform decided last summer to not go for Financial Conduct Authority (FCA) regulation as there isn’t a clear legal framework for cryptocurrencies in the UK. “We're waiting for the UK regulator to come up with a clean legal framework regarding

cryptocurrencies and then we'll submit our application,” he said. “There are high capital requirements and the paperwork can take too long when applying for FCA authorisation, making it harder for us to raise money.” The platform is authorised in Lithuania

as a virtual currency exchange, that allows it to operate across the European Union, which it wouldn’t have been able to do in the UK. Toth said the platform will start by offering single residential property and commercial projects but said there is scope for digital

investments in the metaverse. “There are popular games that have limited lands you can buy, going for an insane amount of money,” he said. “We think possibly our investors want to see something like this. “There are games such as Decentraland where somebody owns the land you are walking on. “We already have plans, we have some land lined up but don’t want to provide a bad investment. “It is really hard to do due diligence, fundamentally the land value depends on the quality of the game, if people play than it goes up a lot, if not then it goes to zero. We need to make sure they are good games and we can back it up with good data.”

NEWS

Connective Lending nets new equity investment after bumper first year CONNECTIVE Lending has secured £125,000 of equity investment from senior executives involved with high street pawnbroker Cash Converters. Ben Ling, a managing director at Cash Converters, and Peter Scrancher, who runs some of the store’s franchises in the south of England, have become shareholders of Connective Lending after making equity investments. It comes after the platform surpassed half a million pounds of lending

despite only launching in February 2021. The company’s latest accounts for the year ending February 2021 show net assets of £46,755 but Connective Lending co-founder Daniel Grimes said this only reflects the period when the platform was seeking regulation and preparing to launch. Now that it is regulated and operating, Grimes said the platform hopes to reach profitability by next year. He said the platform’s largest loan so far was

for £125,000, secured on an expensive watch and backed by 60 lenders. Average rates have hit 12 per cent and there has been just one default so far but the underlying asset was sold and investors got all their money back. To date, secured assets have focused on gold, watches and jewellery. Grimes said there were plans to introduce other pawnbroking assets such as luxury cars and fine wine. “We were a bit worried whether investors would have the appetite with us

being so new,” he said. “But they seem to like my history of being a pawnbroker. P2P lending is a market that if done in the correct way will give people yields forever more. “The pawnbroking style has already been in existence for hundreds of years. “There is plenty of scope for the future of P2P as long as you are producing decent yielding products.” The platform said it believes yields have to be at seven per cent or more to make the risk in P2P lending worthwhile for investors.

Open banking stakeholders welcome FCA’s 90-day rule change OPEN BANKING experts have welcomed the City regulator’s changes to the 90-day authentication rule. Following a consultation, the Financial Conduct Authority recently unveiled it was shifting the requirement to reauthenticate consent every 90 days to the thirdparty provider which is accessing the service. That means a user of a fintech app will not be sent back to their bank every 90 days to reauthenticate and give permission for their data to be accessed but this will instead be done by the open banking provider. Daniel Rajkumar, managing director of

Rebuildingsociety, a peerto-peer lending platform that uses open banking, was pleased with the rule change and said it will benefit platforms using the data-sharing initiative. “It’s a welcome development,” he said. “It’s progress. I think there’s more to do, it’s in the right direction. It addresses

the points of different people’s grievances. It will definitely make it easier for us.” Glen Keller, chief product officer at CRIF Realtime, welcomed the regulator's announcement, but added that he wants clarity on things that are still unknown such as when the changes will be

implemented and how providers will accept users’ consent and if they will need agreements in place with banks. “While I recognise that any movement on the current 90-day refresh is positive, I believe that there was an opportunity to go further and reduce the friction fully for end users,” Keller said. Open banking stakeholders have previously told Peer2Peer Finance News they wanted the reauthentication rule to change as going through the process of reaffirming consent every 90 days causes “fatigue” for consumers and is a “pain” for lenders.

P2PFN EVENT

Risk, regulation and responsible lending Regulation and growth plans were top of the agenda as P2P executives gathered online for the latest Peer2Peer Finance News webinar last month. Marc Shoffman reports…

LATFORM BOSSES, regulators, institutional partners and consultants gathered online for the P2P Leaders Forum, hosted by Peer2Peer Finance News in November. The sector has plenty to chew on, with the prospect of tougher marketing restrictions and increased institutional investor interest. The event was held under Chatham House rules, giving delegates the freedom to speak freely about concerns such as the Financial Conduct Authority’s (FCA) regulatory approach to the sector as well as ideas on how to attract external finance. High risk questions One of the main concerns raised was FCA proposals for new regulations in the P2P lending sector such as tougher marketing rules and investor restrictions. The regulator published a discussion paper in April, lumping P2P lending in with “high-risk investments” such as cryptocurrencies and minibonds. It is seeking views on whether more types of investments should be subject to marketing restrictions, what marketing restrictions should apply and if they should be tougher. But delegates at the P2P Leaders Forum questioned why P2P lending is listed under the high-risk banner with unregulated products. “The idea of one-size-fits-all regulation doesn’t seem to be of

benefit to P2P lending when we have high-risk frameworks that others don’t,” one panel member said. “There is concern that the output from the discussion paper won’t be appropriate for P2P but maybe more suitable for cryptocurrencies.” Speakers at the event agreed that the FCA should look at the actual harm that investors face by investing in P2P lending, against what it perceives to be the risks. “There have been high-profile collapses but the loss rates on the whole across the industry are low,” one participant said. “Retail investors have probably lost more money in the collapse of the Woodford funds than across the P2P lending sector. “It is important to get a sense of context when deciding what the harm you are looking to mitigate is.” The FCA was urged to avoid pre-judgement when it comes to its consultations on high-risk regulations. But delegates said platforms

appear to be preparing for changes anyway. This could involve seeking more institutional funding. “There are questions of what platforms will do if the bar continues to be raised in terms of retail investors,” one speaker said. “Extra regulations could squeeze retail funding. “That could mean bringing in institutions. “In some respects that is not a bad thing as all businesses should have diversified funding models. “Normally that is because of market, not regulatory risk.” Increasing institutionalisation The level of institutional interest in the sector is already on the rise. Institutional money made up 66 per cent of UK P2P lending funding proportions in 2020, up from 42 per cent in 2019, according to the Cambridge Centre for Alternative Finance.

P2PFN EVENT

Attitudes to, and opportunities presented by, the institutionalisation of the sector were discussed during the seminar. Panellists agreed that institutional funds give platforms a certainty of funding and can help them grow. Others said it also works well as part of a mixture of capital alongside retail as long as there are protections in place to ensure all types of investors get equal access. “In reality the crowd moves in a very unpredictable way, while borrowers need predictability in their funding, so in order to make the system work we need to find the right balance where we have the P2P network but also some longer term reliability on sources of funding,” one stakeholder said. Another panel member said that investors should be reassured by seeing institutional funds on a platform due to the thorough due diligence the platform would have completed to have received this. “I think retail investors should take additional reassurance seeing

institutional investors in a specific platform,” the panellist said. “The due diligence can take three weeks, a month or two months and it’s a testament to the robust model of the platform that is eventually funded.” Institutions may not just be interested in funding loans though. The event also discussed how platforms can attract equity funding. The main query was, when is the best time to raise equity? One speaker said platforms should seek to fundraise when they are at a point in their journey where they have a clear articulation of what they plan to do with the money. However, another speaker said that the short answer to when platforms should look to equity fundraise is “when you don’t need it”. “I think the best time to raise is when you don’t need to because you’re under no pressure and the investors see they’ll need to give you a good deal to get into the round,” the panel member said. “A normal fundraise should get

the company to clear milestones and enable them to get to the next round of funding if that’s applicable. There’s a particular question of how much you need to get to the next milestone and is that justified by the commerciality of the business?” Talking tech Beyond institutional funding, delegates at the event also discussed how technology can help them grow. Fintech partnerships, embedded finance and open banking were all described as key ways for P2P lending platforms to attract and retain users. One senior technology expert said fintech partnerships are an effective method of acquisition as you can “piggy back” off the brand equity of partners. Open banking was highlighted as an opportunity to grow and hold on to customers and also to develop tools for forecasting loan arrears and defaults, but platforms were urged to make it relevant for users.

27 markets, 1 licence and 1 network. The making of history. We have been working hard to harmonise capital market rules for tradeable securities and loan based crowdfunding…

Our members are prepared. Are you?

Join us! - I N S P I R I N G TO M O R R O W ‘S F I N A N C E WWW.EUROCROWD.ORG

PROMOTED CONTENT

European market opens to UK’s P2P lenders under new EU regulation

HE NEWLY-HARMONISED European crowdfunding laws under the European Crowdfunding Service Providers Regulation (ECSPR), allow providers of online investment services to be licensed at the member state level while issuing shares, bonds and loans to investors across the European Union. The term crowdfunding replaces here what in the UK is often termed peer-to-peer lending (for business only) and equity crowdfunding. The ECSPR provides access to opportunities across the continent without the additional paperwork that comes with launching products in multiple jurisdictions. “This creates a great opportunity for UK financial service providers operating online equity investment and P2P platforms,” says Ivona Skultetyova of EuroCrowd. “By expanding an existing UK business via a subsidiary in any EU member state, it will be possible to serve European investors as well as businesses issuing shares, bonds and loans.” Because the new law is directly applicable in all EU member states, the legal hurdles to crossborder transactions have been significantly lowered. Compliance regimes are largely adapted to existing frameworks and will not come as a surprise. There remain some nuances in the national application with regard to licensing, marketing and liability, but overall these should be negligible, believes Skultetyova. You can expect significant opportunities for market consolidation and business expansion. Indeed, we have seen the first mergers across the

continent already during 2020 and 2021. In the UK, the proposed - though blocked - merger of Crowdcube and Seedrs needs to be understood in this context. The recent announcement of the proposed acquisition of Seedrs by US platform Republic is also a reaction to this new opportunity. Non-European operators are preparing for their market entry, while European platforms are adjusting their existing operations within their member states. Those which have business in several member states are scouting for the most competitive regulatory implementation. By the way, European platforms will be able to finance British business and real estate, too, under the ECSPR license. With the first European member state conduct authorities having already published their licensing requirements, the race is on to capture the first mover advantage. The new rules have directly been applied in all those member states that have not specifically regulated online equity or lending platforms to date, while in markets where national rules existed a grace period will end in November 2022. This means that some European operators will continue under their old regime for another year or so. But not everywhere. In Malta the application is openly accessible online and licenses are expected to be issued by March if you apply now. But in general, there should be time until early 2022 to review all requirements without losing too much time against the competition. “EuroCrowd members have had a look inside the development of the

new rules over the past years, and today we see that many, including our UK members, have prepared themselves to take advantage of ECSPR early on,” says Oliver Gajda of EuroCrowd. “The opportunity to operate only one office and serve more or less 27 European member states, plus businesses from other countries such as the UK, has not gone past them. “The next two years will be crucial in building a head start before a final set of adapted rules will be applied.” Expectations are high. Interest in the new rules is not only coming from crowdfunding and P2P lending. The rules are also an opportunity for other types of alternative lenders, for cryptoasset transactions, renewable energy and real estate finance service providers publicly offering transactions to retail and institutional investors. Even for business angel networks and venture capital firms which can open cross border transactions while at the same time providing leverage to their own funds. The actual success of the new rules will be in the application by the market and not in the detail of the paperwork. The EU legal framework will in due course offer solutions to national anti-harmonisation efforts by some EU member states. With UK regulation for P2P lending potentially being tightened, institutional sentiment for the market waning and market leaders resigning from the sector, there might just be an opportunity for British P2P lenders to realise that there is a growing market next door, welcoming them and providing significant opportunities for growth.

INDUSTRY PREDICTIONS

What will 2022 hold for P2P?

021 WAS FULL OF surprises and transformational change for the peer-to-peer lending community, and 2022 promises to be no different. From regulatory change at the Financial Conduct Authority (FCA); to a growing focus on investments which offer environmental, social

and governance (ESG) benefits; and the promise of at least one stock market float. Small- and medium-sized enterprises (SMEs) are expected to rebound after two years of Covid disruption, creating a deeper pool of borrowers for P2P lenders to draw from. And retail investors – frustrated by rising

David Turner, chief executive, Invest & Fund “2022 will be a very exciting year – the most exciting since the sector formed. It will be the year when P2P truly bursts into the consciousness and gets taken seriously as a genuinely more attractive model than the banks and traditional players. A year when it will dawn on commentators that P2P actually performed during Covid really strongly and in many cases much better than the big banks, which truly reflects the robustness/maturity of their internal approach and inherent capability. “This will be a year of accelerated and material volumes growth, with strong credit performances starting to become more visible and profiled by commentators. There will be a move by many platforms to a clear trajectory to sustainable profitability, and we will see increased regulation but only to appropriate levels commensurate with a more mature/sizeable sector.” Neil Faulkner, chief executive and head of research, 4th Way “In 2022, we'll see some delayed pandemic defaults arise, but the industry will continue to grow and provide resoundingly positive results for investors for the 18th consecutive year.

inflation – are already starting to explore alternative investment options such as P2P, which could lead to a resurgence of Innovative Finance ISA (IFISA) activity. We asked some of the leading voices in the P2P lending space to share their predictions for the year ahead…

“The industry still needs to grow even more before we'll see any substantial surge in acquisitions and mergers, but we're likely to see more new online lending platforms emerge. “UK-based investors will shift a bit more cash to platforms in continental Europe, as the FCA makes it harder for ordinary investors to access this excellent asset class domestically, and as the European market matures further with common rules across the EU.” Bruce Davis, co-founder and joint managing director of Abundance Investments

“This year will be pivotal for P2P and crowdfunding, which has fought hard to get the regulator to recognise the benefits which the sector provides within the wider financial services industry. “We need to make sure that any measures which are taken to further constrain the reach and potential of the sector are based on solid evidence and in particular that the standards of the regulated platforms are not judged in light of the failures from the unregulated markets.

INDUSTRY PREDICTIONS

“On a positive note, the revolution in customer motivations shifting from traditional measures of performance to broader based metrics of ESG should provide an opportunity for a sector which has been a pioneer of purpose-led investing.” Nicola Horlick, chief executive, Money&Co

“It is becoming harder to find good quality SMEs to lend to because there have been so many governmentbacked loans made by the big banks. That means that we will be focusing on our speciality lending (litigation and music). I think the lack of good quality borrowers will place a constraint on growth for the overall sector.” Narinder Khattoare, chief executive, Kuflink

“I don't think there will be any new entrants in this space, I think the sector will continue to grow as there is a demand for borrowers and investors in this space, it will be interesting to see the consultation paper from the FCA. I think most platforms will have contingencies in place if they do steer retail investments away from development loans. “I think the IFISA will have a record-breaking year, although the average interest rates have gone up people will move away from some providers as they offer unrealistic returns. “We are on course to be profitable as a group in 2022!”

Mike Carter, head of platform lending, 36H Group “The impact of inflation on personal savings will cause investors to look more widely for income-generating investment products, and this should increase investor interest in P2P loans in the next 12 months. “Over the last 12 to 18 months a number of P2P platforms have put in place strategic funding structures which had been planned pre-Covid but which haven’t yet had the opportunity to fully come on stream, and these should start to generate significant growth in 2022. Examples are CrowdProperty’s and Lending Work’s institutional funding lines and Zopa’s banking licence. “SME P2P lenders such as Assetz Capital and Funding Circle should see the benefit in 2022 from the large volume of SME borrowers that used digital loan applications for the first time in 2020 due to the government’s Covid schemes, helping SMEs to move towards greater preparedness to use online borrowing solutions.” Konstantin Boyko, chief executive, JustCoded “Globally I am pretty sure that the market is going to continue growing and our own data can support that statement. “At the same time, the existing platforms will continue to scale, especially with the development of regulations: not just pan-European regulations, but the less mature markets (for example in the Middle East) may transition from limited sandbox-mode operations to fully-functioning regulated markets in 2022. “As for the UK market, this year there have been a few concerns for the P2P lending based on recent FCA restrictions, I am not sure if they were fully resolved. At the same time, the ECSP (EU regulations) will bring opportunities for the UK platforms to grow into markets that were previously hard to reach.”

INDUSTRY PREDICTIONS

Rishi Zaveri, chief executive and co-founder, Lendwise “I expect the hunt for yield to continue – diversification via IFISAs is a good way to achieve this. Lendwise has launched its IFISA product and has AutoLend which allows an investor to tailor their diversification strategy. “P2P has a part to play in the financial services sector. It will continue to grow with new entrants as well as overall volume. “I expect the industry to further advance technologically through methods such as open banking integrations and I anticipate volumes will pick up to match the overall increased appetite both from borrowers and lenders in the new economic environment post-Covid. “There will be possible challenges with government support schemes coming to an end especially with regards to repayments: underwriting models and policies will be put to a tough test!”

Brian Bartaby, founder and chief executive, Proplend “P2P plays an important role in the financial ecosystem for both borrowers and lenders and the sector has proved itself resilient throughout the global pandemic. As long as it continues to operate under the existing regulatory framework, I can only see it continuing to grow and flourish in 2022 and beyond.” Filip Karadaghi, co-founder and chief executive, LandlordInvest

Stuart Law, chief executive of Assetz Capital

“We expect a resurgence of retail investor demand.”

“I would expect those that have established good processes (lending, customer service, tech, etc) to continue capturing market share whilst those with weaker fundamentals will struggle or even leave the industry. “New regulation to strengthen retail investors may impact some more than others.”

INDUSTRY PREDICTIONS

Cormac Leech, chief executive, AxiaFunder

“I predict investor demand for P2P assets will increase as: i) Inflation remains well above bank interest rates and investors seek ways to protect the buying power of their cash; ii) Stock markets soften due to central bank rate increases, driving investors to look for relatively uncorrelated asset classes. Litigation investing being one of the most uncorrelated; and iii) There will be fewer platform blow-ups as the benefits of tighter FCA regulation and scrutiny start to manifest, resulting in increased confidence in the sector. “I also predict a big increase in platforms based on blockchain infrastructure.” Jude Cook, chief executive, ShareIn

“In the last 18 months we’ve seen sustained interest in impact and ethical investment platforms and related investment products, and in particular, a desire at a platform level to better

communicate the performance of impact investment products. “In 2022 we expect to see plenty of platform innovation in impact investment, in particular around the investor experience and how both investment returns and impact metrics are delivered in useful way to investors." Uma Rajah, chief executive, CapitalRise

“Innovations in technology have created new opportunities to invest in property, in faster and more accessible ways using online alternative finance platforms. By combining proprietary fintech platform technology and expertise in the property market, CapitalRise has expanded access to the prime sector of the property market to sophisticated and high-net-worth investors. We predict this will continue, supported by the resilient prime property market that has been seen. “Investing in this asset class will continue to appeal to those seeking strong risk-adjusted returns. These investments will continue to appeal to investors seeking strong risk-adjusted returns with the comfort that investments are secured against prime property assets in highly desirable locations.”

JOINT VENTURE

Kuflink sets carbon neutral goal, as ESG becomes a focus for 2022

UFLINK IS GEARING UP for a busy 2022, but at the top of its list of priorities is a plan to make the company more environmentally friendly, in line with the growing trend towards environmental, social and governance (ESG) investing. And it doesn’t stop there – Kuflink has a plan to bring its entire business model, from its retail investor base to its external partners, on board as it aims to become carbon neutral by 2030. The lender is currently working on its ESG framework and people will be able to see this on the platform at some point in 2022. “We are talking about it to people and we’ve started by making the most basic changes like recycling in the office, making sure we're not using single use plastic, reducing the amount of printing we're doing,” says Laura Hetherington, head of human resources and operations at Kuflink. “We've had an electric point put into the office car park and we will encourage more people to use it as more people hopefully buy electric cars. “We want to encourage car sharing, but with Covid we need to be a little bit careful with that at the moment.” But Kuflink is taking its climatefirst message even further afield. It is committed to educating its 19,000 strong investor base on the benefits of the ESG principles which have been central to the platform’s growth since the very beginning.

In 2008, the Kuflink Foundation was established and close relationships were formed with a local charity which supports people in need, especially younger people in the Gravesend area,

providing much-needed education and health and sports initiatives. The foundation has a number of different partners and is looking to do more in the coming year. “The team at Kuflink are planning to get more involved with this next year so we will be out and about in the community more helping where we can”. Kuflink also plans to speak to its external partners about what they are doing to help the UK reach its carbon neutral goals. “As we are talking to our external partners we will be asking them about ESG to see what they are doing so we can be sure we are working with people who are playing their part as well,” says Hetherington. “We believe that everybody can do more.” In the year ahead, Kuflink plans to launch its first self-invested personal pension product, to maintain its profitability, and to consider its own public listing. But ESG represents a longer-term shift for the platform, as it seeks to shape the future of the P2P lending sector. Hetherington believes that P2P platforms have a certain responsibility to lead the way in terms of ESG, and Kuflink intends to be “very loud about it”. “We are really going to drive ESG, which hopefully will be seen in the market with the hope that others follow suit,” she says. “Its about getting that message across and using the platform you have to make a difference.”

COMMERCIAL PROPERTY

The new commercial landscape Commercial property represents a small but growing segment of the UK’s peer-to-peer lending market. Michael Lloyd explores the opportunities and challenges available…

HE COMMERCIAL property market has changed significantly during Covid. While many office spaces became redundant – at least temporarily – warehouse leases have soared. Meanwhile, an emerging trend for commercial-to-residential conversions is set to shake up the property market. And of course, peer-to-peer lending platforms are well placed to take advantage of these opportunities.

Platforms operating in the commercial space, such as Proplend, LandlordInvest and Relendex, have performed well during Covid, while lenders such as Simple Crowdfunding are now entering the space, have spotted the huge potential of this market. According to the United Kingdom Warehousing Association’s 2021 report, the overall number of warehousing units has risen by 32 per cent rise between 2015 and 2021,

and this is set to continue to increase. In the report, Savills cited research from Prologis which showed that for every extra £1bn spent online, a further 775,000 square feet of warehouse space is required to meet the new demand. This can only benefit P2P platforms operating in this area. P2P commercial property platform Proplend reports that its current loanbook includes around 45 per cent of either industrial

COMMERCIAL PROPERTY

or mixed use industrial, which includes warehouses. “The logistics market has been on fire and that hasn’t really changed from last year,” says William Matthews, head of commercial research at Knight Frank. “Across pretty much all property sectors there has been an improvement this year. It’s been a bit like a rising tide, every sector this year has done better than the last when you talk about investment volumes.”

our membership has more than doubled,” he says. “Lenders are reporting record months, so that’s both in bridging and development finance and commercial mortgages. “There’s plenty of demand from customers and there’s plenty of lenders out there. We’ve just seen the market continue to grow and there’s no sign of that changing other than for retail and offices.” Neil Faulkner, managing director and head of research at 4thWay,

“ Across pretty much all property sectors there has been an improvement this year” P2P lending platforms operating in the commercial property market report that they performed well during the pandemic. LandlordInvest has not experienced issues on commercial loans, Relendex has not seen any problems it cannot work through and in October Proplend revealed that it had been operating profitably in the year to date after seeing strong demand from lenders and borrowers. Furthermore, Simple Crowdfunding is expanding into the commercial property market for the first time and is currently looking at opportunities in this space, with two projects in the pipeline. Adam Tyler, executive chairman at the Financial Intermediary and Broker Association, says the commercial property market has grown, as shown by an increase in membership of his trade association. “The commercial property market has really boomed over the last 20 months, so much so

says that retail, hotels, care homes, leisure, and pubs and restaurants are the areas in P2P lending that are seeing a resurgence. He also praises the sector for its ability to exploit opportunities. “I think that P2P lending platforms are good at tapping into opportunities as soon as they become available,” he says. “We've seen them immediately

take advantage of office to residential conversions, of lending to owners of houses in multiple occupation properties, and of pubs and restaurants opening to replace those that had to close recently. The P2P lending industry has reacted without delay to changes in conditions.” There are many opportunities in the commercial property space for P2P platforms, one of the most popular of which is commercial to residential conversions, for example altering shops into flats. Many property platforms operate in this area, such as Invest & Fund, Blend Network and Simple Crowdfunding, to name a few. And Relendex goes so far as to fund the conversion of churches into homes. “Churches are solidly built and can be converted into good quality housing,” explains Paul Sonabend, executive chairman at Relendex. “Commercial to residential conversions have been going on for the last 10 years and have been a strong market.” Some platforms have reported a rise in enquiries in this space, which

COMMERCIAL PROPERTY

Atuksha Poonwassie, managing director of Simple Crowdfunding, says is partly due to planning changes. Earlier this year the government introduced permitted development changes to allow unused commercial buildings to be changed into homes through a simpler ‘prior approval’ process instead of a full planning application. “There’s a lot of appetite for commercial to residential conversions, it’s not purely because of Covid,” says Poonwassie. “I think there’s a couple of things. In terms of the overall cost structure, the profits do tend to be a little bit better for some projects we’ve seen for commercial to residential and because of the permitted development planning changes there are more opportunities like that available.” Platform bosses have also highlighted the opportunities to be found in the development of care homes and supported living accommodation for ex-prisoners, elderly people and those with additional needs. Assetz Exchange, which is part

home environment space. “There aren’t enough homes for people who need additional support, and it needs to be done properly,” she adds. “That is a huge growth area and does tie in with the environmental,

“ Lenders are reporting record months, so that’s both in bridging and development finance and commercial mortgages

of the Assetz Group alongside P2P platform Assetz Capital, has financed the development of supported living apartment blocks. LandlordInvest has funded some developments of care homes and has seen a rise in enquiries and transactions for these recently. Poonwassie describes seeing a huge push in the social care or multi

”

social and governance impact.” Knight Frank’s Matthews sees the funding of developments for hotels and student accommodation as yet more opportunities within the commercial property space. Property development investment provider Cogress funds the development of hotels, while Assetz Capital has previously

financed purpose-built student accommodation (PBSA) and earlier this year alternative investment manager Pollen Street Capital and lender Downing revealed a £24.3m co-funded deal to construct two PBSA blocks. “Interestingly student accommodation has been one of the beneficiaries of the pandemic in some ways,” says Matthews. “There are good occupancy levels and investors have seen that as a stable sector and continue to see that.” However, despite the opportunities available, few P2P platforms are solely focused on commercial property lending. This may have something to do with the difficulty in defining ‘commercial property’, with some branding anything not residential as commercial, and others taking a more narrow

COMMERCIAL PROPERTY

“ There’s a lot of

appetite for commercial to residential conversions, it’s not purely because of Covid

”

view of the sector, believing that a commercial property must be owned and/or occupied by an existing business. As a result of this, some platform owners believe there is also an opportunity for newcomers to launch into the space. “It’s a big area and there’s definitely market share to be captured by platforms,” says Filip Karadaghi, co-founder and chief executive of LandlordInvest. 4thWay’s Faulkner says that new entrants launching into the sector would need to be confident they can source loans without having to compete too tightly with other lenders. “For example, existing lending businesses might convert to P2P lending without then heating up competition,” he adds. “Commercial property remains more niche. Partly it's because it's

harder to do and there's less data available to help new P2P lending companies shape a good credit policy. “It's also harder to grow further, because competition with other specialist lenders has made it less attractive over the years, since its recovery from the 2008 financial crisis. By no means is it as hot as it was back then, but there is more caution, which means loan volumes are spread thinly across providers.” Offices and retail may also present an opportunity for P2P platforms in future as Matthews predicts their recovery. Knight Frank’s 2021 Active Capital Report predicted that crossborder real estate investment will reach record levels in 2022, with the office sector forecasted to be the focus of more than half of all major cross-border transactions.

“We’re very positive about offices,” he says. “We don’t subscribe to the idea that offices are dead. There is an uptick in investment activity and occupational, they’re both increasing and have as we’ve gone through the year, but not quite to the same extent as logistics. “Where we’re most optimistic is around high quality relatively new space that meets the criteria for attracting talent and people back to the office and is effective for when people want to collaborate. “And we don’t buy into this whole ‘everything is moving online, there’s no way back’. There definitely is still a role for the high street, the challenge is regenerating and creating mixed use. We are optimistic. It’s not as black and white as people like to make out.” The commercial property market is not all doom and gloom, and it is packed full of exciting opportunities for those lenders which are keen to get into the space. From warehouse loans to development finance for supported living units, student accommodation, care homes and commercial to residential conversions - whatever the area, P2P property platforms are wellplaced to exploit the opportunities and will continue doing just that.

So many reasons to feel good Invest in property that provides homes to some of the most vulnerable groups in society and build a diversified portfolio on our investment platform. • • • • •

Long term, stable, monthly income Capital return Inflation linked IFISA Yields typically over 5%

assetzexchange.co.uk info@assetzexchange.co.uk

This is an investment in peer-to-peer loans and is not a direct property investment or a savings account. Your investment is not protected by the Financial Services Compensation Scheme (FSCS). Your capital is at risk. Past returns should not be used as a guide to future performance. Assetz Exchange Limited is authorised and regulated by the Financial Conduct Authority under firm registration number 668931. Registered in England (Co. No. 09285310) with registered office at Assetz Exchange Limited, Assetz House, Manchester Green, 335 Styal Road, Manchester, M22 5LW.

JOINT VENTURE

Eco homes key to the future of housing

CO HOMES REPRESENT the future of the residential property market, and property lenders are being urged to prioritise energy efficient homes when funding new development loans. Last month, Assetz Capital revealed that the company is targeting 95 per cent of all the new homes that it funds to be EPC B or higher by the end of 2022. This is a hugely ambitious goal, which reflects chief executive Stuart Law’s core belief that energy efficiency will be a key driver for property values in the future. “You can't really insulate old housing effectively,” says Law. “Old houses are well known to leak air left, right and centre. They're like a leaky bucket. You can't use a much less effective air source pump mechanism in an old house because it isn't up to the job. And you'll find that you're running a very big electricity bill trying to keep it going because the heat you produce doesn't stay in the house long enough. So personally, I don't believe old housing is in a good place.” Law estimates that the cost of bringing an old house up to spec, energy wise, could easily be between £30,000 and £50,000. “For most houses that is immense, and that's going to come off house prices,” he says. “It's going to come off because mortgage lenders are not going to be lending on those homes or are going tto, at the very least, start to apply mortgage retentions at some point that would be used by the buyer to negotiate the price down. “I think what's going to happen

over the next five years is there's quite possibly going to be a significant market shock because old housing isn't fit for purpose in this new energy-efficient world. We're going to be cautious about funding low-energy efficient housing and we're going to be targeting the funding of more and more eco homes.” Assetz Capital has been funding small- and medium-sized enterprise (SME) housebuilders since the lending platform was founded in 2012, and Law believes that smaller housebuilders are able to act more quickly and efficiently to tackle the challenges of climate change and rising energy bills. The platform has already begun lending to future-thinking, lowenergy homes so Law knows just how transformative eco house building can be and he has direct experience of delivery of those homes. “An example of what is possible is that our group was involved in the delivery of a one-off coastal new build - a three-bed house, with keys delivered over a year

ago,” Law says. “So we've got a full year of data now. This house uses an air source heat pump, which pulls heat out of the air even though it's on the coast in a windswept part of Wales. The heat pump produces all the heat needed for hot water and for heating the house and uses £25 a month of electricity. You can't argue with £25 a month for all hot water and heat. “So would you rather buy an older, energy inefficient home and then have a £30,000 to £50,000 upgrade cost, or would you rather buy a really high quality home and have that kind of saving on your energy?” In the wake of COP26 it has become clear that the way we heat and power our homes is set to change, and older homes are simply not built for this task. However, by working with SME property developers to build brand new, energy efficient homes built for the modern world, Assetz Capital can play a significant role in funding the next generation of eco homes.

PROFILE

Democratising finance

P2P regulation veteran Dr Mark Davis talks to Marc Shoffman about how finance is facing a crisis point

R MARK DAVIS MAY not be the best-known name in peer-to-peer lending but he is perhaps one of the most influential. He has played a role in defining regulation of the sector since its early days and helped construct community municipal investments that have raised millions of pounds for local authority renewable projects through the Abundance crowd bonds platform. Dr Davis, an economic sociologist at the University of Leeds, has now teamed up with Abundance’s Bruce Davis – no relation – to write a book highlighting P2P lending’s role in democratising finance. He discusses how the P2P lending sector has changed and the importance of the new book, Crowdfunding and the Democratization of Finance. Marc Shoffman (MS): How did you get involved with P2P lending? Dr Mark Davis (MD): I have long been interested in challenging the idea that there is no alternative to the mainstream financial system. I was interested initially in ethical consumerism, people making conscious decisions on where their products were coming from. I realised there was a gap in thinking on how people were buying things. They were proud of their bamboo toothbrushes but may still be using mainstream financial products that drive poor outcomes.

In around 2015 I went hunting for alternatives and got involved in researching the UK’s alternative finance sector. I interviewed platforms for research funded by Friends Provident Foundation on barriers to growing the sector. This report led to a project with the Cambridge Centre of Alternative Finance commissioned by the Financial Conduct Authority (FCA), exploring if there were sufficient market protections in place for crowdfunding and P2P investors. It led to rule changes on regulation marketing and investor protections.

MS: How has the P2P industry changed? MD: It has become more ambitious, which is good. The most impressive thing to me to date has been its ability to remain true to its core mission of providing alternative finance. In 2015 there was a nervousness that there was a growing entanglement with mainstream finance and a thinking that platforms would need venture capital investment. A lot of platforms have remained protected from that mission. There has been a growing public appetite for ways of moving money more transparently in support of ventures that align money and morality better. People have become very focused on the outcomes of what their money is doing and are less willing to leave it sat in high street savings and investments. Crowdfunding and P2P lending have narrowed that gap between investor and outcome. MS: Is there still space in P2P lending for retail investors? MD: The work I did for the FCA looked very much at the retail end of the market. We spoke to sophisticated investors in the research and the purpose of improving investor protections was so the retail side could grow. From the data we have gathered in various projects, there is a clear

PROFILE

trajectory for investors to only start by investing a certain percentage of their whole portfolio. They may experiment with different platforms to see what works best and will then gradually grow their investment. I don’t think the retail side is being shut out. MS: Is institutional investment a good thing? MD: The biggest appeal of crowdfunding and P2P lending is that it is outside of the mainstream. Since 2008, people have been distrustful of banks, there is a reluctance to pass on any decent rate of return through mainstream products. That is clearly a sign of how banks view customers. There is still a risk of growing entanglement of mainstream and alternative finance. Separation is important to maintain the integrity of the sector, but platforms are in the position where they need to get money from somewhere. Platforms need to be wary of mission drift and the extent that it compromises their business model and offering to the public. There is potential that by becoming more integrated with the mainstream, that may change some power structures but won’t offer a credible alternative to the overall financial system. If we are looking at democratising finance, we need more alternatives that give people greater agency of making decisions. MS: Why did you write the book? MD: Bruce and I met in 2009 and the book is the outcome of our conversations since then. We have each been involved in the sector for a long time and felt as if we were using the same scripts

with lots of different people all the time. We thought it would be useful to combine my research with Bruce’s professional experience into a narrative that situates crowdfunding and P2P in this long tradition between finance and democracy. The work points out the urgency of reconnecting finance with a sense of purpose, rather than becoming a bit too obsessed with the technical. P2P lending helps remember what finance is for, if not for people and planet then what is the point of all this innovation? We see finance as facing a crisis point, a decision needs to be made over finance and its social licence. One version is going down the crypto route and taking the human decision-making away. This is versus a crowdfunding and P2P model that is arguably more inclusive and democratic. You are empowering the public to take decisions on their money. It is a more transparent way of moving money. MS: Are you anti crypto? MD: I am sceptical of crypto’s claims of being a democratic way of using money. Relying on algorithms and smart contracts removes the human element rather than closing the gap between people and money. I am less convinced that it is a democratic alternative when you have a more mature P2P lending sector. There is a crisis in terms of the legitimacy of finance and we face a decision in terms of the growing power of crypto. I know people with Bitcoin and non-fungible tokens but they know

less about P2P despite it being more mature. I don’t think crypto is going away. What seems to have happened is an attempt by mainstream institutions to assimilate it within their business models and practices. It is a view of finance that sees it as separate from and above the body politic – that we need to take human beings out of finance altogether. Crowdfunding and P2P is a more viable alternative that seeks to trust people to engage with money in a more meaningful way that has already begun with more forms of ethical and sustainable consumption. MS: What is the future of P2P regulation? MD: I am very keen that the sector carries the appropriate risk warnings for investors so they know their capital is at risk. Marketing messages should be clear, particularly around withdrawals. I would caution the regulator against being hypersensitive to P2P lending though. It needs to speak to and learn from those engaged in the sector from the platform and investor side so they regulate it appropriately and don’t lump it into a large blob that looks like things that aren’t usually regulated so must be bad. You lose a lot of benefits when that happens. A lot of people who invest in P2P are incredibly savvy and want to be trusted. I think the regulator should listen to the data and hear from investors rather than taking a position that they already know what they want to do.

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JOINT VENTURE

Why P2P lending is outpacing bank lending

EER-TO-PEER LENDING is overtaking traditional banks in terms of customer service levels and speed of loan approvals, says Mike Moroney, chief operating officer at JustUs. And he would know. Before joining the P2P platform, he spent nine years as regional manager of Santander’s retail mortgage division. Moroney has witnessed first hand the widening gulf between P2P lending and bank lending. “Rapid lending decisions is a notable difference between P2P and the retail banking market,” he says. “Everything that we did in retail was driven by score cards, computers, and credit searches, but P2P has always been far more personal. “In P2P you look at personal circumstances - you look towards the future, not just to the past. I think that was the most refreshing change I noticed in P2P lending, coming into it from a retail banking background.” After leaving the world of high street banking, Moroney describes P2P lending as “a breath of fresh air”. “We spoke to people that have become disillusioned with banks and the interest rates that are available, they're looking for alternatives,” he says. “And I think the disruptive market that P2P is presenting is a really strong alternative for the general public and what they can

do with their money.” Moroney joined JustUs as chief operating officer in June 2017, and will shortly be appointed to the JustUs board. Since then, he has been impressed by the handson, consumer-first approach of P2P. “The retail banking market has gone through its own transition and become far less personal,” says Moroney. “There is a definite move away from face-to-face and a focus on online. “Consumer service standards are something the retail banking industry is fighting hard against. At the end of the day, retail lending is driven by numbers. “In comparison, P2P lenders are very, very good at customer service. “We can get a real feel for someone's affordability once we have the data provided by bank statements through open banking - we can see what the salaries actually look like, we can see where we can support the borrower.” Ultimately, it is P2P’s speed and efficiency that makes it so attractive to borrowers and lenders alike, says Moroney. Borrowers can get a lending decision within a day, rather than the weeks-long wait required when dealing with banks. Meanwhile lenders can get inflation-beating returns by investing in these loans, while banks are still offering consumer

savings rates of little more than one per cent. Most importantly, Moroney believes that it is the human element that truly elevates P2P beyond what the banks can offer. “You are dealing with a human being and they are looking at each individual case and judging it on its unique merits,” says Moroney. “The future is bright for P2P and it would be really good if we could take a lot of people on this journey with us.”

Our magazine is read by peer-to-peer lending professionals, investors and more. If you'd like to be included in our directory, please email Tehmeena Khan on tehmeena@p2pfinancenews.co.uk for details and pricing.