Is the UK Property Market Poised for a Comeback?

The UK’s property market can be seen as a key indicator for the economic health of the country. A prolonged housing shortage means that in theory, demand is outpacing supply. However, the Covid pandemic, rising interest rates, the higher cost of living and a lack of wage growth has led to a recent slowdown in property sales, and a drop in house prices over the past two years.

This property slowdown has been widely documented, and it has understandably rattled many property owners and investors. However, independent industry analysis suggests that there is less reason to believe that we are headed towards a property crash. In fact, according to most sources, the UK’s property market recovery is already underway.

The most recent Halifax¹ data found that average house prices fell by 0.1% in May 2024, month-on-month, and by 0.3% quarter-on-quarter. However, on an annual basis, property prices are actually up by 1.5%.

In certain areas, this annual growth was even more pronounced. Halifax reported that the strongest performing area in the UK was the north-west of England, where house prices grew by 3.8% on an annual basis in May. In Northern Ireland, prices were up by 3.2% over the same period.

And while the base rate remains stubbornly high at 5.00%, a slew of analysts have predicted a rate cut by the end of the year. This appears to have reassured house buyers, who have been actively seeking out mortgages again. In March, the Bank of England confirmed that UK mortgage approvals reached an 18-month high², with lenders approving a total of 61,300 home loans.

This suggests that would-be homeowners are regaining their confidence and showing a willingness to invest in property again, despite the market’s recent volatility.

This has also been reflected in the housebuilding market. In a recent trading statement, housebuilder Bellway³ reported a rise in customer demand as a result of “an improvement in affordability, driven by a moderation of both mortgage interest rates and consumer price inflation and an increase in wages.”

By June 2024, the average rate for a two-year fixed mortgage at 75% loan-to-value was 5.89%⁴. This is more than double the average rate of early 2022. However, property buyers may be willing to stomach these rates in the expectation that they will come down again by the time they need to refinance. In the meantime, they can take advantage of slightly lower property values to buy their dream home or investment property now.

Historical data from the Office for National Statistics⁵ found that by the end of 2023, average UK property prices were at a 12-year low. By December 2023, the average home was selling for £285,000, £4,000 lower than 12 months previous. In many ways, it is a buyers market – just as long as buyers are willing to stomach a couple of years of higher rates.

Seasoned property investors know that this is a cyclical market which is closely tied with macro economic movements.

[1] bit.ly/3NNhwpu

[2] bit.ly/3YpRspj

[3] bit.ly/3YvvfXb

[4] bit.ly/3C4xPvA

[5] bit.ly/48ugQ1U

What Loanpad’s Latest Financial Results Mean for Investors

Loanpad grew its profits again in the year ended 31 December 2023, according to the company’s most recent financial statements.

During the 12 months ended 31 December 2023, Loanpad’s net assets grew to £1,183,852, from £725,454 in 2022 with nearly £700,000 of cash. This accords with Loanpad being profitable on a monthly basis since mid-2021.

But what does this mean for Loanpad’s investors?

All limited companies are required to submit annual financial reports to Companies House, where they are published online and easily available to members of the public. This is where Loanpad’s annual financial statements can be found, along with other administrative information about the firm.

It is important to note that this information relates to the Loanpad business itself, not the company’s loanbook performance. For more information on the loanbook performance or the performance of individual loans, investors can visit www.loanpad.com.

However, many investors are interested to know how robust their chosen peer-to-peer lending platform might be. Reviewing a company’s financial records is a great way to learn more about the underlying health of a business, and its growth trajectory since inception. Of course, past performance is no indication of future success, so this information should be used as a research reference only.

What do Loanpad’s results say about the company?

Loanpad has been publishing its accounts on Companies House since 2016, so investors and other interested parties can parse multiple years of the firm’s finances if they so wish.

One line to look for is ‘net assets’, as this can give an indication as to the overall financial position of the firm.

Loanpad has been profitable on a cash basis every month since the middle of 2021. Furthermore, the company has been narrowing its accumulated loses year-on-year, and increasing its total equity.

However, for Neil Maurice, Chief Operating and Finance officer, the company’s most significant financial feat is the fact that it the majority of its revenue is recurring.

“We are particularly proud of the fact that our income and expenditure is highly predictable and stable,” says Maurice. “We run a very clean, robust business and we are very transparent when it comes to our balance sheet and operations.

“We have grown the business steadily into profitable territory, and we are proud to say that we have increased our profits year-on-year between 2022 and 2023.

“Loanpad’s business model is built on transparency, and we want our investors to be reassured that they are working with a robust company.”

A big feature of Loanpad’s business model is that its revenue is almost entirely recurring and based on a share of interest alongside investors. Loanpad’s revenue is very consistent month on month based on the size of the loan portfolio. This means that Loanpad is not reliant on writing new loans to generate revenue. For example, if there were another economic shock, such as during Covid, where economic activity is heavily curtailed, our revenue would barely change meaning there would be no pressure to reduce costs or write new loans.

Loanpad’s investors can earn daily interest of between 5.5% and 6.5% by backing short-term property loans alongside a suite of experienced property lenders which have been hand-picked by Loanpad’s team.

All of these loans are initially secured at a maximum of 50 percent of the property value. There are no fees for investors, so Loanpad makes its money by taking a portion of the interest earned on each loan. To date, no investor capital has been lost.

How Loanpad Manages Risk Amid Property Market Volatility

Property lending is as popular as ever in the UK, but no investment option is entirely risk free. In property lending, the key risk is that the value of the underlying property will decline substantially, thus making it harder for investors to recoup their capital if need be.

Many investors will remember the early months of the global financial crisis in 2007 and 2008, when house prices fell by between 20% and 30% in some areas, causing property-heavy investment portfolios to sink in value.

As a recession loomed at the start of 2023, UK house prices began to drop again, sparking concerns that another property crash was on the way.

However, this time around the property dip has been much less severe. By the end of last year, property prices had fallen by an average of 1.4%, with the average property in the UK valued at £285,000¹. By April 2024, the average house price in the UK was £281,000², but there were already signs of recovery in the market. According to the Land Registry’s House Price Index, property prices rose by 0.3% compared to the previous month, and were up by 1.1% compared to the previous year. This is a far cry from the double digit losses that property investors suffered during the 2007-2008 crash.

However, property lenders are understandably worried, and may choose to review their portfolio allocations in the light of these new values.

How do falling property prices affect Loanpad investors?

Loanpad’s investors back shared short-term property loans and earn interest daily. Loanpad partners with a select group of property lenders and spreads investor money across a carefully-chosen portfolio of secured property loans. All loan values are capped initially at 50% of the total property value. This means that the value of the underlying property would need to fall by at least 50% before investor capital is at risk.

“Loanpad has always taken a very conservative approach to lending,” says Neil Maurice, Chief Operating and Finance Officer at Loanpad.

“Loanpad only ever lends initially 50% of the value of any property, so if there is a property price crash of 30% or even 40%, it shouldn’t affect our stake in the properties in our portfolio.

“Yes, we’d be much more exposed at that point, but we would expect to recover our money back. Someone who is lending 70% loan-to-value would be much more exposed than we are.”

Maurice doesn’t believe that there will be a significant property crash in the UK this year, due to the extremely high demand for housing and the lack of supply. But the fluctuating value of property is something that lenders such as Loanpad pay close attention to throughout the loan cycle.

Loanpad will never initially lend more than 50% of the value of a property. However, when a valuation changes due to refurbishment or development, Loanpad can amend its funding to fit the new value.

“We do increase the value throughout the project, but it’s only based on the work that have been done,” says Maurice. “We don’t account for any development profit during that process either without an updated valuation, so we’re very conservative in our valuations.”

This conservative approach also involves applying rigorous due diligence at the start of Loanpad’s lending process. Loanpad only works with approved lending partners, and monitors each project from the very start of the term. This allows Loanpad’s management to identify any early issues and step in to protect investor funds if necessary.

This is the level of due diligence that property investors should expect from their investment provider, whether the property market is booming or declining. There are no guarantees when it comes to investing, but market awareness and prudent management can help to manage any potential risks, both now and in the future.

[1] https://www.gov.uk/government/news/uk-house-price-index-for-december-2023

[2] https://www.gov.uk/government/news/uk-house-price-index-for-april-2024

How Compound Interest Helps Investors Build Wealth

Albert Einstein once described compound interest as the eighth wonder of the world. “He who understands it, earns it … he who doesn’t … pays it,” he famously said.

For investors, compound interest represents one of the best ways to build wealth with minimal effort.

What is compound interest?

Compound interest simply means that after you make your initial investment, you commit to reinvesting any interest earned year after year. If you have invested in a fixed return product, or in an investment portfolio which pays even a small amount of interest each year, these compounded returns can quickly add up.

For example, if you are earning five per cent per annum on an initial investment of £1,000, reinvesting the interest each year and assuming no losses, by the end of year one you will have earned £50 in interest, bringing your overall portfolio to £1,050.

During year two, you will earn five per cent on £1,050, rather than your original £1,000. This means that by the end of year two, you should have a portfolio worth £1,102.50.

If you continue to reinvest any interest, by the end of year ten, your portfolio could be worth approximately £1,628.89. That’s over £628 in interest, from a one-time investment of £1,000.

If you are topping up your account on a regular basis, the amount of money earned through interest will be even higher, and compound interest can accrue at an even faster rate.

How to make the most of compound interest

Any investment can benefit from compound interest, but the best results could come from fixed-rate products such as bonds, savings accounts and peer-to-peer loans.

However, it is important to remember that not every investment will result in annual returns being paid. For example, investments in the stock market can lose money during times of macro-economic stress. The past few years have shown us that the stock market is capable of exciting highs and crushing lows. While this can make it an appealing market for traders, it is not necessarily an attractive option for investors seeking to earn compound interest.

Compound interest rewards consistent returns, even if they are small. A small return every year could do more good for the overall size of an investment portfolio than the peaks and troughs of the stock market.

Of course, every investment comes with risk. In P2P lending, the key risk is the possibility of defaults due to borrowers being unable to repay their loans. While P2P platforms work hard to minimise this risk for investors, there are no guarantees and losses do occur, particularly during an economic downturn. While P2P lending has a track record of delivering relatively stable returns, past performance is no indication of future success, and investors are always encouraged to do their due diligence before making any new investment, and to maintain a diversified portfolio.

Having said that, where fixed returns are available, the possibilities for compound interest are compelling. Over time, compounded returns can add a huge amount of extra value, without the need for ongoing investments.

How Loanpad’s Wind-Down Plan Protects Investor Funds

In January, the Financial Conduct Authority (FCA) issued a stern warning to peer-to-peer lending platforms: confirm your wind-down plans or risk losing regulatory status.

By law, every peer-to-peer lending platform must have a wind-down plan in place in order to be regulated. This rule was introduced following the high-profile failure of P2P platforms such as Lendy and Collateral, whose investors are still fighting to recoup their funds more than four years later.

Unlike savings accounts, P2P accounts are not a part of the Financial Services Compensation Scheme (FSCS), so there are no provisions available to investors who lose their money. Wind-down plans were introduced to provide reassurance to investors should their P2P platform fold. These plans can be reviewed by the FCA and act as a step-by-step guide to running down the loan book while minimising investor losses.

Loanpad has had a robust wind-down plan in place since 2019, and it is updated and reviewed regularly. The wind down plan details how Loanpad will protect investor money should the business cease trading, under a variety of possible scenarios. The plan was written by Neil Maurice, Loanpad’s Chief Operating and Finance Officer.

”It was all done in house together with external specialist advice and in line with regulation is reviewed and updated regularly, says Maurice.

“It goes through all the requirements of the wind down plan and the costs associated with it.”

What does Loanpad’s wind-down plan look like?

Under every wind-down scenario, Loanpad is projected to continue generating income for both the business and its investors. This is due to the unique structure of the platform. Unlike many other P2P lenders, Loanpad earns little money from fees at origination of a loan. Instead, it takes a percentage of the interest payments alongside the platform’s lenders. This means that Loanpad as a business should continue to generate revenue as long as its loans are active.

Furthermore, Loanpad does not work directly with borrowers, but with lending partners who themselves liaise with borrowers. This reduces the administrative burden on the platform in the event of a wind down.

There are three ways to run wind down plans, according to the FCA:

1. Platforms can maintain a segregated amount of money which can be used to wind down the loanbook.
2. A third-party can be appointed to take charge of the platform’s portfolio and manage the wind down of the loanbook.
3. The platform winds down its own loanbook based on the resources that it has in-house.

Loanpad has opted for the third solution. The platform has built bespoke software that helps manage the wind down for Loanpad, ensuring that investors are aware of what is happening, and receive regular communication throughout the wind down process.

The company, in line with FCA requirements, has also set aside money to cover the cost of running the business through a wind down. This pool of cash is increased as the business grows.

Furthermore, Loanpad’s lending partners all manage the loans on a day-to-day basis and must report to Loanpad at set intervals.  They also agree to take a first loss provision.

Every lending partner takes a stake of at least 25 per cent of each loan, which means that they agree to take responsibility for the first 25 per cent of losses incurred on any loan. This provision helps Loanpad to mitigate the risk of investor losses in any circumstances, including during a wind-down.

How likely is a wind down?

The economic volatility of the past few years has shown that there are no guarantees in finance. However, Loanpad has put a number of measures in place to ensure that investor funds are as protected as possible.

Loanpad as a company has been profitable on a monthly basis since 2021 and maintains financial resources significantly in excess of those required by the FCA. Loanpad expects to remain profitable on a monthly basis.

All loans are secured against property, with a maximum loan-to-value at origination of 50 per cent. This means that the underlying property would have to lose more than 50 per cent of its value before investor funds are at risk. Investor funds are also automatically diversified across a number of different loans, to reduce the possibility of large capital losses stemming from one or two unpaid loans. These processes are in place to protect investor capital, no matter what is happening with the company.

In the event of a Loanpad wind down, all loans will remain active and the loan book will be managed as usual, albeit without the addition of any further loans.

Loan management is all about balancing risk with reward, and at Loanpad that philosophy extends to its hypothetical wind-down.

“We regularly review our wind down plan, and make updates where necessary. We have built bespoke software to manage any potential wind down to make administering the loanbook far easier in run-off,” says Maurice.

“Should the company fall victim to macro-economic conditions, investors can be assured that there is a detailed plan in place to protect their money and help them sleep better at night.”