How marketplace lending is transforming debt investment in the property sector

Is marketplace lending to property developments different to traditional property investment? In this article, we examine how the two compare.

What is marketplace lending?

In a property development and investment context, marketplace lending is an arrangement through which investors invest money in property project loans which is then lent to developers.

True marketplace lending is almost always conducted via an online platform. According to David Ingram, co-founder and CEO of CrowdProperty Australia, the process is quite simple.

“Small-scale developers come to us, they apply for a loan which can be completed on the platform, our team conducts a thorough project appraisal and, working closely with the developer, confirms development costs, projected values and net profits. If everything checks out against our 57-step due diligence process, we then let our community of investors know about the opportunity and they can choose to pledge funds until the loan is fully raised. Finally, we keep our investors updated throughout the project with regular reports. Invested capital plus the interest income earned is then returned to investors on successful completion of the project.

“Our process has a proven record in the UK with 100 percent of project loans fully paid back to investors in the first nine years over there, and now we’re applying this same marketplace lending template to the Australian market with successful returns in our first three years. Small and medium developers keep returning to our marketplace because they appreciate certainty of finance and being able to talk directly to a specialist who understands their projects. Unlike other marketplace platforms, our property experts have all walked in the shoes of the property developer, giving them unique insight into the pains of project finance.”

The benefits of marketplace lending

Ingram believes traditional lenders, like banks, are failing SME property developers.

“It’s a complex, slow and expensive process that can frequently take between three and six months until final approval. In contrast, in a marketplace lending scenario, developers can receive initial indicative decisions on finance in as little as 72 hours.

“Investors also enjoy significant benefits. Our investors can earn up to 8.5 percent p.a. target income returns* and we do the due diligence which saves them time and money. We also offer the security of first mortgages, our in-house team includes seasoned experts in the property sector, and there are no hidden fees.”

Ingram also points to the fact that investors can invest in small-scale property projects without overheads (no fees or expenses) and it’s a simple way to diversify their portfolio because they’re investing in loans not equity.

In addition, marketplace lending offers a short-term investment horizon, with fixed target income returns within six to 18 months.

“It’s a much quicker ROI compared to traditional property investment,” Ingram says.

Mitigating risk: questions to ask marketplace lenders

As with any investment, however, there are some risks. These can be mitigated by looking closely at the track record of your financial partner, their ability to demonstrate deep relationships with quality developers through a direct origination model, and the transparency of their project-loan performance. And of course, you can get all the risk information in the product disclosure statement — read those carefully.

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