Life After Lendy - Why Well-Managed P2P Really Works
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 had a very high-risk strategy."
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.
"Secure lending can produce 8% gross yield."
Money&Co. takes a totally different approach to lending. For us, it is vital that there is proper security when we lend and that the borrower services the loan during the term, making regular interest payments to lenders. We will never lend more than 80% per cent of the value of a project to ensure that our lenders are protected if something goes wrong.
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.
Another example of a company that is buying existing property is North East Property Investments (NEPI). NEPI buys properties in the North East of England, refurbishes them and then lets them on long contracts to local authorities and government agencies/contractors. We provide finance for the company to buy the properties and they contribute the capital for refurbishment. When the refurbishment is complete, there is an uplift in capital value and we are typically lending on a loan to value of 65 per cent.
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.
It should be noted that Money&Co. has been lending for over 5 years and has only had one bad debt so far, representing a bad debt rate of 0.04 per cent per annum.
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.