How would property-backed investments react to a property crash?

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