House price growth has been slowing in recent months amid concerns that the cost-of-living crisis and interest rate rises will damage confidence among property buyers and sellers.
For peer-to-peer investors who have chosen to put their funds into property-backed platforms, this will be a concern.
There are a few headwinds hitting the housing market that could hit P2P property borrowers and therefore an investor’s portfolio if it includes bridging, buy-to-let or development loans.
For example, Assetz Capital has warned of high prices for construction materials and labour shortages. This could hold up developments and add pressure to developers when repaying their loans.
Another factor that could hit a P2P investor’s portfolio is house prices.
Halifax suggested last month that prices have already started falling from their peak, with annual growth slipping from 10.8 per cent to 10.5 per cent and monthly growth falling from 1.2 per cent to one per cent.
Estate agency Knight Frank is expecting house price growth to slow to five per cent this year.
Falling prices could make it hard for borrowers to sell on or rent out developments, which may be an issue if this is a means for repaying a P2P loan or if a platform needs to recover a property when a loan defaults.
P2P property lenders and investment platforms have already been tested in recent years, with the pandemic putting their portfolios under pressure.
This saw platforms such as Cogress and Octopus Choice pause lending at the start of the coronavirus outbreak and both have since closed.
The key, as with any investment, is to do your research so you understand the type of loans a platform is backing, how much is usually borrowed and the risks involved.
“In addition to real estate risk, platform risk would likely become an important consideration in any downturn,” Filip Karadaghi, managing director of P2P property lender LandlordInvest, said.
“Stronger, and weaker, platforms become more evident during a downturn.”
Slowing house price growth combined with rising interest rates and thus a higher cost of finance could deter developers and landlords from further projects, limiting the choice of loans.
However, it may also make P2P lending more attractive if mainstream banks increase their borrowing rates as alternative lenders do not tend to follow interest rate rises with their own products.
Investors can also protect themselves through diversification.
This may mean backing different loans across a number of P2P property platforms.
Most P2P property lenders will give you the option to choose your own loans or invest in automatically diversified portfolios, depending on your individual preference and risk appetite.
How much a P2P investment portfolio is affected by a downturn also depends on the types of property projects and their locations.
Uma Rajah, chief executive of prime property lender CapitalRise, highlights that London is at a different point in the cycle as it has been in decline since the end of 2014.
“With prices circa 20 per cent below their peak values, the market appears to have bottomed out and is into the growth phase,” she said.
“Savills is forecasting an eight per cent growth for prime central London in 2022 and 23.9 per cent over the next five years.
“If the borrower is unable to repay, the property can be sold to repay investors and with typical loan-to-value ratios of 62 per cent, the investments provide strong buffers.”
It may even be worth thinking internationally.
European P2P lender Estateguru gives investors exposure to property projects in the Baltics as well as Germany and Spain.
“Each country has its own employment and inflation rates, liquidity and housing demands,” Judith Tan, head of capital markets at Estateguru, said.
“The fact that Estateguru operates across eight different markets means we can offer more diversity to mitigate these variables across a whole portfolio.”
Tan, and others, argue that there is a real need for affordable residential real estate regardless of economic conditions. Therefore, there are always likely to be attractive opportunities for P2P investors, as long as you do your research.