Australia has long lagged behind the UK when it comes to adopting the latest innovations in marketplace lending (also referred to as peer-to-peer or P2P lending).
While the UK has reaped the benefits of P2P lending since 2005, the Australian market was still in its infancy as little as a decade ago.
This is all rapidly changing, however, with the Australian marketplace lending sector expected to post strong growth in years to come, bringing benefits to both borrowers and investors.
Given its success in the UK, marketplace lending could have a transformative impact on financial services in Australia.
This is particularly the case with specialised platforms like CrowdProperty, which leverages sector expertise to unearth opportunities for investors in the property market beyond traditional avenues.
The state of marketplace lending internationally
Marketplace lending is a new form of financial intermediation made possible by internet-driven innovations. Instead of channelling funds via a financial intermediary like a bank, marketplace lenders efficiently match investors and borrowers using online platforms.
The marketplace lending sector has seen thriving growth since the turn of the century, with a large number of P2P platforms springing up around the globe.
The technology first made its debut in the UK, with the launch of P2P lender Zopa in February 2005. Zopa was swiftly followed by a slew of other platforms such as Funding Circle, a P2P business lender founded in August 2010.
The UK was quick to embrace P2P lending, to the point of even employing it as a channel for government policy.
In 2012 the UK government provided funds worth £20 million to Funding Circle to support British small businesses. This was followed by another £40 million investment in 2014. The UK government’s British Business Investments committed £15m to CrowdProperty UK in April 2023 to help increase access to finance for small and medium-sized housing developers and support more housebuilding.
As a consequence, the UK has become home to one of the world’s most advanced and thriving P2P markets.
A report from easyMoney estimates that the UK P2P market grew a stunning 1600 per cent during the nine years from 2013 to 2022 to reach £370.7m in total.
The fortunes of the marketplace lending and P2P sector have been more ambivalent in other parts of the world, due to problems with fraud and regulatory concerns.
The US was quick to embrace P2P lending, with the emergence of leading platforms such as Prosper and Lending Club shortly following Zopa’s debut.
These companies have fallen well short of the stellar ambitions of their founders. Lending Club has seen its value plunge from $9 billion when it went public in 2014, to just $350 million by the start of the 2020s.
China initially adopted a laissez-faire attitude towards the P2P sector, leading to its flourishing growth in the first half of the last decade. However, widespread fraud led to a harsh crackdown by regulators, culminating in the complete collapse of the Chinese P2P market by 2018.
Analysts nonetheless expect the global P2P lending market to still have a very promising future.
Research and Markets estimates that the global P2P market stood at US$147.9 billion in 2022, and will more than quadruple over the next five years to reach US$626.5 billion by 2028.
Opportunities for marketplace lending in Australia
Despite its close ties to the UK, Australia’s marketplace lending sector remains in a state of comparative immaturity.
As late as 2014, marketplace lending was still “in its infancy” in Australia, according to a submission made by RateSetter to Treasury. In the same year, the UK government was already channeling credit to British small businesses via P2P lender Funding Circle.
The belated adoption of marketplace lending in Australia is all the more surprising given the tremendous strength of the country’s fintech sector, particularly in the buy-now-pay-later (BNPL) space.
This late development could nonetheless bode well for its future growth in Australia, particularly given its track record of success in the UK.
Business Wire projects that Australia’s alternative lending market - which includes marketplace lending - will post 36.9 per cent growth in 2023 to hit US$5.49 billion (AU$8.2b) in total.
It also forecasts a compound annual growth rate of more than 20 per cent during the period from 2023 - 2027, bringing the total size of the alternative lending market to US$11.50 billion (AU$17.2b).
In addition to rapid growth, some observers also forecast that non-bank lenders could play an increasingly important role in the real estate sector, given the greater flexibility they offer compared to traditional financial institutions.
A report from Foresight Analytics predicts that non-bank lenders could account for nearly a quarter of commercial real estate debt (CRED) by 2028. Foresight found that the non-bank sector already accounted for $74 billion of the $447 billion CRED market as of the end of 2023, for a 16 per cent share.
Marketplace lending unlocks opportunities in property debt
As stated earlier, the fortunes of marketplace lending have been highly mixed in different parts of the world. The UK may have successfully embraced P2P lending, but its performance in the US has been tepid, while in China it’s been completely sidelined by regulators.
One way to improve the effectiveness of marketplace lending is for platforms to specialise in certain sectors of the economy, creating a greater level of security and trust for transaction participants.
CrowdProperty, for example, is a specialist in property development, with a team of real estate experts that collectively lay claim to nearly a century’s worth of experience.
The combination of marketplace lending with specialist expertise gives CrowdProperty a major edge in the development finance space compared to traditional lenders — a fact proven by its track record in the UK.
This edge means it could play an important role in helping solve Australia’s housing shortage and affordability crisis, by channeling funds more effectively towards small-scale developers best placed to deliver new infill housing supply.
Lisa Digby, Head of Operations, CrowdProperty, highlights niche specialisation as a key advantage when it comes to finding strong opportunities for investors. This includes opportunities in new areas of the property sector, such as specialist disability accommodation (SDA).
She points out that CrowdProperty’s expertise enables us to assess and understand the risks of proposed projects better than traditional lenders that are generalists.
“We have in-house credit and property specialists that go through a lengthy due diligence process to make sure quality projects are available for investors,” Digby said.“This takes out much of the guesswork for them.
“We also see many more opportunities, and as a result have much more data available than individual investors who have had to make investment decisions on their own in the past.”
For developers in need of funds, CrowdProperty’s experienced specialist team is better able to assess the merits of their projects, help identify challenges and work with the developer for solutions in funding, a service that traditional financial institutions are less likely to offer small-scale developers.
As property people themselves, CrowdProperty can also provide expert advice and support to borrowers throughout the course of their developments, helping ensure they’re successfully completed on schedule.
As a marketplace lender, CrowdProperty demonstrates how specialised expertise can dramatically enhance the advantages offered by financial innovations for both investors and borrowers in Australia.