Assetz Exchange: The Future of Buy-to-Let

tjtl thank you for your feedback.

On your concerns, I can tell you that AE reported a profit for financial year 2021/22 and a small profit for Q1 2022/23.  We are very aware sentiment has fallen somewhat given recent events and some people are wary of buying as they are concerned about house price falls.  Having said that we have explained the situation to our partners and as you will be seeing we are now bringing higher yield loans to the platform and the demand from our underwriters remains high.  We have indeed slowed down our rate of origination, despite huge demand for properties from our partners, and we are trying to focus on smaller sized deals.  There has been some liquidating of positions by a handful of people but the vast majority of our investors remain happy and are in it for the long term.

Liquidity is of course an important issue and it is the reason we have slowed down origination.  Prices on the platform have indeed fallen, concentrated on the lower yielding supported living properties as interest rates have risen.  It is important however to remember that these leases are inflation linked.  We have 20 properties having their rent reviewed upwards from 1 April and this is going to add 0.50% to 0.60% to the yield on many of these properties which will all of a sudden make them much more attractive - and of course they will continue to benefit from further inflation rises in the future.

On your request for more stats, I am happy to explore this but it's difficult to think what would be informative stats to display.  I am more than happy to discuss what users would find useful.  For example, you reference money on the platform and how it is growing but the money on the platform simply grows as we add new loans.  It's a zero sum game so if someone adds money and buys then the seller simply reinvests in another property or withdraws and if they do reinvest, ultimately someone will be left with cash in their account which they will withdraw. We do of course have a sum of money in our client account that moves around but the main driver of that is underwriters adding money to fund new property purchases and of course when we buy the property the balance reduces.  One major observation I would make is that when savings rates were zero people were happy just to leave idle money sitting in the AE wallet. Now rates are higher we see a huge amount of churn.  Some people are making multiple withdrawals and deposits in the same month to earn interest on their cash when it is uninvested.

On your comments about selling the properties, that isn't our ultimate goal.  We want to provide long term homes for vulnerable people (homes for life potentially) and our aim is not to sell for some of the reasons you mentioned.  Of course this decision remains entirely at the discretion of the lenders and potentially there could be a situation where if the price on the platform was sufficiently below the market price lenders voted to sell the property.  This option in itself should help put a support under the prices on the Exchange.

Finally, on the more general discussion on what's going to happen with house prices I can offer my own personal opinion (and who doesn't like discussing house prices!). Of course, none of us know what will happen but I do think there is going to be (in fact there already has been) a significant fall in real house prices but this will not be reflected in nominal price falls.  What I mean by that is house prices rises will not keep up with inflation.  If CPI is 10% and house prices are flat for the year then thats a 10% real terms fall although actual prices have remained stable. Nominal house prices have fallen around 4-5% nationally from the peak I believe and I do not think they will fall too much more.  We have noticed the market has been weaker over the past several months but more recently we have actually been outbid on a number of properties (see the newsletter we will be releasing later today for more details) and that simply wasn't happening 3 months ago.  Yes people are being hit with higher mortgage costs but employment is still buoyant and people are finally seeing reasonable pay rises which will help.

Of course, I could be wrong and it takes 2 views to form a market but I do know some people who have been calling a house price crash for the past 20 years. As pointed out though with demand outsripping supply and the population growing I struggle to see large nominal price falls.

BenAssetzExchange I assume a lot of the stats will be covered in the annual Outcomes Statement which I guess is somewhere on platform (I haven't looked yet). There are some on the losses & default page as well ... current year figs 3 months out if date but I guess due for quarterly update

Thanks. Interesting point. Does not the fact that UW are initially required to sell at par mean you are setting the price to a degree? Also the borrower is not the partner but the SPV, the platform is deducting fees etc which influence the return paid to lenders so the interest payable to lenders is not purely determined by the partner. It seems an interesting consequence of the hybrid model AE runs that parts of COBS that affect pure P2P platforms don't apply.

On that specific point, I very much don't agree either.  I'm reminded that the Blackburn loan (#139) looked risky at the outset with nothing but hope that rental income would flow from tenants yet to be signed-up, and so it proved!  And then effectively leasing the whole development to Serco...

But then I don't understand the risk assessment categories "Low", "Low-Med", "Med", etc.  Are these based on any sort of objective basis or what?

I have been investing with Assetz Echange for about a year now, gradually increasing my allocation to the point that it is now over 80% of my P2P lending allocation (and about 12% of my overall portfolio, which is roughly 60% equities, 20% property/REITs and 20% fixed income, including P2P lending. I see AE as a hybrid between REIT and P2P lending and it has accordingly occupied some of the property and some (most) of the P2P part of my asset allocation). 

Since I started allocating to AE, capital values have come down, and some of the rents have started increasing, so yields have gone up, and new properties coming to the exchange start at higher yields. This is along the lines of the expected path in a scenario that inflation spikes leading to interest rate and yield increases. I expect the situation to reverse when eventually inflation subsides, leading to easing of interest rates as well, and therefore market yields for properties in the exchange (and in the broader market). The capital losses would then prove temporary and the accumulated interest will lead to satisfactory total returns (even more so if reinvested at the higher yields over time). This is roughly how I see it playing out (not financial advice! ):



The main risks I see are:

• Interest rate spike and associated capital value decline is higher. This is essentially duration risk and I am comfortable having it as long as the principal is tied to inflation in some form (which is also the reason why the only long term gilts I have are index-linked (and I purchased them only once the yield went positive)
• Default risk. This is obviously a risk but a) it is more likely to happen in a scenario of a severe recession leading to funding for the tenants being cut off, less likely in a mildly recessionary or even stagflationary environment, which is the most likely bearish scenario at the moment, and b) it will lead to plummeting interest rates and yields which will help with capital values, in fact as rates are more likely to move faster than actual funding cuts, it's likely that capital values will increase at the onset of a recession (at which point it will be a good time to reallocate to equities or REITs)
• Platform risk. This is the biggest one for me, and the only one that makes me question my current allocation to AE. My impression is obviously quite positive so far (otherwise I wouldn't have invested so much), but it's still a risk and something that I am aware of. To this end, continued communication and transparency helps. I presume there are others in similar situation.

Inflation and rising yields is the primary reason I shifted most of my P2P lending to AE. Duration works both ways. While now, that yields are rising, it hurts, when eventually yields start dropping, one would have wished they had locked a higher yield, especially one that is index linked. With a 5+ year time horizon I prefer a 6% inflation linked yield to even a 10% nominal yield for a few months with reinvestment risk (the flip side of duration risk).