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Why fintech should not be ignored

Crowdfunding platforms are a small part of Europe’s real estate finance market, but financial technology moves fast and can be disruptive.

Crowdfunding platforms are a small part of Europe’s real estate finance market, but financial technology moves fast and can be disruptive.

In the early 2000s, when most people still bought things in shops, the emergence of e-tailing prompted some bold predictions. The high street would become obsolete, long-standing retail brands would disappear and virtual merchants would dominate.

Those predictions only came partially true. Some online upstarts – Amazon springs to mind – are ubiquitous and some of the old order are out of business. But the high street didn’t die and most established retailers integrated technology into their offerings. For shoppers, the result has been greater choice and more competitive prices.

In the world of global finance, ‘disruptive innovation’ through so-called fintech is upsetting the apple cart. So far, the emergence of crowdfunding platforms has had only a moderate influence on European real estate finance.

However, property finance professionals would be wise not to overlook the activities of those known as marketplace lenders and crowdfunding platforms.

The Investment Property Forum this week published an interesting paper, asking if real estate crowdfunding is a “gimmick” or a “game-changer”. Globally, around $145 billion of crowdfunding capital was raised by the end of 2015. Commercial real estate debt accounted for just over $7 billion.

The UK dominates European activity, but it remains a very small part of the lending market; crowdfunding platforms originated well below £1 billion of loans in the UK last year, by the IPF’s reckoning. Platforms include LendInvest and AssetzCapital and activity is focused on under-banked parts of the market; bridging finance for SMEs, funding for professional buy-to-let investors and small lot size properties in higher-yielding secondary markets.

Fintech has the potential to grow. It’s massive in China and in the US even large developers have tested the market by offering small loan tranches to “the crowd”, which increasingly means institutional money as well as high-net-worth-retail investors.

Regulatory treatment of the sector is still a work-in-progress. In the UK, fintech is regulated by the Financial Conduct Authority, although a review of rules laid down in 2014 is underway. Due diligence, marketing and disclosure rules are all likely to become more stringent. If anything, this could raise fintech’s credibility.

By offering retail investors a route into real estate debt, fintech could also contribute to the diversification of capital in the sector. Crowdfunding’s focus on higher-yield returns creates attractive fixed-income for investors and increased liquidity for sponsors.

There is also potential for platforms to package loans into securitisations, giving institutional bond buyers arms-length access to the high-return loans they are writing. This year, Funding Circle became the first marketplace lender in the UK to securitise SME loans in a £130 million deal.

Fintech could also increase transparency in real estate debt. The direct investment structure disintermediates debt arrangement and reduces borrowing costs. The transparency of such platforms could potentially impact pricing efficiency in the wider market.

“Fintech is blurring the boundaries as it moves towards the established playing field,” explained the IPF report’s author, Brenna O’Roarty. “Rationalisation of fee structures and more detailed reporting to investors creates more accountability.”

In the early days of the e-tail boom, it wasn’t the scale of online shopping which upset the sector, it was the pricing competition it created. The question is whether, just as the retailers embraced internet shopping, the established providers of real estate debt will integrate marketplace platforms into their strategies.

Real estate debt crowdfunding is yet to weather a full property cycle and has a long way to go before it becomes a truly meaningful part of the market. However, technology moves fast. “The potential’s there for sponsors to, one day, be able to post their debt requirements on a commercial-level,” said O’Roarty, only half-jokingly.