The Alternative Finance Marketplace: How is Real Estate Shaping Up?
We’ve been eagerly poring through NESTA’s 2015 UK Alternative Finance Industry Report, ‘Pushing Boundaries’, since it was published in February this year. The report offers a fascinating, in-depth look at all areas of the alternative finance industry, including – crucially – the Real Estate Alternative Finance (crowdfunding and Real Estate P2P lending) market.
If you like data, you’ll love it. But if you’d prefer something a bit more readable, you’ll be pleased to hear that we’ve put together our own guide to the state of the alternative finance industry, keeping the emphasis squarely on Real Estate Alternative Finance, of course.
Things have changed since NESTA published its report, ‘The Rise of Future Finance’ in 2013. At that time, the alternative finance industry was worth £939m. In 2015, NESTA reported its value at £3.2bn. The market is on course to surpass the £5bn mark in 2016.
It’s not just financially that the alternative finance sector has grown. It has evolved taxonomically, too.
In the 2013 report, NESTA identified a range of distinct funding models operating in the sector. Two years later, 28% of alternative finance platforms surveyed reported that they were operating a ‘mixed’ or ‘other’ business model, which does not fit into the existing taxonomy.
Real Estate Alternative Finance: Crowdfunding and P2P Lending Tops the Tables
The 2013 report has no mention whatsoever of the terms ‘real estate’ or ‘housing’. And yet, by 2015, NESTA’s report segments data on Real Estate Alternative Finance into its own category, such is the proportion of the industry it covers.
In 2015, Real Estate and Housing was the most popular sector for the alternative finance market.
- Real Estate and Housing
- Manufacturing and Engineering
- Food and Drink
- Retail and Wholesale
- Leisure and Hospitality
- Community and Social Enterprise
- Education and Research
Combined debt and equity-based funding for Real Estate Alternative Finance amounted to nearly £700m in 2015, with P2P business lending in Real Estate (for mortgages and property development) taking the lion’s share: £609m – 41% of the total volume of P2P business loans in 2015.
The market volume of equity-based crowdfunding is much more modest, coming in at £87m for 2015, still a very significant sum.
P2P Business Lending in Real Estate
In 2015, P2P real estate lending financed over 600 commercial and residential developments, mostly by small to medium sized property developers.
Of that hearty £609m funding sum for 2015, Real Estate P2P lending saw increased growth throughout the year:
Q1 → £120.78m
Q2 → £146.81m
Q3 → £152.96m
Q4 → £188.12m
Perhaps some of this extraordinary success has something to do with institutional funding in the P2P Real Estate lending sector? Institutional funding was around 25% in 2015, and up to 75% on some platforms.
P2P business lending for Real Estate comprises a range of financing models and products. There are the short term bridging finance loans, which run for a 12 to 18 month period. Them, there are the longer term (3-5 years) commercial and residential mortgages, and construction/development debt finance.
In 2015, the average size of P2P loans for Real Estate came in at £522,333, slightly under 2014’s £662,425 average. The figure for 2015 was more in line with the average UK house price than the previous year. This may be due to the growing use of P2P lending in funding residential and commercial mortgages, rather than the larger developments focused on in 2014.
Just a quick clarification point here: regulatory constraints mean you cannot use P2P Real Estate lending for your own residential mortgage.
It’s also not a done deal to apply for a loan for a Real Estate development: in 2015, 27.5% of loan applications in P2P Real Estate lending were accepted.
The average number of lenders required to fund a typical P2P Real Estate loan? 490.
Equity-Based Crowdfunding for Real Estate
This model enables investors to acquire ownership of a property asset, via the purchase of shares, either of a single property, or a number of properties as part of a portfolio.
In 2015, equity-based crowdfunding for Real Estate raised a total of £87m, for 174 development projects. This is how the annual quarters looked:
Q1 → £13.09m
Q2 → £23.16m
Q3 → £35.70m
Q4 → £14.63m
Equity-based crowdfunding for Real Estate had a great year in 2015. The record for fastest funding for a development project was set: £843,100 was raised in just 10 minutes and 43 seconds, from a total of 319 investors!
Unlike P2P Real Estate lending, with equity-based crowdfunding, there is scarcely any institutional involvement. Of the 10,626 funders participating in Real Estate crowdfunding, NESTA found that only 3% were categorised as institutional investors by the platform. This contrasts with the 77% of sophisticated or high net worth investors in the model.
Yes, equity based crowdfunded property investment is much more grass roots in many ways than the P2P Real Estate sector. The recent inclination to lower minimum investment thresholds in this area, with the aim of enticing more retail investors attests to this in a very clear way.
Whilst 27.5% of loan applications in P2P Real Estate lending were accepted in 2015, in equity-based crowdfunding for Real Estate, platform acceptance rate was much lower. Only 2.9% of deals made it onto the platform, on average.
However, deal success rate for those who did make it onto the platform was pretty high: 87%. There are also far fewer investors required for an equity deal – NESTA reports an average of 150 per deal. The average deal size for 2015 in the crowdfunding sector for property was fairly high, too: £820,042.
Real Estate Alternative Finance and Manchester
Of the 58 alternative finance platforms surveyed by NESTA for their report, 62% were – unsurprisingly – London-based. However, a significant 5.2% hailed from our home city of Manchester.
Manchester is also one of a number of regional and local authorities that have either partnered with online alternative finance platforms to fund local SMEs, or have used alternative finance methods to fund community projects.
NESTA’s data shows that the most active regions receiving funds from Real Estate crowdfunding were London (of course), the North East, and the North West. The North West was also found to be one of the top 3 regions actually providing funds.
This isn’t terribly surprising given the growing trend for emphasising Real Estate crowdfunding within areas in need of regeneration. Manchester has, as we know, come a very long way. The economy of the North West has been transformed over the last few years, in no small part due to the heavy investment in regeneration projects, in the form of development funding from both the public and private sectors.
It is these regeneration areas that are being identified as some of the potentially best investment opportunities. Not only do they cost investors less than prime locations, but these areas are also the ones that will experience the highest growth over coming years.
Real Estate Alternative Finance and The Government
Direct investment from the government has helped support the growth of both peer-to-peer and crowdfunding markets. In 2015, £60m was lent by the British Business Bank via P2P lending platforms, specifically for SMEs.
Tax incentives have also been applied, including the EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme). These schemes have been widely used, by a large proportion of investors using alternative funding platforms, and have been especially popular within the equity-based crowdfunding market.
The launch of the IFISA (Innovative Finance ISA) in April 2016 is also an exciting development in the alternative finance sector.
In particular, P2P business lending platforms for Real Estate expect the IFISA to generate a whopping 51.9% growth in transactional volume this year, whilst equity-based crowdfunding platforms for Real Estate predict 30.31% growth as a result of the IFISA.
The figures for Real Estate Alternative Finance outmatch those elsewhere in the alternative finance market. P2P consumer lenders, for example, expect a 26% increase in total volume as a result of the IFISA. It’s clear that Real Estate lending stands to benefit the most.
In anticipation of the influx of retail investors expected by the onset of the IFISA, some P2P Real Estate lending platforms are even lowering their investment thresholds.
What is the IFISA?
At its most basic, the Innovative Finance ISA allows UK investors to lend money using P2P lending platforms to invest up to 100% of their £15,240 annual ISA allowance, and to receive any interest and capital gains tax-free. You can find out more here.
Institutional Investment in Real Estate Alternative Finance
Catching the scent of a good thing, institutional investors are also muscling in on the peer-to-peer real estate lending market, as they are across the alternative finance industry.
It is estimated, based on platform reporting, that in the UK in 2015, 1,031 institutional funders were at the bottom of financing loans and equity deals in alternative finance.
45% of all alternative finance platforms reported institutional involvement in 2015. In 2014, this was 28%, and in 2013, just 11%.
For P2P business lending, in 2015 26% of total funding was attributable to institutional funding. In peer-to-peer Real Estate lending specifically, a total of 25% institutional funding was reported, with significant increase between the 3rd and 4th quarters of the year, in particular:
Q1 → 22%
Q2 → 22%
Q3 → 23%
Q4 → 31%
By contrast, however, in equity-based crowdfunding, 2015 saw just 8% of funding coming from institutions.
With institutional funding growing in the alternative finance market, as well as the influx of more high net worth investors, there is some discussion about whether the disruptive force of the alternative finance market is at risk of being stemmed.
Banking institutions have found themselves burdened with heavy regulatory compliance, cumbersome legacy systems and bureaucratic complexity. Since the debacle at the end of the last decade, the general populous has been hungry for new alternatives to the traditional financial system. Confidence has been lost, and – at the retail end of the investment spectrum at least – making one’s savings grow within the received systems has less potential for gains than what’s promised by alternative finance.
Alternative finance has become a key player in the development of a whole new generation of financial products. Along with a range of other FinTech solutions to saving, banking and investment, this revolutionary rumble has got the banks concerned.
It’s no wonder that, as such a disruptive movement grows, it finds itself on the precipice of being co-opted into the corporate world. But all the time that interest rates on savings accounts remain shockingly low, and first-time buyers view getting on the property ladder as likely as a winning Euromillions ticket, the prospect of a less suffocating alternative for growing money will continue to be thoroughly desirable.
And, focusing on Real Estate specifically, research conducted by Crowdstacker found that 44% of retail investors would like to increase their exposure to the UK property market, not only owning their own home, but also by investing through P2P lenders, like The House Crowd. Investor reluctance was found to centre around the time consuming nature and costs of property management, as well as affordability. The alternative finance model of crowdfunded property investment and P2P lending in Real Estate removes those factors from the equation.
2015 also saw the emergence of self-managed, platform-owned listed investment trusts, funds and vehicles: a sure sign that platforms are preparing to challenge the fund management space.
And as the alternative finance world continues to evolve, we are also seeing the emergence of a number of independent online aggregators, such as Informed Funding, FinPoint and ABF. These are rising up to provide additional channels and services for connecting business fundraisers to alternative finance platforms.
That being said, corporate interjection into the alternative finance space should not be considered a negative. It is this involvement that is allowing the industry to grow and evolve.
A number of P2P consumer lending platforms have struck high profile partnership deals with some big-name corporates.
Corporate partnerships have been witnessed between alternative finance platforms and large brands such as Virgin, Amazon, Uber and Sage. As NESTA puts it, these partnerships are “fusing the traditional corporate world with the disruptive models of alternative finance”.
It is these partnerships that will aid in increasing public awareness of the alternative finance sector, but not only this. Corporate partnerships will also attract high quality borrowers, reducing default rates on P2P loans, and also offers the potential for data gathering, which will enhance the industry’s credit scoring capabilities, and inform risk management.
The increasing involvement of high net worth investors, along with institutional funding and corporate partnerships is what is allowing alternative finance to push boundaries, blur definitions, and limit the dangers of orthodoxy: it is a catalyst for rapid evolution.
The extraordinary growth of the industry that we have witnessed over the last few years has begun to level out.
In 2015, the UK’s alternative finance industry facilitated investments, loans and donations totalling £3.2bn. In 2014, this figure was £1.74bn – a YoY growth rate of 83.91%, which is not to be sniffed at. But when you compare this to the 161% growth between 2013 and 2014, it looks positively small.
In 2014, 24 new alternative finance platforms began trading. This was down to 14 in 2015. Fewer new entrants are joining the market, whilst existing platforms continue to increase their total volumes at a steady rate.
Up until now, the industry appears to have been actively pushing its boundaries, both in its evolution, and in its rate of growth. Whilst the figures continue to be staggeringly impressive – with the market on course for a £5bn year in 2016 – plateauing figures are a good sign that the industry is maturing.
Alternative finance is coming of age with intelligence and dignity. It is listening to influential voices from big corporates, accepting helping hands where they are offered, and maintaining its grass roots persona. Most of all, however, it’s making money, not just for a few, but for a large body of investors all along the wealth spectrum. In Real Estate, it’s helping to regenerate run-down neighbourhoods, keeping a stagnant housing market moving, improving living standards across the board.
In short, alternative finance may have been a disruptive teenager, but it’s growing up to be a real force for good in the middle of a blighted financial landscape. The future of finance is looking promising.