In the high-profile wake of the failure of peer-to-peer (P2P) platform Lendy, there has been widespread caution about the P2P sector. However, it would be very wrong to generalise from the particular. As more has come out about the way that Lendy managed its business, it has become apparent that it took unacceptable levels of risk.
Lendy portrayed itself as providing investors with a low-risk way of gaining exposure to direct lending, stressing that all of its loans were asset-backed through charges on property. It is true that the loans were secured, but the platform was lending to property developers to help them purchase sites, many of which did not yet have planning permission. This was a very high-risk strategy. In addition, we understand that the developers were not required to service the loans and that interest payments were only made when the loan was repaid. The result of this was that 60 per cent of the loan book was in default and the top financial regulator, the Financial Conduct Authority (FCA) forced the platform to close.
Lending in the property sector can also include lending to companies that are looking to purchase existing properties. One of our lenders, webuyanyhome.com, provides home owners with the opportunity to make a quick sale at a discount. In the North of England, it takes seven months on average to sell a house and 21 viewings. Webuyanyhome.com will purchase the property in seven to 14 days and bear all the costs, but the vendor will only get 80 per cent of the market value. The company then sells the property without any refurbishment in 90 days at 95 per cent of the market value. This allows those who, for example, have an elderly parent that needs to move to a care home to achieve a quick sale. The loan to value for the webuyanyhome.com loans is 65 per cent, which gives us plenty of headroom if something goes wrong and houses need to be sold to repay our lenders.
We are currently working with a number of house builders to create a model to allow them to borrow from Money&Co. Banks are currently reluctant to lend more to the property sector and this provides us with an opportunity, but we must ensure that our lenders have sufficient security and we will not allow borrowers to roll up interest payments. There continues to be a shortage of housing in the UK and small house builders need access to capital in order to help reduce this shortage. If we can provide lenders with secure lending opportunities in this sector and the loans can be held in an Innovative Finance ISA, then lenders can get a gross yield typically of 8 per cent per annum and a net yield of 7 per cent per annum after our annual fee of 1 per cent and this is received completely free of tax.
In part II of this blog – how our P2P loan book compares, in terms of security and access as well as performance, with leading mainstream investments.