Should you invest in P2P property IFISAs?
Property has long been one of the most popular investments in the UK.
But rising property prices and an ongoing housing shortage means that not everyone can afford to invest. Enter peer to peer (P2P) property platforms…
How it works
P2P property lending allows anyone to invest in a range of different properties across the UK from as little as £10. A number of platforms specialise in different types of property lending and investing, from buy-to-let opportunities, to commercial real estate, to property developments.
The property’s owner or developer will approach the P2P platform for funding – either by releasing some of the equity in the property, or by applying for a new loan. The platform will then begin a long credit-checking process whereby the project will be assessed, and the borrower will have their financial records scrutinised before they are assigned a risk rating.
If the project is considered to be very high risk, the platform may decline to offer funding to the borrower. Likewise, if the borrower has a history of unpaid loans, they are unlikely to be offered finance.
Once the project has been fully vetted it will go live on the platform, and potential lenders can choose whether or not to invest. In most cases, platforms will give investors the choice of either fully funding one loan at a time or diversifying their P2P property investment across a few different projects.
Once an investment has been made, lenders will receive interest payments on a monthly or quarterly basis, before their capital is returned at the end of the loan term.
However, there is always a risk that the property owner or developer will default on one or more of their repayments. For instance, a property developer may apply for a loan to complete a block of apartments, but the resale value could drop before the end of the loan term, leaving them without enough available cash to pay back the loan.
It is the P2P platform’s responsibility to properly vet each and every borrower, and to inform all lenders of the risks involved. If defaults do occur, the platform must have a contingency plan in place to help recoup the lender’s money.
Some platforms choose to maintain a provision fund which is treated as a sort of default insurance policy. If a loan defaults and all avenues for recovery have failed, the platform can repay investors their capital by raiding their rainy-day funds.
In reality, it is very unlikely to come to this. Most platforms set a cap on all of their property loans, so they will not lend more than 70-75 per cent of the value of any given property. This means that the value of the property would have to drop by at least 25 per cent before investors’ capital is at risk – even during the housing crisis of 2008, property prices only fell by 16.2 per cent.
This doesn’t mean that would-be property investors can rest easy. P2P lending is never risk free, and it is vital that every lender does their own due diligence on both the platform and the project in question before any money changes hands. However, for rate-seeking investors with an eye for a good property deal, P2P property IFISAs could be a game-changer.
Five P2P property IFISAs for first-time investors
Returns targeted: 4 per cent
Minimum investment: £10
Founded as an offshoot of investment management firm Octopus Investments, Octopus Choice invests in bricks and mortar properties across the UK. Each investment is spread across a range of properties, and Octopus will also take a ‘first loss’ stake of five per cent in every property on its platform. Although it targets returns of four per cent per annum, the current rate of interest is 4.1 per cent.
Returns targeted: 3.54 per cent
Minimum investment: £100
Landbay was one of the first property-focused P2P platforms, and one of the first to offer IFISA products. It invests lender money across a variety of buy-to-let mortgages, and offers a choice between fixed rate returns (3.54 per cent) and tracker rate returns (currently 3.18 per cent), which are set at 2.5 per cent above LIBOR. A reserve fund exists to protect lenders from defaults, although the platform claims to have had no missed payments to date.
Returns targeted: 10 per cent
Minimum investment: £1,000
Unlike other P2P property platforms, CapitalRise exclusively invests in super-luxe properties in high-demand areas. Each property is hand-picked by the platform’s in-house team of experts, and CapitalRise will always invest alongside every lender to offer added security.
Returns targeted: 5-12 per cent
Minimum investment: £1,000
Proplend invests in a range of commercial and residential properties, and offers three different risk profiles to potential IFISA investors. In the lower risk category, the properties are capped at 50 per cent loan to value (LTV), rising to 65 per cent LTV and 75 per cent LTV for the higher-risk accounts.
Returns targeted: Up to 10 per cent
Minimum investment: £500
Relendex specialises in commercial property lending and offers two different types of IFISA.
The Self-Select Portfolio ISA allows investors to hand-pick the properties that they want to support. This account can be opened with £500, and targets rates of up to 10 per cent. The Secured Portfolio ISA passes the risk management and portfolio construction on to the platform, so the rates are a little lower. The minimum investment on the secured portfolio account is £2,500.
Updated: Monday, December 10th, 2018