News

Bricks, mortar, and crowd finance

January 25, 2017 • By Emily Mackay

Hot on the heels of the consumer-focused peer-to-peer lending market is the growing popularity of property crowd financing, which is starting to make waves in a market that's long been dominated by banks and traditional lending houses.

Hot on the heels of the consumer-focused peer-to-peer lending market is the growing popularity of property crowd financing, which is starting to make waves in a market that's long been dominated by banks and traditional lending houses.

Property-focused platforms, such as LendInvest, Property Moose and RateSetter, allow 'crowd' investors to pool their capital and act as a lender to developers. The pooled capital is then used by the developers to fund their deposit or the work on the development. It is then paid back to the lenders, usually on a monthly basis with interest.

Rates of interest are attractive for both cash investors looking to get a higher return than the high street bank offering, and to the borrower, who can secure capital on attractive terms. The platform operates online, creating important visibility and transparency in the process, and crucially can scale the offer to a dispersed market.

So, it’s a sweet deal for both investor and borrower. There must be a catch, right?

Of course, there are downsides, including the possibility of default on the loan that’s being offered by the crowd to the developer. Despite being vetted by platforms, this type of loan has, in the opinion of some industry experts, a relatively high default rate when compared to other forms of property borrowing, such as traditional mortgages. As a result, there’s an argument for stricter credit checks to be applied to developers. However, the requirement for rigorous checks could, potentially, slow the growth of the industry.

With the above in mind, there is a danger that, in trying to support property finance innovation, regulators become lackadaisical in their oversight of credit checks processes, which is a scenario we saw in the traditional property market in the mid 2000s. This could lead to defaults and a rapid implosion of trust in the property crowd finance market. This in turn, could bleed into the wider world of crowd finance.

The industry and investors are of course armed with that knowledge. As we’ve seen on the UK's P2P scene over the past twelve to twenty four months, industry-wide regulation and the need for transparency mean that property crowd finance continues to grow under regulation and with a healthy level of scrutiny.

If regulation remains proportionate to the risk and avoids becoming burdensome, we see no reason why property lending via crowd finance cannot and will not continue to grow.