Is marketplace lending a solution for affordable housing?

Marketplace lending could be part of the solution to the shortage of affordable housing in Australia, by using online fintech platforms to improve funding options for small-scale property developers.

Australia has seen a rapid rise of marketplace lending over the past decade, as an efficient, fintech-driven means of providing capital to those parts of the economy sorely neglected by the mainstream banks.

In addition to making finance more accessible, marketplace lending offers opportunities to investors on the hunt for alternative returns.

These opportunities are especially pronounced with marketplace lenders offering specialised funding expertise in their niche, alongside security during periods of uncertainty.

How can marketplace lending impact the property development sector?

In the context of the property development sector, marketplace lending is an arrangement which uses online platforms to connect project developers in need of funds with retail and wholesale investors in search of returns for their money.

These platforms leverage the latest fintech innovations to raise the efficiency of the lending process and improve quality of service for customers.

The world’s first marketplace lender was Zopa, which was established in the UK in 2005, and enabled people to lend money directly to each other via an efficient online platform.

CEO and co-founder of CrowdProperty UK, Michael Bristow, says a key advantage of marketplace lending is its ability to solve the financing pains experienced by those areas of the market under-serviced by traditional lenders.

“As property developers ourselves, we know of the pains that small and medium-sized developers in the UK face when raising funds for their projects from the banks,” Bristow said.

“We decided to solve that problem by setting up a better specialist lender which fractionalised and sourced the capital from many people, just like Funding Circle and Zopa.”

Marketplace lending in Australia

Marketplace lending has been a presence in Australia for more than a decade, with US-headquartered Capify (formerly Ausvance) becoming the first platform to launch operations locally in 2008.

The subsequent decade saw a surge in the number of marketplace lenders operating on Australian shores, with key players including SocietyOne, MoneyPlace and Plenti.

While the marketplace lending sector has seen its ups and downs over the past decade, the overall trajectory has been one of remarkable growth.

In 2020 the marketplace consumer lending market in Australia expanded from AUD$2.86 million in 2013 to around $245.5million in 2020, according to a report by L. Granwal.

According to CEO and co-founder of CrowdProperty Australia David Ingram,

recent estimates from 2020 forecast the Australian marketplace lending transaction value to reach half a billion dollars by 2022.

The benefits of marketplace lending for the property sector

The ability of marketplace lending to provide much-needed funds to neglected areas of the market could bring major economic benefits.

This is particularly the case for the property sector, where a scarcity of funds for small-scale developers has contributed to a shortfall in affordable housing.

“Australia just isn’t building enough homes for the needs of the market, because developers are under-serviced by the banks,” Ingram said.

“Household formation is expected to outpace new housing supply by over 163,000 to 2032 as net overseas migration recovers to pre-pandemic levels of about 235,000 by 2024-25. The market needs to build more homes and we need to make the finance easier for small-scale developers.”

Marketplace lending can help service this need for funding of affordable housing by channeling capital directly from investors to small-scale developers.

The potential advantages of marketplace lending for investors

A major potential advantage of marketplace lenders from the perspective of investors is the potential for strong and steady returns, thanks to the efficiencies of online technology and the removal of financial ‘middlemen’.

“For the investor side it’s about efficiency,” Bristow said. “Marketplace lending enables the direct and efficient matching of the supply and demand of capital.

“To invest in some of our projects two decades ago [in the UK], you would likely need to meet with an independent financial advisor who might put your money in a general fund. That fund would then invest in a property fund, which would in turn deal with brokers.

“This means your funds pass through multiple hands, creating a great deal of cost and inefficiency.

“Matching the supply and demand via marketplace lenders both helps developers, and offers potentially strongreturns to investors.”

CrowdProperty Australia typically aims to offer wholesale investors target income returns over a 15–18-month period, with a target income return of up to 8.5% per annum*.

Specialised marketplace lenders offer alternative to fixed income style returns

In addition to efficiency, marketplace lenders can offer further advantages compared to the banks by specialising in particular niches of the market.

In the case of CrowdProperty, the team is comprised of property sector veterans who are experts in the development and funding of high quality, small-scale residential real estate.

“This gives us a pivotal advantage compared to banks and other more generalised lenders when it comes to conducting due diligence on property investments, as well as the subsequent monitoring of loans,” Bristow said.

“It doesn’t make sense to be a generalist — property is a niche that requires deep expertise.

“The key value we provide investors is we are a specialist in property lending, which makes us a better property development lender through decades of combined expertise and success. We are plugged into the grassroots of the property development sector.”

CrowdProperty’s diverse funding sources aim to provide greater security to investors

Compared to other marketplace lenders, CrowdProperty’s approach is to aim to provide greater security for investors during times of uncertainty. In the UK business’ context, this is thanks to the diverse sources of funding it can access as a result of its proven track record in high quality housing finance. Something the Australian company will develop in the local market as well.

“In the UK, we have built up an incredible track record of supporting 400-500 million pounds in projects, and delivering great returns for investors,” Bristow said.

CrowdProperty’s impressive track record has drawn the attention of wholesale and institutional investors eager to capitalise on its expertise by providing sources of capital.

The past several years attest to this, with CrowdProperty UK, and now Australia, proving itself capable of providing a steady supply of funds to developers amidst the uncertainty created by the Covid-19 pandemic.

“It’s vital to have diverse sources of capital, as they can help mitigate some of the volatility and risks,” Bristow said.

“Many property projects found that releases of capital stopped because they only had a single source of funds. We were able to support developers throughout the pandemic because we have access to diverse sources of capital.”

Australian wholesale investors looking for investments underpinned by rigorous due diligence should consider the opportunities offered by CrowdProperty Australia, as a specialised marketplace lender with a proven track record in high quality housing development finance.