Now, get a crowd to fund your new home

London: Looking for a mortgage in a hurry? Tiny deposit? Not much idea where the capital for repayment is going to come from? There is not much point darkening the door of a bank these days, as that is precisely the sort of lending that got them into so much trouble. But there is a new type of lender in the market only too happy to consider such a proposition.

Grassroots microfinance websites — known as crowdfunding and peer-to-peer lending — are rushing headlong into the property market. Most focus on buy-to-let properties, but some have also begun to lend for development finance and to purchase commercial property.

They market themselves as a way for ordinary people with as little as £100 to get a toehold in Britain’s rapidly rising property market.

While there is now a range of risk and reward to choose from, their advertised returns generally compare very favourably with most of the other options available to retail investors in today’s world of ultra-low interest rates.

And with bank lending constrained by tighter regulations and the legacy of caution left by the financial crisis, these new lenders report strong demand from borrowers.

Kersfield, a property developer based in southwest England, last month took out Britain’s largest property p2p loan of £10.8 million from lender Wellesley. It will use the funds to convert a historic Bristol mansion into apartments and build new homes alongside it.

Wellesley has also backed two of Kersfield’s other projects. David Newton, a Kersfield partner, says his company turned to the lending platform because it is so hard for small developers to secure funding from the banks.

“The option of peer-to-peer finance was extremely attractive as it is quicker, more flexible and often with better commercial terms than traditional lenders,” he says. “We have also found banks unwilling to lend in regional cities despite there being strong residential markets.”

Such sites do not just lend on residential property — some are looking at the commercial market.

Daniel Miller set up US website Fundrise in 2010 and is now bringing it to the UK. His platform specialises in funding sub-$20m commercial property schemes in regeneration- focused areas of big cities. He thinks these “transitional neighbourhoods” are well suited to the grassroots lending model.

“The tangible, social and community aspect attracts people, particularly younger people, in up-and-coming areas,” he says.

But some of the more established lenders fear that a recent flurry of interest in the sector is drawing in new participants who take greater risks.

The most obvious divide is between p2p lenders, which invest through debt finance, and crowdfunders, which place investors’ funds into real estate projects as equity finance. Crowdfunders generally pair investors up with individual borrowers — so backers take a stake in a specific property, rather than in p2p lenders’ diversified portfolios of properties.

All this, p2p lenders argue, makes crowdfunders much riskier. Graham Wellesley, who founded the lender that provided Kersfield’s finance, warns that “there is concern within the [lending] industry that some of the investments [crowdfunders] back are quite speculative”.

Mike Roberts, managing director of crowdfunded house-builder HAB, says he was wary of some platforms which did not sufficiently stress the risks. “We didn’t want to have people on our investor roll who thought this was an instant route to riches,” he says.

P2p platforms are urging the government to tighten the regulations. Earlier this year the Financial Conduct Authority brought p2p and crowdfunding under its regulatory watch — though it did not differentiate between the two types of lender, which some in the industry say was unhelpful. FCA regulations require p2p and crowdfunders to offer investors clear information about the risks they are taking, and what safety nets are in place if they run into problems.

But the sites are still not part of the Financial Services Compensation Scheme, so the FCA has been accused of giving investors a false sense of security. In fact, investors are reliant on each company’s investment judgement and have no financial recourse if their choice of investment turns sour.

— Financial Times