The big story for the UK’s alternative-finance sector is how many platforms are beginning to look less than “alternative”: Zopa is getting a banking licence, while Funding Circle’s deal with fast-food titan JustEat – to supply lending capital to takeaway food businesses – feels very much like the commercial banking relationships of old. But what has most caught my eye is peer-to-peer (P2P) property-lender Landbay: more than £30m of its buy-to-let mortgages have been included in a large securitisation of loans with an AAA rating.
For loans to be bundled together, split into risk segments and awarded a triple-A rating is a big deal. It implies recognition that the underlying assets are suitable for large institutional buyers such as funds or insurers. According to AltFi.com, which collates data on the alternative-finance sector, this is the first time “that a UK/European platform has scored a top rating from a pool of its assets”. The £309.5m securitisation “reflects loans mostly originated by Paratus AMC, a mortgage asset manager and servicer, with 87.7% coming from Paratus directly and 12.3% originated by Landbay on behalf of the firm”. This securitisation consists of a pool of nearly 1,300 mostly interest-only (96%) buy-to-let mortgages, with the average principal outstanding balance per account of £188,417. Nearly two-thirds are from London and the southeast.
All this raises two questions: why should we care, and does investing in buy-to-let as an asset class make any sense at all right now? Landbay is one of the smaller platforms in a market dominated by Lendinvest (by far the biggest, with over 50% of the market), Lendy and Octopus. Landbay’s monthly origination (new loan) numbers are building momentum, but it is still small (£47m in total funded) and very focused on buy-to-let mortgages, not the bridging loans beloved of some of its bigger peers. It advertises two main investment options: a fixed rate of 3.75% (for between one and five years) and a tracker rate of 3.34%. These are lower than those from the big P2P platforms such as Zopa, Funding Circle and Ratesetter – all in the 4.5% to 6% range – but its mortgages provide real asset backing (the loan-to-value ratio is averaging 67%) and so far there have been no defaults.
But while the tracker rate may appear appealing, the broader question is what might happen next to the buy-to-let market? I don’t think we are about to face a housing-market meltdown, but prices could drift down by around 5% to 10% in the next few years. But buy-to-let is far from finished. It will remain a large part of the rental market simply because so many people can’t afford to buy or aren’t offered loans. That will keep regional yields at sensible levels (5% in many areas) although the chances of any big capital upside are limited. If demand stays stable, voids are kept under control and mortgage rates remain below 5%, I think we’re unlikely to see any big price drops for mid-market rentals (outside of certain local markets such as London). That and lenders’ determination to keep loan-to-value ratios below 70% might help keep defaults under control.
I’d also note that shares in buy-to-let specialist Paragon currently yield 3.25% (these shares are inevitably very volatile, especially after a 153% rise over the last five years). And I should mention specialist mortgage fund UK Mortgages (LSE: UKML), which is managed by TwentyFour and yields 6.3% on a diversified book of residential mortgages – all bundled up in a securitisation structure.
From P2P to hire-purchase
In a further example of the “normalisation” of the alternative-finance sector, peer-to-peer lender Ratesetter is branching out from traditional P2P lending and is offering hire-purchase loans to businesses that “want to purchase… critical assets in order to invest and grow”. Loans will run for between 12 and 60 months, and are available to businesses with a trading history of at least three years. Ratesetter will take legal ownership of the underlying assets in each agreement until the borrower makes the final payment, with the borrower responsible for its insurance, maintenance and upkeep. Ratesetter also plans to launch hire-purchase products for individuals “later this year”, it says.
In the news…
• Cryptocurrency bitcoin has shrugged off competition from its newly spawned offshoot, “bitcoin cash”, and hit another record high last week. The digital currency’s share price shot up to more than $3,200, giving it a market value of over $50bn. The price of bitcoin cash, by contrast, slid after an initial surge saw it peak at over $750 a share. It is currently sitting at around $265. Bitcoin “forked” into two competing currencies last week as a result of long-running disagreements over how to expand the size of the underlying blockchain, the electronic ledger of transactions. Bitcoin has become unable to cope with the volume of user transactions, leading to long delays in settling trades and high fees from “miners”, who crunch the numbers necessary to verify transactions.
• An initial coin offering promoted by boxing champion Floyd Mayweather Jr raised $33m last week. Stox, an open source platform for prediction markets, raised 148,000 ethers, a token used on the Ethereum smart-contract platform. Stox describes prediction markets as “a disruptive economic instrument that has yet to penetrate mass investor audiences due to excessive regulation”. Individuals buy and sell shares in an outcome of “any imaginable topic such as election results, sports, entertainment, financial instruments and even the weather.” with the market price indicating how strongly the crowd believes in any given outcome.