9th August 2023

Property Peer to Peer (Property Debt)

In its simplest form, property peer to peer investing means lending money to a property developer (this is the money you invest) for the duration of a property development project.

If you invest in a peer to peer loan, you are like the bank, loaning money for a fixed period of time (known as the term), for a fixed return.   Interest payments will be made periodically or, in some cases, at the end of the loan term. The loan is usually secured against the property,, which means that if something happens, the developers have to sell the property and pay back the peer to peer loan investors first, before paying back shareholders (equity crowdfunding investors).

These “debt” investments are regarded as a lower risk versus “equity” (crowdfuding) investments and so typically offer a lower projected return. This is because peer to peer projects will typically have some form of security, which means that there is a charge over an asset. Charges can be a first charge which ranks top and means these charge holders get paid first. Secondary (or later) charges means that the charge holder gets paid after the higher ranking charges have been paid. First charge holders typically control whether to trigger a demand for payment. 

Some peer-to-peer lending platforms require security in order to further secure investor funds. Whilst this does not guarantee that an investor will receive their funds back if a project does not go to plan, there is a better chance that the funds will be recoverable.  

An obvious example of when security may exist is in a crowdfunded property project. If a fundraiser has a piece of land and wishes to raise finance for the development and build, the platform will look to take a registered charge on the land. The value of the land must be enough to cover the original amount borrowed and associated fees.  

Let’s look at an example.

A developer wants to develop a new property project and needs £200,000 to do the work. They have already bought the land for £300,000. In order to get the £200,000 they need to build out the project, they’re ready to pay an 8% return per year to investors for the duration of 2 years. For security for the £200,000 they’re seeking, they might offer the land that they bought for a value of £300,000. i.e. a first charge could be registered against the land on behalf of the peer to peer loan investors.

As an investor, you could participate in this project by lending money to the development company doing the project. You’re expected to receive 8% return per year. Let’s assume you’re investing £1,000, this means that you’re expecting to get £80 back the first year and another £80 the second year, in addition to your £1,000 initial investment that you’d get back at the end of the project.

If something was to happen and the project wasn’t going on or failed to complete as planned, the developer would have to pay the lenders (you) back first. In this example, an option would be for the developer to sell the asset (in this case the land) to pay back their creditors (you and the other lenders). This is no guarantee that you’ll receive everything back, but it puts you in a better position than shareholders (the crowdfunding investors), who are the last ones to receive money back. You might be thinking that if peer to peer lending has less risk and could offer some security versus property crowdfunding, why would anyone invest in property crowdfunding? Well read more on that in the Property Crowdfunding blog here.