The institutionalisation of online lending

“The UK property market has been seriously dysfunctional for some time”. This was the attention-grabbing assertion made by InvestSure chief executive officer (CEO), Janine Lewis, upon the launch of the new online financing platform earlier this week.

“The UK property market has been seriously dysfunctional for some time”. This was the attention-grabbing assertion made by InvestSure chief executive officer (CEO), Janine Lewis, upon the launch of the new online financing platform earlier this week.

In this column seven days ago, we reflected on the tight regulatory restrictions straightjacketing the banks and how this has created opportunity for debt funds. But that shift from bank to non-bank (some happening now, some of it seen in crystal balls) is not the only ripple effect being observed in the post-crisis lending world.

One of the other signs of the times is the burgeoning growth of online financing platforms – thus far, commonly referred to as “peer-to-peer”. In the “Pushing Boundaries – 2015 UK Alternative Finance” report published by the University of Cambridge and Nesta, the innovation charity, it was revealed that the UK’s online alternative financing sector had grown by 84 percent last year – enabling £3.2 billion in investments.

The single most popular area for peer-to-peer lending was real estate, with £609 million committed to business loans during the year. It’s notable also that the total amount committed increased by a material amount quarter after quarter – this is a trend that has momentum.

However, the average size of these loans – mainly directed to small- to medium-sized property developers – was £522,333. This was actually less than the £662,425 average recorded the previous year – implying that, while peer-to-peer lending may not be lacking in terms of volume, it may not perhaps be filling a demand for larger ticket sizes (or showing any signs of doing so).

And this is where InvestSure comes in, with what it describes as a “pro-to-pro” platform focused on professional investors (which account for only around a quarter of peer-to-peer loans). InvestSure’s minimum capital raising amount is set at £1 million and – although no cap is stated – it’s fair to assume that many financings on the platform will be significantly larger.

For property developers faced with banks prepared to stump up only 65 percent loan-to-cost at best since the crisis, the ability to put their projects on the platform and have investors and lenders fight each other to participate in them could potentially shift the economics back in their favour.

Up to now, developers have had to identify their own backers for the remaining 35 percent of the financing. Sources in the market say this has frequently resulted in many investor-friendly but developer-unfriendly deals being struck. The competitive tension inherent in InvestSure’s model should help redress this imbalance. It should also result in greater efficiency as capital seeks developer rather than vice versa.

Moreover, that capital is coming from myriad sources, with investors showing an interest so far including “a mix of institutional banks, high-net-worth family offices, boutique banks, pension funds and trusts”. While it’s the earliest of days for InvestSure and the approach that it represents, it’s not impossible to glean signs of the institutionalisation of online lending.

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