20 year ex banker’s reflections on the world of property peer to peer lending
One month in, reflections on the world of property peer-to-peer lending.
When a former colleague started a well-known peer-to-peer (P2P) lending platform over 5 years ago, I remember thinking great idea, but I’m not sure it’ll catch on. That business lent over £650m in the last year, and UK P2P platforms have loans books in excess of £8bn (per AltFi). Still small compared to the big banks, but becoming meaningful.
Towards the end of 2015, with the bad bank strategy done and 20+ years of City life nearly behind me, my thoughts turned to what I should do next. As a real estate banker, I become increasingly interested in a number of LinkedIn posts from Brian Bartaby, about commercial real estate peer-to-peer lending. Brian founded Proplend back in 2014, and to my mind had a compelling business idea based upon the simple premise: why get very little interest on your bank savings when you could get between 5 and 12% by lending it to credit worthy borrowers, secured on income producing real estate.
That conversation developed and here I am, suits and ties left hanging in the wardrobe, helping him grow a well-developed fintech into hopefully a sector leader. I thought I’d share my new-to-the-sector thoughts and observations, so in no particular order:
Many smart people have some trenchant views on P2P risk without really digging down into what it is and how it works.
It doesn’t help that the different platforms operate different P2P models, and the product range is broad, across the consumer and SME lending space. Yet big banks, who are heavily regulated, have armies of risk people, policies for everything, still manage to get fined millions and lose billions in credit losses. P2P platforms will not be immune to those issues. But by combining some good old fashioned grumpy bank risk people, armed with the horror stories of the past, with top draw analytics and technology, they are well set to perform well in this area.
As Lord Adair Turner, previously a P2P sceptic, said at the recent LendIt conference;
“[P2P platforms] might in some cases be able to do it [credit underwriting] better than banks, and they can certainly in many cases do it at least as well while providing better customer service”.
P2P platforms are not really competing with the banks.
People like having some cash in the bank guaranteed by the Financial Services Compensation Scheme (FSCS), but at what cost? P2P offers higher returns by making loans without the benefit of the FSCS, so why not do both?
Similarly on the lending side, there are many billions of pounds of small CRE loans needing to be refinanced and many disenfranchised property owners. With many players exiting the sub £5m space (see the current Nationwide story), the remaining mainstream banks can pick the best of the best, which score well in their regulatory capital models. Proplend is targeting the best of the rest, and particularly likes buildings that are fundamentally sound with a good asset management story, perhaps shorter leases but with a resi conversion angle.
Hopefully in time, Proplend will be able to partner with a mainstream bank on a referral basis, to complement their core offering.
Platforms like Proplend charge transparent and reasonable fees. How?
Proplend just doesn’t have a huge cost base to fund (no head office in W1, no branch network) so the bulk of the loan return passes straight through to the investor.
Returns are compelling.
The size of the bubbles on the graph below shows annual return, and is perhaps a little limited, but I think makes the main point well: P2P lending can offer comparable and sometimes better returns than higher risk products. P2P lending isn’t about headline returns, it’s about risk adjusted returns. It’s true that the Proplend numbers do not include credit losses (because there haven’t been any yet) but they remain extremely compelling to low risk investors at the A and B level where loans can withstand 50% and 35% property value reductions before capital is at risk (compare that to 2008’s extreme peak to trough reduction of 45% on average).
Fintech, by definition, puts the customer experience front and centre.
Many Fintech people haven’t got a good word to say about their bank. Despite occasional grumbles, I happen to like mine, probably because my bank manager Bob (real name) is great, repeatedly going out of his way to help. Problem is, he can’t design the products or change the IT platform. Platforms like Proplend are starting from scratch, are nimble and can. That’s the difference.
Fintech is all about efficiency of process, ability to replicate, scale and industrialise.
Think Uber and Airbnb. That’s what Proplend is trying to do: maximise the efficiency and repeatability of the transfer of value from borrowers to lenders. But old fashioned conveyancing remains a challenge and we need to find solutions there too.
So at Proplend, we’ve proved the concept works, we’ve a small loan book, a growing investor base crying out for more product, a healthy pipeline, a great team and credible plans to scale the business. Let’s hope we can follow in the slipstream of the other platforms.
Proplend is a Peer to Peer lending platform for sub £5m commercial real estate debt. See www.proplend.com for more details. Investor capital is at risk. Andrew Pinfield is Head of Risk and Operations at Proplend. The views above are my own and not a representation of Proplend or any other platform.