Property P2P – the consolation prize for Generation Rent?

Iona Bain

Recent statistics from L&G showed a continuing and worrying reliance on the Bank of Mum and Dad to fund property purchases among millennials today – renewing fears that a millennial wealth gap is opening up between those who can rely on wealthy parents and those who can’t.

But for those who can’t turn to BOMAD, there may be a consolation prize. A new industry of peer-to-peer lenders has sprung up to offer cash-strapped millennials a more accessible way to invest in bricks and mortar. P2P allows you to put your money into a range of buy-to-let, residential or commercial developments, with the projects’ investors paying you back with interest on a monthly basis.

The rate of return is determined by how risky the project is. Residential and buy-to-let usually produce a stable mortgage or rental yield a few notches above normal savings rates (between three and five per cent). More risky property investments are likely to be funded through bridging or development loans and while there is a chance that you will not get all your money back, you could be rewarded with higher returns of up to 15 per cent.

Online property lending is becoming big business in the UK, generating £700 million worth of investment in 2015 alone. Newer entrants to the industry include Bricklane, which is selling its own property ISA, and Octopus Choice, which offers a target rate of 4.2 per cent.

A further boost has been provided by the introduction of the Innovative Finance ISA, which shields all P2P returns from tax, although only a handful of providers have regulatory permission to sell the product so far, including Lending Crowd, Landbay and LandlordInvest.

The trend is being driven not just by institutional investors but young web-savvy investors who are disillusioned with poor rates of savings. One P2P platform – ThinCats – reckons that millennials are four times more likely to choose this option as those aged over 55.

The phenomenon has even spawned a new book on how to make money from property lending from Frazer Fearnhead, founder of property crowdfunding platform Housecrowd. The entrepreneur has raised eyebrows by arguing that alternative property investment could be a far more potent wealth creator than pensions, savings or equities in the long term.

Frazer Fearnhead’s argument is that those who invest sensibly in property from a young age “can realistically expect a much larger retirement fund than if they were going to put their money in a pension, even after taking into consideration tax breaks afforded to contributions”.

However, Iain Niblock, co-founder of the independent P2P research firm Orca, said the strategy is not without its hazards. “The main risk is that the investor is unaware of the trade-off between risk and rewards and hasn’t carefully researched the asset class from an independent source,” he said.

Mr Niblock also highlighted the fact that peer-to-peer lending is not covered by the Financial Services Compensation Scheme, which protects deposits in mainstream savings accounts up to the value of £85,000, so investors could lose money if borrowers default on the loans.

“Major P2P platforms do, however, implement strict security measures, including asset security to mitigate borrower default,” he added. “Low bad-debt rates across the industry reflect the robust underwriting processes implemented by platforms.”

Property investors also need to note the difference between P2P lending and crowdfunding, which is the category that Housecrowd falls into. Haaris Ahmed, founder of property crowdfunding platform uOwn, said P2P lending consisted of property-backed loans where a lender will pay an interest rate that is “set in stone”, unless a borrower was to default.

“Property crowdfunding gives you an equity stake where you get rental income but also a share of capital appreciation,” he said. “It appeals to first time buyers, because if they’re putting aside money for a first home and they think property values are likely to rise, it makes sense to expose themselves to a market that they want to enter.”

That said, Mr Ahmed noted that such investments come with a specific health warning: “It’s higher risk and you expose yourself to the upside as well as the downside.”

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