PLCs (property lending clubs) are the future
Roxana Mohammadian-Molina is chief strategy officer at Blend Network
What does PLC stand for? In this instance, not a public limited company, but a property lending club, commonly described as peer-to-peer property lending and abbreviated as P2P property lending.
P2P, highly regulated by the Financial Conduct Authority (FCA), is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. P2P property lending is the process of lending money secured against property assets. For example, Blend Network operates a platform where investors lend money to pre-vetted experienced property developers who want to borrow money to build low-cost houses across the UK.
Why would such borrowers not borrow from a bank, one may ask? The reason is simple: after the Global Financial Crisis of 2008-9, traditional lending institutions and banks largely stopped providing development finance to small to medium enterprise (SME) property developers.
According to a recent report by the Home Builders Federation, availability and terms of financing for residential development has become extremely difficult for small housebuilding companies over the past decade. Lenders drastically changed their attitudes to the sector since the Global Financial Crisis. Consequently, many experienced developers were left struggling to access finance.
Why do investors join PLCs?
Over the past decade, interest rates on cash deposits have been close to zero. A comparison of saving account rates on sites such as Moneysupermarket shows that interest rates range between 0.5% and 0.8%. Once inflation is accounted for, savers are effectively losing money by holding their hard-earned cash in savings accounts.
Consequently, savers are looking for yield where they can invest and earn a decent return. Property lending clubs or P2P property lending platforms offer exactly that. Though savings accounts are Financial Services Compensation Scheme (FSCS) protected and P2P is not, P2P property lending platforms allow investors to invest from as little as £1,000 – in the case of Blend Network – and earn considerably higher returns than in savings accounts.
Furthermore, the return on P2P lending products tends to be a fixed return, so investors do not have to worry about volatility of their returns. For example, Blend Network offers investors the possibility to invest in property-secured loans that offer 8% to 12% return p.a. and that are secured against first charge on UK property.
In recent months we have seen governments throw money at anything that moves, leading to an enormous debt mountain that eventually will need to be repaid. While the consensus is that developed countries will be able to tolerate higher debt burdens and remain on a sustainable debt path, this does mean that interest rates across the developed world, already at historical lows, will likely remain low for the foreseeable future.
Yet some degree of structurally higher inflation is also likely because there is a limit to how much governments have control over interest rates, and a question mark on whether they could resort to policies of financial repression to artificially lower bond yields.
So, while I do not believe that inflation is about to shoot to double-digit levels, I do think that the world of sub-2% inflation is well behind us, while interest rates will remain very low. This scenario is the reason why I believe PLCs will become an increasingly important component in every investor’s portfolio in years to come.