Shift of Demand on UK Property Marketplaces

The market situation on UK property marketplaces for bridge loans with high interest rates has turned drastically in the past 2 months. For a long time before there has usually been much more investor demand than could be soaked up by loan demand. That the situation has changed is most visible on the loans on offer (mostly through the secondary markets). There is currently nearly 8 million GBP on offer on Lendy (that was close to nil 8 weeks ago). At Moneything there is 2 million GBP on offer and at Fundingsecure 0.6 million GBP. Collateral recently raised the interest rate for new loans from 12 to 14%.

So what is causing this change? I will look at possible causes and measures the marketplaces could take to react.

  • Have property prices peaked?
    Building activity and property prices are influenced by the economy. This Guardian article says UK house prices fell three month in a row. Should investors think, the economic climate is cooling down, they might be more cautious as loans to property developers would be affected in a downturn.
  • Defaults are rising on Lendy
    Loans that are more than 180 days overdue are categorized as default loans on Lendy. There are now 19 loans in default, with the total loan amount in these loans adding up to 23 million GBP. While this does not mean that money will be lost – the loans are secured by the property, it makes investors cautious and hesitant, asking more questions about valuations and collection procedures.
  • Lenders might fear that the assets become increasingly illiquid
    Part of the attraction of Lendy and Moneything in the past (aside from the high interest rate) came from the fact that loans could be sold very fast, usually within hours for most loans that were not overdue. That has changed on Lendy and might be currently changing on Moneything. However with the queues for sales building up on Lendy it is too easy to just look at the nearly 8 million GBP on offer and deduct that it takes very long to sell loans. Not all loans are equally liquid. I sold 400 GBP of DFL025 recently. Despite over 35,000 GBP in the queue before me, my part sold within 3 days.
    A major factor with the longer selling times is that on Lendy, investors forego interest while the loan part is on sale. On Moneything it continues to accrue interest while on sale.
  • UK investors are increasing their stake in tax sheltered IFISA products
    That is my favourite explanation. The shift in the above markets 2 months ago coincides with the launch of many IFISA offers on other UK marketplaces. Lendy, Monything and Collateral currently do not offer IFISAs. Check the database for best IFISA rates of other marketplaces. Fundingsecure has an IFISA. I am not currently investing on Fundingsecure, therefore I am not as closely monitoring the market developments on Fundingsecure as on Lendy or Moneything. But it seems that investor demand on Fundingsecure has not changed as much as on Lendy or Moneything. It is obvious that UK investors will prefer to invest in IFISA offers, at least until their yearly allowance of 20,000 GBP is reached.
  • Brexit and pound uncertainty pause international investors
    All of the above platforms are open for international investors. I currently run a survey among German speaking investors on my German p2p lending forum. 31% precent of respondents have already invested on UK marketplaces. But 5% want to reduce their level of investment because of the uncertainty of the pound development and for this reason 20% will not consider to start on UK marketplaces.

So what could marketplaces do and what measures are they already taking?

  • Attract more investors, increase marketing spend
    I believe this is already happening. Lendy revamped the referral program as of June 1st and Collateral announced it will launch one soon. Lendy will sponsor the ‘Lendy Cowes week’ sailing regatta. I have doubts this will be cost effective, but its hard to tell from the outside without access to hard figures. I know of other p2p lending platforms that sponsored golf events in the hope of targeting and attracting the right audience and discontinued that (for reasons unknown to me).
  • Launch an IFISA
    Actually I think this would most profoundly change the situation for Lendy. However for that Lendy first needs to get full FCA approval. Moneything has recently said it has put an IFISA higher on the priority list, but it is still not imminent but planned for later this year.
  • Find ‘different’ sources of capital
    This could be institutional money. Or a differently structed offer like the Lendy bond. But it is to early to tell how the Lendy bond is taken up.
  • Raise interest rates
    Collateral has taken this step. And Moneything offered 1 percent more on a very large loan. I don’t think Lendy will take this route as it recently moved from 12% interest for all loans to a broader range of 7 to 12% interest rates.
  • Change the model of the secondary market
    Lendy and Moneything currently have secondary operating at par value. The investor community seems split. While some applaud the simplicity and ease of use of this model, others argue to allow discounts (and possibly premiums). One argument for discounts and premiums is that it might better match demand and supply. Counterarguments are that p2p lending is not a high volume market and variable pricing would not be suitable and that premiums will attract traders. Also some feel that seeing discounts will furthermore undermine trust and deter new investors from signing up.
  • Show recovery results and better communication and transparency of collection efforts
    Obviously full recovery on defaults would be a most effective measure to increase confidence and trust of investors. However this will take time and I don’t think haste would do the results good. Therefore the only thing Lendy could do short-term is communicate more and in more detail.

What is your opinion, dear reader?

P.S.: On the continent at Estateguru with its 10-12.5% interest property loans there is no change of market conditions. Investor demand continues to outstrip loan supply.

Which P2P Lending Marketplace Do You Recommend?

I am often asked “Which p2p lending marketplace do you recommend?“. It is a natural question to ask for people that are familiar with the concept of p2p lending, but have not invested yet.

I feel hesitant to answer it with an outright recommendation for any one marketplace.

Sure I do have my preferred marketplace. Everybody has. But ask 10 different seasoned p2p lending investors and you might get at least 5 different answers. What is right for me, may not feel right for you. There can be no one size fits it all for p2p lending marketplaces. Interestingly as a sidenote investors seem to have less problems to agree why they dislike a platform – and they can also agree on ‘better’ platforms, you just don’t get consensus on the best platform.

What an investor prefers is influenced by his personality and past investment experiences. Investors differ in the expectation they tie to the investment, in risk appetite, in how they perceive and gauge risks. They may prefer a more actively managed investment or a passive investment style. Some enjoy auctions and elements that create competition for others factors like user interface might be a factor that lifts one platform over another.

That such a variety of different models has evolved and still prospers shows that they cater to an audience that is not homogeneous in their needs and wishes. One could argue that there is such a variety because it is a new field and everybody was just implementing ideas and experimenting and there were no role models, but that eventually the models will converge towards a best practise model. And I believe that is and will be happening, but only to a certain degree. Doing business over the internet allows marketplaces to deviate somewhat from the mass market and develop a style that fits a certain clientele easier than it would be for an offline financial offer because the economics of reaching out to and serving this clientele are different.

One entrepreneur recently told me ‘We are different, we just need 10% of the users to like us’ (sry if I rephrased that to much). My answer was ‘Just don’t be to different. Investors are conservative. Why scare 90% of your potential customers away’. I still believe in my answer, because I think it commercially makes sense. However it is minted by my past experience and my perception of the investor behaviour. So I actually want him to succeed in doing things VERY differently and making it as satisfying and enjoyable for those 10% he wants to be the perfect marketplace for.

What do I answer on the question?

At conferences or in other situations without much time, I usually suggest several marketplaces the investor might want to look into and point to my blog for more information.

If there is more time, I usually ask questions to try to find out what the person is looking for, what factors are important for him and what his past investment experience is. Then I tell which marketplaces do well on these factors and might in my opinion be a good match based on what I understood he is looking for. It still feels imperfect and uncomfortable for me sometimes. Maybe it is just a cultural thing, that most people are not comfortable in making recommendations how other people should invest money.

What would be the best answer?

I often think, the straightforward answer is ‘It depends‘. I have never given this answer. Even in situations when I am pressed for a very short answer.

Why do we Need P2P Lending in India?

This is a guest post by Sunil Kumar, CEO of Loanmeet

Tragically, more than 78% of Indian population cannot get a personal loan from a bank or NBFC. Why? The reason is quite simple – most banks grant personal loans to salaried employees with annual gross salary above Rs. 3 Lakhs. Some banks give personal loans only to individuals earning Rs. 6 Lakhs per annum. If an individual is NOT working at one of the big MNCs or listed companies, then it would be a difficult for him to get a loan, or worse yet, his/her interest rate would be substantially higher. The P2P lending however, works differently; it comparatively uses multiple parameters to determine credit-worthiness of borrowers. The P2P credit models traverses beyond the salary of individuals; and fortunately, it does not decline the loan application even if the borrower’s salary is considerably low.

P2P lending, peer-to-peer lending amongst individuals, is not a new concept. It has been practiced for centuries. Even today, most individuals ask money for their short-term needs from friends and relatives. In old days, most individuals did not make EMI payments when they got loans from their friends and relatives; most loans were interest free, and as a victim of the evil perception of temporary profitability and eventual losses, there was a balloon payment at the end of the loan period. The private money lenders charge high interest rates, and seize land or jewelry for collateral. The online P2P lending model formalized the entire process of taking loans from friends, relatives, and unknown individuals, and made it simpler for us to get quick cash or earn great returns. The borrower puts an online loan application, and the platform either rejects or accepts the same. If the loan application is approved, then the lenders fund the loan amount. The loan payment is collected in the form of EMI payments, and sent to lenders. Continue reading

Queue Up for P2P Lending!

When was the last time you stood in a long line outside your bank branch, patiently waiting to deposit money into your savings account? Imagining a scene like that seems ridiculous at a time with near-zero interest rates in an increasingly large number of developed countries.

But there where you would least expect it, in the Fintech world of fast-moving bits, some startups actually are imposing measures to throttle influx of investor money in order to balance it with borrower demand. Welcome to p2p lending (short for peer-to-peer lending). The sector is experiencing tremendous growth rates. With attractive yields for investors some platforms struggle to acquire new borrowers fast enough for loan demand to match the ever-rising available investor demand.

One challenging factor is deeply ingrained in the business model of p2p lending marketplaces: once a new investor is onboarded and found the product satisfactory, he is most likely to stay a customer for years to come and reinvest repayments received and maybe the interest also. On the other hand the majority of borrowers are one-time customers. They take out a loan typically just once. While it may take years for the borrower to repay that loan, in most instances there is no repeat business for the marketplaces. So the marketplaces have to constantly fire on all marketing cylinders to win new borrowers in order to keep up and grow loan origination volume.

This has sparked some outside of the box thinking, e.g. the partnership of Ratesetter with CommuterClub to win their loan volume, which is in fact mostly repeat business.

Winning investors has been relatively easy for many of the p2p lending services in the recent past. Investors are attracted typically through press articles or word of mouth. One UK CEO told me he never spent a marketing penny ever to acquire investors.

But what happens on the marketplace, when there are so many investors waiting to invest their money in loans, but loans are in short supply?

  • If the marketplace does nothing or little to steer it, then those investors that react the fastest, when new loans are available, will be able to bid and invest their money. This is the situation e.g. on Prosper, Lending Club and Saving Stream.
  • The marketplace has some kind of queuing mechanism. This is typically coupled with an auto-bid functionality. Examples of this are Zopa, Ratesetter and Bondora.
  • The investors are competing during an auction period by underbidding each other through lower interest rates. Examples of p2p lending services with this model are Funding Circle, Rebuilding Society and Investly.
  • The marketplace can lower overall interest rates to attract more borrowers while the resulting lower yields slow investor money influx.

The UK p2p lending sector is eagerly awaiting the sector to become eligible for the new ISA wrapper. Inclusion into the popular tax-efficient wrapper will attract an avalanche of new investor money to the platforms.

“That’s going to be a challenge for the industry,” said Giles Andrews, CEO of Zopa. “Once the dates are worked out, the industry will need to plan for that together, and we may have to do something we have never done before, which is to limit the supply of money. It’s not good to have people’s money lying around [awaiting new borrowers] or to lower standards of borrowers.”[1]

So there is some speculation that UK p2p lending services could impose temporary limits on new investments.

The investor viewpoint

The aim of the investor is to lend the deposited money easy and speedy into those loans that match his selected criteria/risk appetite. Idle cash earns no interest and will impact yields achieved (aka cash drag).

For the retail investor none of the above mentioned mechanisms are ideal. The “fastest bidder wins” scenario means he would either have to sit in front of the computer most of the time or be lucky to be logged in just as new loans arrive. The queuing mechanisms are disliked as they can prove to be very slow in lending out the funds and can be perceived as nontransparent (see the lengthy and numerous forum discussions on the Zopa queuing mechanism). Underbidding in auctions does provide the chance to lend fast, but at the risk of setting the interest rate too low and this requires a strategy and can also be time consuming. Continue reading