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How A Property Crash Will Hit P2P Property Lending

By Matthew Howard on 20th July, 2022 | Read more by this author

Naturally, we can't know the answer to the question in the title precisely, because every major economic event is unique, coming with different causes, different factors happening at the time.

However, investors need to invest – and lenders need to lend – with a large margin of safety against terrible events. Because terrible events aren't all that infrequent.

That includes large slumps in property prices.

Are property peer-to-peer lending companies ready?

We can't speak for every property P2P lending company, as not all of them engage with 4thWay by going through a remarkably intensive assessment.

As you'd expect, those that get all the way through the assessments are almost always very high quality, because it's not at all realistic to hide poor quality from 4thWay's specialists throughout that whole process.

So that explains why we are top-heavy in terms of reporting on those that are in the best shape for a large property crash.

A few P2P lending companies mentioned on this page, coming further down, will probably surprise long-term readers, as I think they've not had the chance to appear on any 4thWay lists before.

What are the overall prospects for property P2P lending in a major crash

The market as a whole is extremely well placed to make it through a serious crash, with the vast majority of lender cash held in lending accounts that are the most resilient.

This is due to each peer-to-peer lending company's blend of two factors: the quality of borrowers is often high, meaning few loans turn bad, and the property used to secure the loans is usually easy to sell and valued substantially above the loan amount. In some cases, one of those factors is much stronger than the other, but it often balances out.

The core forecasts – very conservative forecasts – made by 4thWay's specialists show that most lenders should expect to earn enough money to cover all the losses made on their loans in just over a year, and in some cases possibly in as few as two months. In any event, long before all the loans are repaid.

List of property P2P lending companies tested in a severe property crash

This first list I'm presenting is of those property peer-to-peer lending offerings that have come out with excellent results in 4thWay's stricter version of the global banking tests, called the Basel tests. I've included 4thWay's core forecasts for each lending account.

These are stress tests in the event of a 1-in-100-year recession combined with a severe property crash similar to 2008, where distressed sale prices were sometimes 55% below the initial property valuations.

The question these tests seek to answer is: are lenders strongly expected to come out with positive returns? (Especially when lenders lend across a basket of similar lending accounts.)

The forecasts for each of them are not intended to be precise predictions, which are impossible, but rather just to give you an indication of the relative strength of the opportunities. The forecasts also assume you hold onto your loans until borrowers repay them naturally and that you've taken sensible steps to spread out across many loans.

Loanpad*. 6.5% interest rate, automatic diversification across lots of development loans worth 50% or less of the initial property valuation. Read review.

The core forecast is for total losses of just 0.28% by the time the loans are repaid, which is easily covered with just a couple of months' interest. Losses will be very evenly spread between lenders. This is by far the best forecast of all lending companies, which goes a long way to show why Loanpad seems to make it onto every list 4thWay makes.

Proplend*. Paying lenders an average 6.71% before bad debts for the least risky loans and rising to an average of 11.9% for higher risk. Some automatic diversification is available and you can choose to lend in loans that are 50% or less of the property valuation. Most properties are commercial properties receiving rent, and there's some bridging lending. Read review.

In lending at 50% or less, 4thWay's most recent core forecast is for losses of 4.28% over the full life of the loans, which is covered in less than one years' interest. For the most part, any losses should be spread well out among many lenders.

In lending above 50%, core forecast of losses jumps to 14.83%, mostly on account of all these loans being junior to the safer loans, so they soak up losses first.

That additional risk is covered by the higher rates paid in those loans for an overall profit only after a year and more of earning interest. In this conservative forecast, which assumes a lot of worst cases, a minority of lenders might suffer noticeably more than others, impacting their returns more, unless they have also been lending in the safer loans.

CrowdProperty. Interest rates of 10.12%. Some automatic diversification is available across mostly development loans that are no more than 70% of the hoped-for sale price of the finished development properties and some bridging loans at a maximum 70% of the property valuation. Read review.

Core forecast is for 6.18% losses before interest over the life of the loans, which is usually going to be covered by interest over the course of about one year. There will be noticeable variation in results for some few, unluckier lenders.

Kuflink*. 7.00% target in its five-year account, with some automatic diversification. Loans are for a maximum 75% of property value for bridging loans and 70% of the hoped-for sale price in development loans. Read review.

Core forecast is 9.22% losses over the life of the loans. 4thWay's specialists expect lenders to be lending for over a year in the same loans to earn enough to cover bad debts, but they'll be profitable overall. Substantial variance between lenders will exist, although lending results will be well tolerated by the majority.

Invest & Fund*. Paying 6.75% before bad debts, with some automatic diversification. Loans are almost exclusively development loans that are valued at 70% or less than the hoped-for sale price of the properties. Read review.

Most recent core forecast is for 5.9% losses before bad debts, which will be covered in about a year of lending interest. Some variance will occur between lenders, but less than at some other lending companies, with the vast majority of lenders sticking to sensible strategies coming out just fine.

Assetz Capital. Interest rate on its 90-day account (its highest-paying automated account) is 4.59% (4.50% if you don't re-lend repayments), with very good diversification and a reserve fund that might take some of the edge off bad debts. Assetz Capital does a wide range of property lending, usually capped at 75% of the property valuation, or the hoped-for sale price in the case of developments. Read review.

Core forecast is for losses of 9.1% over the life of the loans, before reserve fund payouts and interest – and after a considerable number of loans are recovered after turning bad. As many of the loans last many years, 90-day account lenders are just about expected to make it through with sufficient positive returns for lenders overall. Lenders adopting sensible strategies should see well shared out bad debts between them, with not a huge variation in fortunes, for the most part.

Hidden gems

Some other P2P lending companies haven't been fully tested yet, due to their size and history not quite being sufficient. But 4thWay's lead specialist, Neil Faulkner, is confident they'll also get the top rating eventually, even while offering high interest rates:

CapitalStackers*. 13.41% interest rate, albeit with limited diversification and mostly on junior lending, meaning other lenders get repaid before you. It does a variety of property lending. Only for wealthy or “sophisticated” lenders – not least because the minimum lending amount is £5,000. Read review.

It's pretty unusual for junior lending to make this list, as these loans will certainly be hit hard during any major downturn. CapitalStackers still has some time to go before it will have enough history to be assessed, as it does take time to select the very best opportunities. Certainly there are risks, but Neil believes in the talent and integrity of CapitalStackers' management to get most lenders through really bad times feeling good about their choice to use this lending platform.

CapitalRise*. Has been paying an average 8.79% in bridging lending and development lending. Only for wealthy or “sophisticated” lenders. Read review.

CapitalRise has already just reached sufficient size and a full assessment is due very imminently. It is surely going to pass with flying colours – and that's even though 4thWay will hit it with additional penalties in its stress tests, because its history still just barely makes the minimum criteria. CapitalRise's shift to mostly senior lending in recent years will have gone a long way to reinforcing a positive forecast.

Other strong candidates

I've got some other very strong candidates for your shortlist that don't quite make it into hidden gems. At least not yet.

One of these lost its rating recently as it didn't continue to provide quite all of the information 4thWay needs as a minimum for being rated, but at that time it still was extremely likely that it would pass the stress tests. Two others don't yet provide the data and information at all, but still seem most likely by far to pass the same tests. Some others enter this category as they have either provided very little information for a long time and/or are too small to be properly assessed, but their prospects still look very good based on what we've got on them:

Blend Network. Paying 9.62% before bad debts in development lending. Read review.

While we have a lot less data, information and engagement from Blend, which makes it especially difficult in regards to forecasting the results of development lending, it still seems most likely at this stage that lenders in its senior loans will get their money back and more, on average, even in a major downturn and crash.

Sourced Capital. 10% interest rates if lending under £20,000 and 12% if lending above, with all loans to developers in the Sourced franchise. Read review.

Sourced has been stepping up its engagement with 4thWay again recently and it looks most promising at this stage. It certainly appears to have the traits of a lending platform that will help many lenders weather a hurricane.

LandlordInvest. Last data showed around 10.52% interest in bridging lending and development lending.

It no longer supplies data to 4thWay, but on this occasion there's no reason to believe it's because it's now got something to hide. Prior data, information and research has shown LandlordInvest to have sufficient quality to give most lenders a positive return after bad debts, even in a disaster period.

SoMo. Latest rates we have for this are 9.12%. Again, in bridging and development. Minimum lending amount is £5,000 per loan. Read review.

This is one of the very few that got away from 4thWay, having never provided data to us despite all our specialists believing it's likely to offer a great risk-reward balance even in tough times.

One certainty that is part-and-parcel of good money lending

Particularly likely in major property-crash-and-recession combos is that lenders wanting to exit early by selling their loans to other lenders – before borrowers repay naturally – won't be able to do so. (Although trying to sell up in these times will usually will mean you're panicking, rather than acting sensibly, and so you typically increase your risk of losses by cutting short the interest you earn on your good loans)

Indeed, it's so certain that some lending accounts will be unable to offer early access that a well-diversified lender should really consider it a certainty in these times, rather than a risk or probability.

It's not possible in advance to tell you which lending accounts will be affected, as this will be different with each downturn. If this lock-in bothers you, you should either not lend at all, lend less, or take other steps to increase your chances of getting more of your money back earlier. Read 10 Ways To Get Your P2P Lending Money Back!

You could take great comfort in the fact, while you're locked in, you continue to earn interest on your good loans, bad-debt recoveries will happen over time, and that those able to sell other investments – such as shares – will likely do so for a huge loss during downturns. Most lenders should end up feeling that they've effectively had lending discipline enforced upon them through fixed interest rates hitting market forces.

Are lenders ready?

So plenty of property peer-to-peer lending companies are ready for severe crashes – but are you?

Because it's not just on the providers. Lenders also have to maintain simple, sensible strategies to greatly reduce the risk.

The lenders who will lose out in a property crash are those who haven't stuck to high quality platforms and spread their risk across lots of platforms and loans.

It's the ones who aren't ready for higher bad debts and for lock-ins. It's the ones who haven't held back cash in their bank accounts when they no they have a large bill coming up.

It'll be the ones who panic and sell their good loans, in some cases for a loss, because a few P2P lending providers do allow you to do that.

4thWay's forecasts

4thWay's forecasts won't always give you the margin of safety you wanted in any individual lending account. We have to expect, at some point, that 4thWay will get it completely wrong.

It's not happened yet, in eight years, including during a 1-in-300-year recession. But it surely will.

All we can do is keep reminding you that the best defence is to lend across a basket of top lending accounts. The protection this affords is truly phenomenal.