|Alternative Funding Network|
In a week of big numbers, the standout figure has to be the £250m financing line agreed between Landbay, an online P2P lender specialising in buy-to-let mortgage lending, and an unnamed British bank in partnership with a European asset manager. As Landbay’s press release pointed out, this is the biggest single funding commitment to a UK platform to be deployed solely in the UK market (Victory Park Capital’s commitment to Funding Circle is larger but will be lent via FC’s UK and US operations over three years). It will officially go live on July 1.
So how did a UK P2P platform that has to date completed 35 mortgages worth a total of about £5.8m manage to land a one-year wholesale funding line of £250m? It seems extraordinary, as does Landbay’s confidence that it will lend the entire £250m within the first 12 months and will in due course do further similar deals on top of this one to increase its lending capacity substantially. It may seem odd but it makes sense to me for several reasons.
First, banks like to lend against property. Depending on the model they use to calculate their risk weightings, property lending can require a bank to hold less capital against its risks than other types of loan and so can offer it attractive returns. However, if it is to build a significant lending book in BTL, for example, the bank will need to have a large operation to underwrite the individual loans and service the borrowers. This adds cost, bureaucracy and complication. If it can partner with an agent that will do all the underwriting and deal with the borrowers, it can take a lot of the hassle out of the process and still make a decent return.
So partnering with a Landbay makes sense from the bank’s point of view – provided it is confident that its agent has robust credit underwriting procedures in place. “For the past few months we’ve had people looking at all our processes and our underwriting criteria and they’ve given it the thumbs up,” says Landbay CEO and co-founder John Goodall. “Hopefully that’ll be seen as an endorsement from people who’ve looked under the bonnet.” From the point of view of retail lenders, who will still be able to lend on the same terms and will have access to the same deals as the wholesale funders, this should come as a welcome reassurance that the platform has robust risk management.
From Landbay’s point of view, securing on a wholesale financing line is ideal. Property lending, particularly against multiple properties in a BTL portfolio, involves pretty large loans and is tough to finance at volume using only retail money. To grow the lending book substantially, Landbay clearly needed access to much more firepower, which it now has. Similarly, most retail P2P lenders are looking for yields well north of 5%. The typical returns to investors that Landbay must offer in order to able to lend at competitive rates in the BTL mortgage market are modest by other P2P standards: current returns to lenders are 4.2% fixed for three years, or a tracker at base rate plus 3%. Those rates will struggle to attract really large sums of retail P2P money, but for a bank able to access very cheap funding, returns of that sort look perfectly acceptable.
So Landbay needs to operate on fairly tight margins at high volume in order to make a good return, and it can only realistically achieve that by working with wholesale funders that are happy with the returns that mainstream BTL lending offers and with mortgage brokers able to channel large flows of business its way.
Goodall is confident that origination will not prove a problem and says Landbay’s ability to move quickly, be responsive and offer a good level of service will give it plenty of traction in the brokerage community.
So the deal should work for all parties. If all goes to plan, Goodall expects to be lending around £10m a month from September, rising to around £20m a month by the end of this year, with plans to go much further. “We’re pretty confident that in the medium term we could build up to a point where we’re lending £30m-£40m a month,” he says. “We spent a lot of time on the origination piece and we’re pretty confident that not only can we originate for this deal but that this deal is not going to shut out other lenders, whether they be retail or other institutions.”
In time, once the lending book has grown sufficiently, Goodall hopes to repackage parcels of loans into securities and sell them to institutional investors, which would mark another big step in the evolution of the P2P sector in the UK, although similar things have already happened in the US.
It all adds up to a fascinating prospect, and again demonstrates the recurring tendency of the online P2P model to evolve in interesting ways that bring together alternative and traditional finance to create something new. In this case, a platform that started out as a straight P2P proposition is evolving rapidly into an underwriting and origination agent for banks and fund managers looking to build exposure to BTL as an asset class. But thanks to its roots in P2P, individual lenders can participate alongside the institutions on the same deals.
Some might object that this effectively ends Landbay’s career as a genuinely P2P platform catering to individuals who want to invest in previously inaccessible asset classes. I’m not so sure. I think this is a pragmatic solution to the question of how you scale a P2P platform focused on a mainstream area of the property market that requires volume to be properly profitable.
Gross BTL lending in 2014 totalled £27.4bn according to the Council of Mortgage Lenders – with a book of £250m Landbay would represent less than 1% of that market. It just goes to show that even after what is a huge leap for the P2P world in terms of lending capacity the platform will still be a minnow in the overall scheme of things. There’s a lot more room for online platforms (P2P or otherwise) to evolve into the fast, consumer-friendly front-end of this market, while banks and others sit behind them, supplying the large-scale funding. As an investor, my hope is simply that the platforms continue to let the retail money have a seat at the table.