Over the last few years we have seen a major change in the UK property finance market. Traditional banks are being forced to up their game, peer-to-peer lending is becoming more popular with headline interest rates and costs falling. The property market is one which has benefited enormously from crowdfunding with the ability to lock in attractive rental yields which more than fund interest charges. This is likely to continue in the longer term with private banks also coming to the fore.
Traditional banks under pressure
Again, much of the changes ongoing in the UK property finance market can be traced back to the introduction of the Internet. The ability to use the latest online technology to cut costs and increase visibility has not gone unnoticed by peer-to-peer lenders. As crowdfunding platforms and traditional banks are financed and structured in very different ways, the degree of flexibility also varies.
Interestingly, while traditional banks do not appear to have the risk appetite to take on the peer-to-peer lenders and private banks, many seem happy to fund them indirectly. This takes away the day-to-day management of alternative financing services and instead replaces commercial profit with investment returns. Is this a win-win for traditional banks?
New crowdfunding regulations
We know that the European Union is currently working on an array of new crowdfunding regulations which will give the sector more structure and increase confidence. However, many people miss the point when we talk about new crowdfunding regulations.
Current crowdfunding companies are still regulated by the broader financial regulations in the UK. It is not simply a case of “every company for themselves” but the new structure will create more focus. We are also likely to see a number of smaller crowdfunding companies fall by the wayside or merge with their larger counterparts. Traditionally, more regulations tend to translate into increased business costs which will ultimately be passed on to customers. Whether this is the case with crowdfunding remains to be seen.
Flexibility is the key
Historically high street banks have been fairly inflexible with regards to property and business loans. A degree of arrogance led them to believe that off-the-shelf products were the best way forward rather than moulding property lending to a customer’s exact needs. The introduction of peer-to-peer lending and private banking into the wider property investment community has prompted a big shift in focus.
It is also worth noting that both crowdfunding and private banking groups are also more flexible with regards to security. The vast majority of relatively small crowdfunding loans are based around personal guarantees as opposed to specific property charges. Where companies are involved there will need to be proof of income, bank statements and projections going forward. However, the days of rigid inflexible collateral demands have changed dramatically.
Property based crowdfunding allows investors to spread their risk amongst an array of different projects. This is something which would not readily have been available prior to crowdfunding. The opportunity to buy small stakes in large developments – as opposed to putting all of your eggs in one basket – has been welcomed by many with open arms.