The benefits of peer-to-peer lending

With the UK’s bank base rate at 0.5 percent for 3.5 years, pain continues for investors. Will peer-to-peer asset-backed lending provide them with a real alternative?


The UK base rate has been held at 0.5 percent since March 2009, and investors holding cash tend to receive very poor returns if their main concern is capital preservation.

Relendex – a new peer-to-peer lending marketplace – may have an attractive and viable answer. This web-enabled exchange connects borrowers with multiple lenders for real-estate loans from £500,000 to £50m. Lenders provide parts of a loan and receive interest rates from five percent to 12 percent over one to five years. All loans arranged through Relendex are secured on property assets – which can be retail, offices or industrial – and are let on long-term leases yielding more than enough rent to pay competitive interest rates to savers every quarter.

Banks are only lending selectively and slowly, and are incapable of addressing the sheer scale of UK real estate refinancing demand

Relendex assesses each loan proposal individually, arranges the security and documentation, and monitors the loan throughout its life. In each of these processes, Relendex has the benefit of advice from the property arm of a leading financial organisation, and proposals will be supported by professional valuations and full title reports. Loans advanced will represent a conservative percentage of the professional valuation, allowing for a substantial buffer in the event of values falling.

Lenders have the opportunity to participate through a variety of efficient structures suitable for UK and international investors. A secondary market enables lenders to re-sell loan parts, thus providing easy access to funds if required before the end of the term.

The potential market for Relendex in the UK alone is enormous. Over the next three years, £120bn (£40bn per annum) of the £293bn of currently outstanding bank debt lent against UK commercial property will be due for repayment. Since the banks are not lending easily or quickly, Relendex has a catalogue of properties available for refinance.

Transparent and efficient
The advantage to borrowers of using Relendex is that it’s a transparent marketplace. Since all legal and valuation enquiries are completed before the property is listed on the site, bids for loan parts from lenders are binding. When the auction is closed and the total amount required is received from a collection of lenders, the loan is completed by solicitors acting for the lender group. Relendex provides an ‘electronic data room’ so registered lenders can view all documents relating to the transaction, together with a summary of the loan terms. Investors can use the Relendex auto-lending function – where they specify the type of property loans they like and the interest rate they wish to achieve – and the system bids for them in multiple auctions until their funds have been deployed and the desired interest rate is achieved.

Relendex never handles the cash; all deposits are handled by the Royal Bank of Scotland in a special, segregated account. The accounting functions allow investors to view and download a variety of reports through the website.

When loans are completed, each investor receives a deed confirming his or her identifiable part of the loan and charge over the property. If there are ever any problems with the property during the loan period, Relendex works closely with the borrower to remedy them. Relendex has the ultimate sanction of selling the property to repay lenders their principal and interest.

Speed in a slow market
The Relendex marketplace could not have arrived at a better time. Since the crash of 2008, bank balance sheets have shrunk considerably following huge losses resulting from uncontrolled lending during the decade-long property boom. Now, with smaller balance sheets and reduced lending ratios, the banks are only lending selectively and slowly, and are incapable of addressing the sheer scale of UK commercial real estate refinancing demand.

To make matters worse, regulatory changes will increase the amount of capital that lenders are required to hold against their loan books. The introduction of Basel III into national legislation by January 2013 means banks’ lending will be further curtailed. As the provisions of these EU regulations begin to bite hard over the next two years, banks will need to reduce their loan books further. All these measures will suck debt financing out of the system when it is most urgently needed.

Banks will need to recapitalise in order to face their futures under Basel III, but European governments are reluctant to provide more support to their ailing banks. The private sector has no appetite for bank equity right now as there may still be skeletons in the closet – so the banks will have to make it on their own for now. In order to recapitalise, the big banks need to recognise more of the losses they have not yet recognised and then perhaps they can raise enough new capital to provide new lending. This situation is unlikely to happen for some time.

As there has been a significant correction in property values since 2008, lending against income-producing real estate is now a good prospect. Rental yields have increased and, as demand from borrowers is high, lenders can command competitive interest rates. With the strong likelihood of interest rates remaining low for the foreseeable future, Relendex expects to attract many alternative sources of capital seeking competitive interest rates.

Last year, the UK Government launched the ‘Red Tape Challenge’ process, putting whole stocks of rules and regulations on probation from the outset. The starting point is that regulation should go, unless there is a strong justification for it to stay, and even here they are finding ways to reduce burdens in its implementation. The UK Government is now supportive of peer-to-peer platforms and is encouraging self-regulation through the Peer-to-Peer Finance Association, as well as promoting dialogue with the sector to monitor the appropriateness of the current regulatory regime.

Peer-to-peer lending in the US, led by Lending Club and Prosper, is experiencing continuing growth, with Lending Club reporting up to 70 percent participation in loans by institutions.

The benefits of Relendex
The Relendex platform is designed for ease of use. Its ethos is based on transparency and encouraging a marketplace between real estate players seeking debt funding with lenders seeking a proper return on their capital.

The platform provides comprehensive loan data, allowing a lender to take his/her own decisions and putting control in the hands of savers and investors. Lenders have the opportunity to diversify their portfolios over tens or hundreds of loan parts, thereby spreading their risk and providing a buffer against single loan defaults.

The auto-lending facility gives lenders the ability to define their lending criteria (risk category and interest rate) and the system will select loans that meet these requirements.
Auctions will be run in one of two ways: either a Dutch auction, in which the lowest interest rates win and borrowers benefit from the weight of funds competing to participate in a loan, or a fixed interest rate auction, in which the first bidders who collectively fill the loan requirement win.

Relendex is attracting very different kinds of lenders. They range from high-net-worth individuals to wealth managers, insurance companies and pension funds. All of these lenders seek good medium-term returns with security. Given the poor performance of equity and bond markets, real estate lending offers a viable, practical and attractive alternative.