Rethinking bricks and mortar: alternatives for property investors
A mismatch of supply and demand has made UK property more unaffordable than ever for would be buyers. Property investors pursuing the buy-to-let route are also facing challenges due to a recent crackdown in tax legislation. Against this backdrop, peer to peer (P2P) and equity crowdfunding have grown in popularity as alternative ways to access the property market.
But what should you know about each?
Property peer to peer (P2P)
Property P2P lets investors build a portfolio of loans – each one of which is secured against a property – to target a regular rate of interest.
When you invest in a P2P lending product, you are essentially lending money to a borrower, and using one of their properties as security in case they fail to repay – just like a bank does when it extends a mortgage. Your investment return comes from a borrower’s regular interest repayments. Generally, your money is invested across a number of loans.
With P2P, you do not have a direct investment in the property market, so your investment will not rise or fall in line with property prices. Instead, you can target a regular return from a borrower’s repayments, most often paid monthly.
The importance of loan to value: The loan to value (LTV) ratio of a loan is a crucial consideration for investors. It shows the size of a loan, relative to the value of the property that it’s secured against. For example, a £750,000 loan secured against a property worth £1 million would be described as being made at a 75% LTV.
If a borrower fails to repay their loan, their property can be used to fund the debt. The lower the LTV, the more ‘headroom’ there is against any fall in its value. The average LTV of loans with Octopus Choice is 60% – and the maximum is 76%. That means these properties could still fall in value by 24% before any capital would be lost (leaving aside legal fees).
How to access: some P2P platforms require investors to choose individual loans, while others – including Octopus Choice – do the hard work for you. Investors can get started with a minimum of £10.
Property equity crowdfunding
Property equity crowdfunding refers to the process of buying shares in individual properties alongside other investors. Investors target returns in two ways; firstly through a monthly rental income, and secondly, if the value of the property increases.
An obvious benefit of property equity crowdfunding is that investors can enjoy uplifts in the underlying property market with the additional bonus of being able to easily diversify. For example, you can own shares in properties in Newcastle, Birmingham and Brighton without requiring the cash to purchase three separate properties outright. This gives investors access to multiple regional property markets.
Property Partner also enables investors to take a monthly rental income, from tenants renting the properties they are invested in. So even if the property market experiences a downturn, investors can still receive a regular income from tenants.
How to access: minimum investments vary, but as with P2P these are a far cry from the average house deposit. At Property Partner the minimum investment is just £250. Investors can go online and view a range of properties with a surveyor’s report. Investors can either select to be put into a portfolio, gaining an equity investment in a range of properties across the UK or can handpick investments themselves.
Key considerations before picking an investment route
Investment risk: In either case, the value of investment and any income from it, can fall as well as rise. You may not get back the full amount you put in.
Debt or equity: With property crowdfunding the greatest risk is that property prices fall and the value of your investment in a property falls in tandem. Nonetheless, the risk is mitigated by regular income from a tenant. With property P2P investors are not exposed to property market swings. The biggest risk to the investor is if borrowers default on their loan. Provided there is a sufficient LTV cushion, a fall in value could still be absorbed.
Liquidity: Liquidity refers to how easy it is to access and exit your investment. Property is traditionally an illiquid market. Consider the time it takes to sell a house, for example. Both Property Partner and Octopus Choice allow withdrawals – with the average time under five days. However, as both routes are directly or indirectly grounded in property, neither can guarantee instant access.
Who’s the provider: As with any investment your capital is at risk. Investors should do due diligence into the company they plan to invest with. It is beneficial if the company is FCA regulated.
P2P lending and equity crowdfunding will suit different investors depending on their investment objectives and risk appetite; one size certainly doesn’t fit all. Thanks to these two innovations, accessing the property market is simpler than ever before.
Sam Handfield-Jones, Octopus Choice and Mark Weedon, Property Partner