P2P Investing Summit October - Special Report by Alternative Credit Investor

The peer-to-peer investing report Published in association with the P2P Investing Summit October 2021 supported by

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INTRODUCTION

Introduction from report editor, Kathryn Gaw

elcome to the fourth quarterly P2P Investing Summit report. A lot has changed since we launched this series of webinars and reports in January. We now know that peer-to-peer lenders can survive – and thrive – during an economic downturn. Despite the ongoing volatility of the stock market and the stagnation of savings rates, P2P platforms have continued to produce inflation-beating returns while providing essential funding to small business owners and property developers. But the pandemic has also forced change among the alternative lending community. In this report, you will learn

how P2P platforms have adapted to our new normal, and which changes are set to stay even as Covid becomes a distant memory. This report also shines a light on the good work being done to promote ethical and green investing solutions – a subject that has been central to many P2P platforms for several years now. Despite the difficulties of the past year, this is an industry that doesn’t stand still for long. The shutdowns of 2020 have led to innovation in 2021, and we hope that all our readers discover something new in these pages about this disruptive corner of the fintech world.

Introduction from our platinum sponsor, Shojin Property Partners

e are pleased to sponsor Peer2Peer Finance News at its most recent investor event. The stock market has been the focal point for investors for decades, although it took hundreds of years to perfect. The first stocks were traded in the coffee houses of Europe as far back as 1531, starting first as debt instruments and later equity. The fractional alternative investment markets, what we call peer-

to-peer lending or crowdfunding, are fledglings by comparison, although they are rapidly gaining popularity. Not only do they enable investors to diversify from mainstream markets but also to achieve stronger returns on investment. All investors should have an allocation to alternatives through digital platforms. In this event we discuss the opportunities and risks within this space.

INDUSTRY INSIGHTS

How has Covid changed P2P? The Covid-19 pandemic has changed the way we live, work and invest. Peer-topeer lending platforms have always been adaptive, and the pandemic proved just how flexible and innovative they can be. We spoke to a few P2P platforms to find out what changes – if any – they made during Covid. Lee Birkett, chief executive and founder of JustUs “We are now fully flexible working from smaller offices. We have seen a busier housing market as the housing supply chain, including materials, falls one to two years behind. We are now doing business internationally, and it has become just as natural to jump on a Zoom call as it is to jump on a plane.” Jatin Ondhia, chief executive and cofounder of Shojin Property Partners “Covid gave us a chance to take stock because everything slowed down. We were able to focus on our underlying programmes and systems and solidify them to enable growth when the economy opened back up. “We did feel that pre-Covid, things moved very quickly. After things started opening up we put in place our growth plans and we made new hires. “The big change was figuring out how to engage with our investors and potential investors just using technology.” Nicola Horlick, chief executive of Money&Co “Nothing has changed with regard to our underwriting other than we normally visit borrowers before lending and we were not able to do that when the lockdowns were in progress. It all had to be done via Zoom. “With regard to our own working, we are now back in

the office three days per week but we are keeping an eye on the sharply rising infection rate and may decide to work from home again if things get worse.” Roxana MohammadianMolina, chief strategy officer of Blend Network “We are not flexible working – everyone is back in the office full time, but we obviously understand when people have family issues and need to be flexible. We have launched new products and we have moved the level of gearing we offer back to pre-Covid levels at a time when most lenders out there are still at conservative levels of gearing.” Filip Karadaghi, co-founder and chief executive of LandlordInvest “No changes whatsoever due to Covid, to be honest. “Having a fundamentally strong infrastructure and foundations, as we have, should ensure that a company will remain resilient through a crisis. Those with weaker foundations are often more prone to be impacted when a crisis occurs.” Narinder Khattoare, chief executive of Kuflink “We have launched/ developed the following products: compound interest on select invest loans, a select invest Innovative Finance ISA and a new ISA wallet.”

INDUSTRY INSIGHTS

Roy Warren, managing director of Folk2Folk “We implemented operational changes from application through to credit approval. When assessing applications, we continue to consider how the crisis has impacted on each borrower. We adapted our credit assessment process to include a Covid-19 section and explain how we have assessed the Covid-19 impact in the loan information we provide to our investors. “We enhanced our credit approval process in the form of a credit committee. “We also adapted our working behaviour. Our team adapted effortlessly to home working during lockdown and after collating staff views, we have now embraced a hybrid model of home and office working. This in turn has led to a re-evaluation of attitudes towards staff work/life balance and we’re in the process of introducing a sabbatical policy for staff who want to take a longer break from work while having peace of mind they have a job to return to.” Bruce Davis, founder and managing director of Abundance Investment “Beyond following the government guidelines on social distancing and working from home, we haven't made any significant changes to our business model that were Covid related – being a virtual business meant that we had already set up our systems and controls to work independent of location of the office. “Longer term we are considering what the 'new normal' will look like but as per the Financial Conduct Authority’s communication on the subject we will notify them of any permanent change to our way of working that resulted.”

Uma Rajah, chief executive and co-founder of CapitalRise “Covid-19 has impacted how we work and operate in many ways, some of these changes will be here to stay, such as the trend towards a

hybrid working model. The pandemic created a catalyst for change and now property loans can be executed digitally in the same way that other areas of the lending industry have been able to do for many, many years. This has delivered numerous benefits such as saving time, saving cost, increasing efficiency and convenience. “As a fintech business, we are always looking for ways to streamline our processes and increase automation to enable us to scale faster and more efficiently. Since the start of the pandemic, we have seen a surge in demand from investors and borrowers, which forced us to accelerate the pace of change in order to keep up with the increased volumes, which puts us in a strong position to support future growth.”

Brian Bartaby, founder and chief executive of Proplend “The enforced work from home guidance during Covid gave us the opportunity to refine workflows, processes and internal and client communication, all of which are baked into our current practices.” Stuart Law, founder and chief executive of Assetz Capital “There haven’t been any negative forced changes in the business. “In fact, Covid has opened the door to a much greater choice of funding lines which has helped make us a bigger name in the market, bringing in more business and more loans. It has opened the door and taken us to the next level.”

ETHICAL INVESTING

How P2P platforms pioneered ethical investing

NVIRONMENTAL, SOCIAL and corporate governance (ESG) investments are having a bit of a moment. Institutional giants such as Blackrock and JP Morgan have made ESG a cornerstone of their investment strategies, while the Bank of England has added ESG targets to its financial policy statement, and the Financial Conduct Authority (FCA) has pledged to promote green alternatives within the financial services industry. While the ESG term is relatively new, alternative lenders have been championing the ethical investing cause for years. Triodos Bank and Abundance Investment were offering ethical investment opportunities before the term ‘ESG’ was even coined. Abundance is still pioneering in this area today, offering Innovative Finance ISA (IFISA) eligible investments in everything from geothermal power stations to municipal council bonds. Since 2016, Energise Africa – a joint venture owned by European impact investing platforms Ethex and Lendahand – has been offering returns of up to six per cent for funding clean energy projects in Africa, which can

also be held in an IFISA. Two of the largest peer-to-peer lending platforms have heightened their focus on ethical investing over the past few years. Rural P2P business lender Folk2Folk recently highlighted that its investors have used their money to support their environmental concerns by investing in renewable energy projects across the UK. And Assetz Exchange has been offering inflation-beating returns to its investors by funding the development of supported living apartment blocks to home ex-prisoners and people with learning disabilities. Meanwhile, a number of newer entrants in the P2P market are specifically focused on ethical and green lending options, such as Charm Impact, which will support clean energy entrepreneurs in developing economies. Soon-to-launch consumer lending platform Plend aims to address the ‘S’ in ESG by creating a bespoke credit system for people “who are vulnerable to rip-off rates and financial hardship because of a flawed credit scoring system”. And the ethical investing trend is not limited to UK P2Ps. Crowdfunding research project CrowdSpace, created by technology

company JustCoded, recently found that 27 per cent of P2P and crowdfunding platforms in Europe already offer green energy and impact investing opportunities, while 12 per cent solely focus on impact investing. Ethical investing is already embedded in the P2P ecosystem, and innovative platforms are already looking ahead to solve the ethical investment problems of the future. Several P2P property lending platforms, such as Assetz Capital, JustUs and CrowdProperty, have recently begun to fund the offsite construction of greener, sustainable housebuilding. This usually means that they will build ‘eco home’ properties, those that are energy efficient and therefore have a minimal impact on the environment. Assetz Capital recently called for alternative lenders to fund the construction of factory-built eco homes to address the UK’s housing crisis. Meanwhile, a range of fintech lenders have spoken out about the importance of greening the housebuilding industry in an effort to meet the demand for new homes in a sustainable manner. Assetz and Shawbrook Bank recently urged Chancellor Rishi Sunak to relax planning laws to allow for more brownfield eco-housebuilding activity in order to meet the growing demand for new homes. As ethical investing becomes more prominent, P2P lenders are able to remain one step ahead of the mainstream thanks to their ability to respond quickly to investor demand and work closely with both business borrowers and property developers. In fact, this ability to adapt is one of the core strengths of the P2P lending model. In a recent speech, Innovate Finance chief Janine Hirt said that fintech lenders can “save the world” by aiding the fight against climate change to avert a catastrophe. As more lenders join the ethical investing movement, let’s hope this turns out to be true.

PROMOTED CONTENT

An alternative opportunity

There’s a way for investors to earn strong, risk-adjusted returns away from the stock market, as Shojin Property Partners’ chief executive Jatin Ondhia explains

RACTIONAL INVESTING is not new. Fractional investments were traded in the coffee houses of Europe as far back as the 1500s. Back then they traded debt instruments and later company shares. Of course, this evolved into centralised exchanges and eventually the stock market behemoths that we know today. Peerto-peer lending and crowdfunding are following a similar trajectory. This is a nascent industry, capitalising on the funding gap between “friends and family” and mainstream markets, using the efficiency of technology to fractionalise investment opportunities. Being an inefficient market, it creates significant opportunity for investors. One day, “alternative investments” will be traded in the same way as mainstream products on the debt or equity markets, of course they won’t be called “alternatives” then! We have seen this in the evolution of every market. It started with debt instruments, then equity, then FX, commodities, credit default swaps, the list goes on. Crowdfunding and P2P open up parts of the market that are underserved for both borrowers and lenders. Take, for example, a property developer. When they are doing small developments, they can get the funding from the bank and the equity from friends and family. However, as they start to do larger projects, they need more capital and outgrow their friends and family for the equity. Unfortunately, however, they are too small to go to the regular private equity funds. So, they’re stuck in this well-known funding gap. On the other side you have investors who either leave their money in the bank earning next to nothing, or they can leave it with

investment funds, where the layers of fees eat away at their returns. Fractional investment platforms, aka P2P and Crowdfunding, enable those same investors to invest money, on a fractional basis, into the developer’s business. The developer gets the funding they need and is happy to share the profits, so the returns can significantly exceed what investors could otherwise earn. It’s a classic win-win. If you invest in the stock market, you may have heard of the efficient market hypothesis. This suggests that markets are always efficient, and that demand and supply always equalise and converge onto fair pricing since all information is universally known. Unfortunately, the middle markets are not efficient, creating a mismatch between demand and supply and therefore enabling the opportunity for stronger risk-adjusted returns. Within the online investment market, investors are able to choose where they want to invest – for example, real estate assets, lending to real estate developers, investing in company shares or lending growth capital to a business. Investors can choose the borrowers that they

lend to and ensure that they are comfortable with the risks they are taking on. They are, in effect, investing “directly”. This contrasts with leaving your money in the bank or mainstream investment funds – the power of platforms is to enable direct investment, cutting out all the middlemen, and keeping the greater returns for yourself. Of course, there are risks, the primary one being a lack of liquidity so you have to be comfortable staying in any investment until the expected exit. The other obvious problem is not knowing which platform to invest with. Whichever platform you choose, you should first check that it is Financial Conduct Authority regulated. While no guarantee of success, it at least weeds out all the unscrupulous players. Thereafter make sure you understand what due diligence is carried out on the underlying investment and how you are being protected from losses. Ultimately do your own research and ensure you are comfortable with all aspects of the investment and, if in doubt, walk away or do smaller trial investments until you are comfortable. Most platform operators will also be happy to meet with you or have a video call, so that you can ask further questions and ensure you are fully informed before proceeding. Alternative investments through online investment platforms present a great opportunity in today’s markers. They should make up some part of a diversified portfolio and offer returns that are uncorrelated with mainstream investments. The inefficiency of the market they operate in can generate strong risk-adjusted returns. Just be sure to do your research and invest conservatively until you are comfortable.

DATA

Which are the biggest P2P lending platforms in the UK?

HE PEER-TO-PEER lending landscape has changed considerably over the past few years. Between acquisitions, winddowns and expansions, a number of big names have exited the space, and others have grown substantially to replace them. However, in terms of sheer lending volumes, there is no touching the big two – Funding Circle and Zopa. Between them, they have lent almost £14bn to UK-based borrowers, dwarfing the competition. Yet other platforms are catching up. There are now three lending platforms which can boast a loanbook value of more than £1bn, and at least seven platforms which have passed £100m in lending volumes. These figures demonstrate the maturity and popularity of P2P lending in the UK, and hint at the growth that can be achieved as the economy starts to recover from a year and a half of lockdown measures.

Peer2Peer Finance News can now reveal the 10 largest P2P lending platforms by loanbook volumes.

support a public listing. Meanwhile, Zopa’s P2P division has lent more than £5.66bn to UK borrowers.

Funding Circle Total loanbook value since inception: £8.3bn Since the company was founded in 2010, Funding Circle has grown to become one of the largest P2P lending platforms in the world, with £11.5bn originated globally. £8.3bn of that amount has been loaned to UK borrowers alone, making it far and away the largest UKbased platform in terms of lending volumes.

Zopa Total loanbook value since inception: £5.66bn The world’s first P2P lending platform is 16 years old this year, and it is still innovating. Last year, it launched Zopa Bank, and more recently it has been raising funds to

Assetz Capital Total loanbook value since inception: £1.4bn In March 2020, Assetz Capital passed its £1bn milestone, just seven years after the company was founded. During the Covid-19 pandemic, Assetz Capital was one of the few alternative lenders selected to offer the coronavirus business interruption loan scheme (CBILS), and the follow-on recovery loan scheme (RLS). Including the money loaned via CBILS, the platform has now funded more than £1.4bn in loans.

Folk2Folk Total loanbook value since inception: £479.6m Folk2Folk does not consider itself to be pure P2P, although it does

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pitch itself as a ‘human 2 human’ lender. Since the company gained its P2P licence in 2014, it has gone on to lend almost £0.5bn to property developers, farmers, and businesses across the UK, with a focus on the South West region of England.

Lending Works Total loanbook value since inception: £231.6m One of the few personal loan providers still active in the P2P market, Lending Works has loaned more than £230m since it was founded in 2014. The platform has delivered average annual returns of between two and six per cent via its flexible and growth products, and all investments can be held within an Innovative Finance ISA (IFISA) wrapper.

CrowdProperty Total loanbook value since inception: £163m Birmingham-based CrowdProperty has helped to fund more than £345m worth of property by lending £160m to borrowers seeking development finance, refurbishment finance, bridging

finance, development exit finance and auction finance. The property lender has been active since 2014, and has maintained a track record of zero investor losses to date.

Kuflink Total loanbook value since inception: £148m Kuflink started out as a bridging lender, before expanding its product range to include P2P property lending. The platform invests alongside its lenders, taking a five per cent stake in each project. It became profitable for the first time in 2020 and plans to ramp up its development funding in the years ahead. Like CrowdProperty, Kuflink has never lost any investor capital.

ArchOver Total loanbook value since inception: £144.7m Business lender ArchOver has paid over £11m in interest to its investors, by maintaining interest rates of between seven and nine per cent per annum every year since 2016. Lenders can choose between backing secured or unsecured business loans, with an IFISA

wrapper available to maximise investor returns.

Proplend Total loanbook value since inception: £139m Property lender Proplend has funded £240m worth of properties by financing £139m in loans on commercial properties. It offers three different lending options to investors, with target rates of between seven and 12 per cent per annum. It is one of the few P2P platforms that offers both an IFISA and the option of adding Proplend investments to a self-invested personal pension, or SIPP.

CapitalRise Total loanbook value since inception: £122m CapitalRise has carved out a niche as a prime central London property lender, and this strategy has already paid off. Since its launch in 2016, the platform has originated £122m in loans, funding more than £0.5bn in central London properties, with zero defaults to date. All investments are IFISA eligible, with a minimum threshold of £1,000.

IFAS

Engaging with IFAs What more can be done to attract financial advisers to the peer-to-peer lending sector?

T’S COMMON KNOWLEDGE that independent financial advisers (IFAs) have always been reticent about the peer-to-peer lending sector. There are a variety of reasons why IFAs are still cautious about P2P: a lack of education or awareness about the products on offer; the fact the P2P lending sector does not have financial services compensation scheme protection; the relative nascence of the industry; and the occasional piece of bad press following the high-profile collapses of platforms such as Lendy and Collateral. The professional indemnity insurance costs for IFAs is another reason, as insurers are wary of any alternative investment, not just P2P. Advisers tend to stick to plain vanilla asset classes because they are easier to understand and defend in the event of a complaint. And of course, investments in equities, bonds and property have a long track record which means that many investors will already have a pre-conceived idea of the risk involved. This makes it much easier for IFAs to ‘sell’ these traditional investment classes to even the most inexperienced investor. By contrast, the P2P lending sector is still considered to be relatively new, and its critics have argued that

it has not yet gone through a whole economic cycle and proven that it can survive in a downturn. Of course, the Covid-19 pandemic and economic recovery should hopefully put that to bed, as many platforms have not only survived but thrived during the crisis. But for now, with just 16 years of history to draw from, advisers find it difficult to assess if P2P is low, medium, or high-risk. This poses a challenge for any IFAs looking to advise on P2P. “It’s difficult for IFAs to engage with the sector,” says Anthony Carty, group financial planning and business development director at self-investment specialists Clifton Asset Management. This is the unfortunate reality of the P2P/IFA relationship. Education is obviously needed, to show IFAs the risks and returns of the sector and where P2P can fit in their clients’ portfolios. More third-party risk assessments of P2P may also help to improve engagement with advisers. But it’s not just down to the platforms. IFAs also have a responsibility to seek to upscale and engage with the sector in order to advise clients with a wider knowledge of investments in their toolkit. Innovative Finance ISAs (IFISAs) have been touted as an attractive product for IFAs, due to the

widespread recognition of the ISA brand among individual investors. However, it is down to the platforms to communicate these benefits to IFAs in a way that is compliant with the Financial Conduct Authority (FCA) marketing restrictions. “P2P needs to ensure the right products are marketed to the right people and to be careful that IFAs know exactly what the features of the products are,” says Mark Turner, managing director, regulatory consulting at Duff & Phelps. “I think IFAs should gain more comfort through the fact the sector is well regulated.” While regulation is important, ultimately IFAs want to see evidence of consistent asset performance. A huge reason why many advisers have avoided P2P is the fact the sector hadn’t been through a whole economic cycle and thus did not have any proof of how it would perform during a downturn. Covid-19 has provided this test and most platforms have passed it. Those platforms that have shown that they have provided a diversified source of income and have managed risk well in this difficult time, will stand out for IFAs. Furthermore, the downturn may show that P2P is even more attractive than other assets, such as stocks and shares, as it is does not experience the same level of volatility during economic instability and tends to offer fixed, inflationbeating returns. “I think IFAs will come around and won’t be able to ignore P2P forever,” says Lisa Best, head of financial services content at alternative investments research firm Intelligent Partnership. “It’s another alternative that can provide income for clients and I think you’ll get more advisers coming to P2P as it becomes clear that it’s not susceptible to immediate mood swings from investors in the same way as equity.”

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PROPERTY

Its not easy being green

Peer-to-peer lenders are leading the eco-housing revolution. We explore the opportunities in ethical property investing, and what the future may bring

ORE THAN 500 Extinction Rebellion protestors were arrested during the group’s two-week protest in London over the summer. Climate activists blocked roads and bridges while some members even threw paint at banks and glued themselves to a McDonald’s restaurant. Whether you agree with their methods or not, they have certainly brought the issue of climate change to the forefront of people’s minds. Peer-to-peer property lending platforms have also been doing their part to raise awareness of environmental issues by offering ethical investments to climate-

conscious investors. According to a recent study by metals exchange traded commodities provider Global Palladium Fund, nearly half (47 per cent) of retail investors plan to invest more of their cash in companies and funds at the forefront of the green revolution. And in June, The Investor Index – an annual report authored by communications firm AML Group and research agency The Nursery Research and Planning – revealed that millennial investors are more likely to consider environmental, social, and governance (ESG) products. 27 per cent of younger investors now include responsible

investments in their portfolio, compared to only four per cent of investors aged 55 and older. “Ethical P2P property investing is in its infancy but is primed for strong growth in the years ahead as lenders and platforms seek to embed ESG criteria in their loan origination activities,” says John Cronin, an analyst at brokerage Goodbody. Neil Faulkner, managing director of P2P ratings and research firm 4th Way, says that alternative lenders have always been interested in ethical investments, and predicts that the shift to sustainability will continue. “We've seen resistance from investors in lending to claims-chaser type firms,” Faulkner says. “A high proportion of investors are also attracted to P2P lending companies' better and fairer treatment of borrowers. “My view is that while the shift

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to sustainability will continue to be far too slow for our planet, it will continue to accelerate rapidly, offering considerably more opportunities for P2P lending platforms and investors in the immediate future.” The main way in which P2P property lending platforms offer ethical investments is by funding the development of greener, sustainable housebuilding to build new properties. These are often described as ‘eco homes’ and are designed to be energy efficient and have a minimal impact on the environment. These homes are usually created through modern methods of construction, using materials such as timber instead of bricks. Often, these properties are built offsite with precision engineering that cuts out much of the wasted energy, for example, through various ways of

preventing warm air leaking out of the house. Several P2P property platforms already operate in this area, including Assetz Capital, JustUs, CrowdProperty and Crowdstacker. “You wouldn’t build cars in a muddy field, they’re built in factories,” says Stuart Law, chief executive of Assetz Capital. “Brick onto brick in a muddy field is very stupid and leads to poor energy efficiency, while factory built is brilliant with precision engineering.” Typically, traditional lenders are more hesitant about funding the development of eco homes through offsite construction, so the consensus among industry stakeholders is that there is a huge opportunity for P2P platforms to step in and lead the way. “The old-school lenders will catch up soon but there’s an opportunity for forward-focused platforms like us in this area,” says Lee Birkett, founder and chief executive of JustUs. Law believes that P2P platforms can tap into this opportunity by aiding the many small- and medium-sized enterprise (SME) developers who see the benefits of offsite construction while national

housebuilders lag behind and “don’t really understand it”. He says that valuers need to start raising their valuations of eco homes to mirror the savings on the energy costs they produce, and this will lead to a rise in finance for their development, while government legislation over the next few years should force the housebuilding industry to move in this direction. “I think the future is coming, it’s all about climate change, the government is behind it and there are plenty of ahead-of-the-curve SME housebuilders that are doing it,” Law says. “We understand it and are supportive of it, we are funding lots of these developments, but we know the risks and wouldn’t fund everything. “We think P2P is definitely leading the way on this.” Karteek Patel, chief executive of Crowdstacker, says he has seen a shift towards the importance of ethical building choices in construction projects, driven by buyer demand. "In our experience raising money for property developments we can certainly see a shift towards the importance of ethical building choices in all aspects of a building project, from choice of materials to how new buildings will function, and also how

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the actual build process itself impacts communities and the surrounding environment,” he says. “To our mind this is being driven by house purchaser preference. People want efficient homes not just because they are ethically superior but because they tend to be cheaper to run.” Besides greener housebuilding for eco homes, there are other ways in which P2P property platforms can offer ethical investment opportunities. One such way is Assetz Exchange’s funding of supported living properties for ex-prisoners, autistic people, those with learning difficulties and others, to address a shortage in these facilities. Chief executive Law says that the platform has seen a rise in demand in this area from both borrowers and investors due to the social and economic benefits available. He explains that ethical property developments that are leased to corporate and charity tenants can also provide a more stable source of returns than short-term six-month tenancies on flats and houses. “It’s definitely an area of growing opportunity for us,” Law says. “Our investors recognise the potential for attractive rates of return while making a positive social impact, while our borrowers are motivated to develop suitable properties for those that need live-in care or specialist support.” Over the past couple of years, several companies have pioneered new ways to help borrowers and investors benefit from the ethical investing trend in the property market. In November 2020, Rito Haldar and Aswin Parameswaran – who

are behind P2P platform Unbolted – launched OnStep Homes. This is a P2P finance-backed shared ownership scheme that launched to offer people a way to invest in residential property while supporting first-time buyers. The platform supports people seeking to purchase a property without a mortgage and with a deposit of just five per cent of the property value. It acts as an equity loan and the rest of the money is then funded through P2P finance to form a shared equity mortgage.

“ Ethical P2P property investing is in its infancy but is primed for strong growth in the years ahead

”

Bruce Davis, managing director of Abundance, says that his crowd bonds platform finances retrofit loans to improve the energy efficiency of a home. This is done through a series of measures, such as replacing a gas boiler with a heat pump or hydrogen boiler, to reduce the energy consumption or switching the energy supply to a renewable source. “The bulk of eco homes investment would be retrofit and not new build, the problem has been the number of public sector-led schemes for retrofit that have been a bit stop/start in the way they have been implemented so you haven’t seen much progress,” says Davis. “We’re at the stage of development that wind farm technology was at 10, 15 years ago. Engineers need to get their heads around the problem

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“ We can certainly see a shift towards the

importance of ethical building choices in all aspects of a building project, from choice of materials to how new buildings will function and create efficiencies, there’s a huge opportunity for the UK.” As one of the earliest champions of eco housing investments, Abundance has an acute awareness of the challenges for ethical property lending. Abundance used to fund the development of eco homes and social housing but stopped when the Financial Conduct Authority (FCA) introduced a permanent mini-bond marketing ban in January.

”

“Abundance eco homes’ development funding came to a blinding halt when speculative illiquid securities rules came in,” Davis says. “I think we have something to offer to housebuilders, whether offering green or affordable housing, and certainly from an investment perspective we believe it’s a good investment to have on your portfolio, but the FCA has taken the view that the structure used and type of risk is

not appropriate when using a bond and is currently reviewing the status of it on the P2P side too.” If the rules were to be introduced in the P2P sector, this would also stop P2P platforms from offering development loans, something industry stakeholders have repeatedly spoken out against. As well as the threat of additional regulation, P2P property lending platforms have faced the twin problems of Brexit and Covid leading to a shortage in construction labour and materials, as well as rising costs of building materials due to inflation. Assetz Capital’s Law says that these shortages and rising inflation have slowed down the building of houses, making it more difficult to predict when developments finish. This may ultimately lead to fewer homes being built. He says that eco housebuilding has been particularly impacted, with fewer workers and rising material costs. Timber prices alone have increased by at least 50 per cent. However, he is still optimistic about the future of eco property building. “I would hazard a guess that in the medium-term eco homes will be absolutely fine, as it takes less manpower to build an eco-home than a traditional home,” Law says. “Traditional builders are more exposed to labour shortages than those building eco homes. I think eco homes will do better on a relative basis.” Despite obstacles to overcome, P2P property lending platforms are clearly committed to ethical investments, whether through greener housebuilding, helping firsttime buyers onto the property ladder or retrofit loans. Extinction Rebellion activists may argue that change is not moving quickly enough, but P2P property lending platforms are rising to the challenge and creating a roadmap for other climate-conscious property lenders to follow.

SIPPS

The pension question Diversity from the stock market, inflation-busting returns and a variety of products on offer… with all these benefits, why haven’t peer-to-peer investments become a mainstay of the self-invested personal pensions market?

OR SEVERAL YEARS, peer-to-peer lending platforms have been trying to tap into the lucrative self-invested personal pension (SIPP) market. But despite offering inflation-beating returns in a tax-free wrapper, progress has been rather lacklustre to date. A SIPP is a personal pension tax wrapper which people can pay into and use to manage their investments flexibly in a tax-free environment. They can contribute up to 100 per cent of their annual earnings, with tax relief applying on contributions of up to £40,000 per year, with no capital gains or income tax. The concept was first introduced in 1989, but P2P platforms were only allowed access to the scheme in 2016. A number of platforms now accept P2P investments through SIPPs, including CrowdProperty, Proplend, Money&Co and Ablrate to name a few. However, five years after P2P SIPPs were first introduced, the concept of P2P pension investing has not really gained traction. This is partly due to

the many challenges that P2P firms currently face in the SIPP market. John Dowding, technical director at SIPP administrator Morgan Lloyd, says that he has seen falling demand for P2P investments through a SIPP. He believes that demand has dropped this year due to “uncertainty over the economy and concerns that businesses may default on lending, coupled with the coverage of the likes of Lendy”. “In our experience interest peaked around 2018/2019 but has diminished quite considerably since this time,” he says. Lack of demand may be one reason for P2P platforms’ limited progress into SIPP money, but is only part of the problem. Residential property investments cannot be held within a SIPP, which means that some P2P property lending platforms are automatically excluded. Furthermore, the ‘connected parties’ rule means that SIPP investors cannot lend to a ‘connected person’ like a spouse or close relative, which is difficult to

“ There was a flurry of people getting involved

in SIPPs, but I think the IFA market and SIPP providers are just not getting involved

”

guarantee when putting money into a P2P platform that auto-diversifies investments. And then there are sectoral challenges, such as the fact that P2P lending is labelled as a non-standard asset and relatively few independent financial advisers (IFAs) recommend P2P to their pension-planning clients. “There was a flurry of people getting involved in SIPPs, but I think the IFA market and SIPP providers are just not getting involved,” says David Bradley-Ward, chief executive of Ablrate. “I’m sure there is quite a lot of

SIPPS

SIPP money around. We have quite a lot on the platform but it’s not an easy thing to do. Not many SIPP providers would allow SIPP investing into P2P loans because it’s a non-standard asset. “It’s a niche marketplace as far as that’s concerned and with increasing trajectory of what the Financial Conduct Authority (FCA) says you can invest in, I would imagine they wouldn’t be too keen on pension money going into P2P loans in future.” On top of this, Dowding says Morgan Lloyd has an additional

charge for SIPP clients that invest in P2P to cover the extra admin and due diligence that is required. He says the SIPP administrator offers a free SIPP where all investments are on its own platform or a low-cost SIPP where other platforms and standard assets can be held, which is charged at between £150 to £350 per annum. Meanwhile, Dowding says the standard charge for P2P investments, which is classed as a non-standard asset, is 0.35 per cent on the first £500,000 and 0.25 per cent on anything above £500,000, subject to a minimum of £1,350 per annum.

“This covers the additional admin and due diligence that is required for these types of arrangements,” he says. “The regulatory capital and risk increases pro rata to the size of the investment hence the tiered charge.” This effectively makes it more expensive to invest in a P2P SIPP, as it is only economically viable if a hefty investment of many thousands of pounds is being made. Nicola Horlick, chief executive at Money&Co, blames SIPP administrators for the slow uptake of P2P SIPPs.

SIPPS

“The main problem is that the client has to persuade the SIPP administrator that P2P loans are a suitable investment for their SIPP and many administrators see P2P lending as high risk and will not approve an investment,” she says. “This is the main reason why so few SIPPs have P2P loans.” However, Gareth James, head of policy at AJ Bell, suggests this hesitation around P2P is understandable given the possible consequences if something goes wrong and the low demand for SIPP investment into this sector. “Providers and SIPP customers face a risk of penal tax charges if the party they’re lending to holds a SIPP under the same registered pension scheme,” he says. “Larger SIPP firms have tens, or even hundreds, of thousands of customers making this a risk which is beyond the control of the provider, as they don’t have sight of the parties to the individual loan transactions. “This, combined with low customer demand, is the main reason larger SIPP operators haven’t been encouraged to make P2P lending available through their pensions.” Dowding agrees and is pessimistic for the future of the P2P SIPP market, saying take-up is “unlikely” to improve. “On current trends, it is likely that the P2P SIPP market will continue to contract,” he says. “The principal challenges are twofold. Firstly, to include sufficient controls to ensure that the borrower and SIPP investor are not connected, secondly to ensure that the borrower is a genuine diverse commercial vehicle. Failure to observe these requirements could have significant tax consequences.” He goes on to say that SIPP

providers have come under increasing scrutiny from the FCA around the investments that they accept and the level of due diligence that is undertaken on them. “It is considered that the demise of Lendy for example, has seen a greater reluctance from both SIPP providers and SIPP investors to enter this market,” Dowding adds. However, some industry stakeholders predict that take-up will improve, whether through engagement and education with advisers and SIPP providers or

through the simple fact that the P2P sector is building up a strong track record – something that IFAs should take note of. Neil Faulkner, managing director and head of research at 4thWay, says platforms have already been working on educating SIPP providers about the risk-reward profile of P2P lending platforms. He says they need to be able to show SIPP providers how they will concretely benefit in the form of rapidly attracting more SIPP customers, while also generating

“ When SIPP providers better get to grips with P2P lending and as

platforms develop better ways to communicate with them, take-up might finally speed up

”

SIPPS

“ For P2P investments to become a mainstay

in SIPPs the industry would have to win over financial advisers and SIPP providers, and ultimately this will be driven by customer demand

awareness and interest from their own investor base. “Take-up will improve slowly for the foreseeable future,” he says. “When SIPP providers better get to grips with P2P lending and as platforms develop better ways to communicate with them, take-up might finally speed up.” Karteek Patel is co-founder and chief executive of Crowdstacker, which stopped offering the ability for investments to be held within a SIPP following low demand. He says there isn’t enough interest to drive the sector to work on educating and convincing financial advisers and SIPP providers of its benefits. “For P2P investments to become a mainstay in SIPPs the industry would have to win over financial advisers and SIPP providers, and ultimately

this will be driven by customer demand,” he says. “This demand is not yet there, customers are much keener to use P2P investing as an overall add-on to their day-to-day investing, and those seeking tax advantages utilise their ISA allowance.” The limited progress of P2P lending tapping into the SIPP market can be shown through several challenges, from the ‘connected parties’ rule, SIPP administrators and IFAs being reticent about P2P lending and P2P itself being labelled as a nonstandard asset with SIPP holders charged more for these investments, not to mention the FCA’s direction of travel for the sector. These challenges are stalling take-up despite the obvious benefits of diversified tax-free investments which can achieve inflation-beating returns. Yet despite the barriers, several platforms still accept investments through the tax wrapper and have

”

received SIPP money with minimal marketing of the product. The P2P SIPP market may not have fully taken off to date, but platforms aren’t closing the door on SIPPs just yet. Peer2Peer Finance News understands that Kuflink is working on a SIPP product, while Property Bridges is looking into accepting SIPP investments and Lendwise chief executive Rishi Zaveri says it “makes sense to offer this in due course”. In addition, Relendex is preparing to enter the SIPPs market a year from now through its new associated company Farringdon Portfolio. The next generation of SIPPs couldn’t have arrived at a better time. Low interest rates and rising inflation have encouraged many investors to look at their pension portfolio with fresh eyes, and P2P lending platforms have a strong track record of delivering inflation-beating returns even during a global pandemic. While obstacles remain, the story of P2P SIPPs is far from over.

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