INVESTING theory suggests that investors should always have some level of asset allocation to the stock market. However, with global markets at or above all-time highs, many risk-averse investors are nervous of adding to their share portfolios. In addition, high valuations lead to low dividend yields, and for investors searching for yield the alternative options are also becoming unattractive as, in the current climate, buy-to-let property, bonds, bank deposits and other yield based investments all have relatively low after tax yields.
Against this background, what alternatives are available for risk-averse yield hungry investors?
One alternative which we believe is worthy of consideration is Peer-to-Peer (P2P) lending secured against property where yields of between eight and ten per cent can often be achieved. P2P lending is a method of debt financing that enables individuals to borrow and lend money without the use of the balance sheet of an official financial institution as intermediary. P2P lending removes the balance sheet middleman from the process, but it also may involve more time, effort and potential risk unless it is conducted through a trusted party which structures the loan and orchestrates the syndication to investors.
In London, and indeed in the Channel Islands, the concept of property secured P2P investing is not new. Firms such as BM Samuels, Property Finance Capital, MT Finance and others have been syndicating property backed loans before the term ‘P2P’ was even invented. In Jersey, Acorn Finance and, more recently, Sancus, have been syndicating loans to Jersey based HNW investors, usually secured on assets based in the Channel Islands. For many years prior to this, ‘Advocate’s Loans’ were, and still are, available to facilitate borrowing against property.
A key feature to the scalability of P2P has been online web-based automation which has been applied to the allocation of funds based on the criteria specified by lenders. Through the use of online platforms, it is possible to ‘fractionalise’ single loans, breaking each one into multiple contracts owned by different investors. This process – made possible by the efficiency gains from automation – is at the heart of the rapid growth of P2P. It enables private individuals to own small portions of numerous different loans and so gain diversified exposure, despite having relatively modest sums to deploy.
Many changes have occurred as a result of the financial crisis and if the emergence of P2P as a branch of direct lending was revolutionary, the creation of a framework to regulate this new activity was no less significant. The Financial Conduct Authority, (FCA), has defined new rules stating that, to be authorised and fit for purpose, a P2P loan structure must comprise a direct lending contract between a borrower and each individual lender who provides it with funding. This may sound obvious, but many structures leave investors exposed to the failure of the platform provider. Platforms that can demonstrate to the FCA that they operate on this legally robust basis and can satisfy the regulator on other essential issues of process, conduct and exposure can become fully authorised.
Authorisation under the P2P lending rules is the goal that all the major platforms continue to pursue. One such platform to have recently received full authorisation by the FCA in the UK is Relendex, a London-based business whose mission to date has been to focus on building high quality technology and FCA authorisation rather than growing scale for the sake of scale, (see Relendex.com). Unlike many of the better known P2P lending businesses (such as Zopa, Ratesetters and Funding Circle) which in some cases are not fully FCA authorised and lend on an unsecured basis to small and medium sized enterprises and consumers, Relendex focuses exclusively on secured property loans at loan-to-value ratios of around 60 per cent with all properties independently valued by qualified valuers.
Average interest rates on Relendex businesses written to date have provided annual interest of eight to ten per cent to lenders. With unsecured consumer loans on alternative platforms offering rates of between four and six per cent, there seems to be a dislocation between risk and return. In addition, Relendex has built a fully-operational secondary market where existing loans can be bought and sold online on a matched bargain basis, the genesis of the company’s name being: Real Estate Lending Exchange.
Relendex has recently become an ISA Manager and launched its Innovative Finance ISA (IFISA) in May. UK residents can use their annual ISA allowance to lend tax-free on the platform and anyone who has an ISA pot accumulated over previous years, can transfer all or part of its value to Relendex’s IFISA, even if they now live outside the UK. As a fully-regulated and HMRC recognised P2P platform, Relendex allows investors in the Channel Islands to lend money for more than 12 months, if they wish to, without suffering UK withholding tax – a significant advantage for offshore lenders who typically are restricted to bridging loan business.
This article originally appeared in the Jersey Evening Post’s Investment Review Supplement 2017.
