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Post by jackpease on May 3, 2016 7:40:39 GMT
I am currently facing an issue where a commercial property was valued on Funding Knight at £300,000 or 120 day sale value £275,000 on the 29th of Aug 2015. Now as of April 2016 the receiver values it at £150,000. Therefore we the lenders will most likely incur losses. Furthermore even if £150,000 is realised there will be disbursements to the administrator/receiver thereby increasing our losses. I appreciate there can be variations in valuations. What I don't understand is why don't P2P companies and or banks get second references/opinions rather then relying solely on one valuation? I think that neatly encapsulates my fears with property based lending - fans say that a property crash would only wipe 20% off values and gaily throw money in to the likes of SS as it is 'safe' being 'asset backed' but then valuations like this (and loads of examples on other platforms) highlight the pitfalls of a distressed sale. It's not as if the likes of zoopla is of any help as it's valuations appear to be plus or minus 50% even for identical flats in the same block. Jack P
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ben
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Post by ben on May 3, 2016 8:03:44 GMT
As with everything it is opinion based, aslo what has happened to the property in the last year might effect it, ie have they tried to do some work but done it badly
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Post by chielamangus on May 3, 2016 8:52:33 GMT
Also I disagree with the presumption that asset values do not decline steeply over shorter periods, especiallly when sentiment turns against a particular sector, e.g. (although I sincerely hope doubt there is any such security held in respect of these) holiday properties in Spain, Portugal, France could experience significant and rapid falls should Britain vote to leave the EU on 23 June. The Brexit doomsayers can't have it all ways. Osborne, the CBI and the big business establishment predict a dire fall in the value of sterling in the event of a Leave vote. But if this is the case (which incidentally I think ridiculous scaremongering) then the value of assets abroad will jump in value in sterling terms. There would be a couple of years of uncertainty while the dust settles, and after that a much clearer path to prosperity for the majority (rather than for the minority as at present).
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Post by mrclondon on May 3, 2016 11:44:35 GMT
I appreciate there can be variations in valuations. What I don't understand is why don't P2P companies and or banks get second references/opinions rather then relying solely on one valuation?
As others have said the biggest variation in valuations comes about from the use of differing sets of assumptions used to create the valuation.
A significant number of the valuations we see are based on residual value assumptions; i.e. take the estimated value of a completed project, subtract the estimated cost of implementing the project, subtract a sensible profit margin, and what you're left with is today's "value". The trouble is that is today's "value" to that particular borrower only. Another purchaser of the security may have a different project in mind, and hence deduce a different "value" for the security today.
Then we see valuations that contain "hope value" attributed to a planning application (especially for a change of use), i.e. the "value" calculated as above is only valid if a planning approval is obtained.
RICS valuations should always contain a list of comparable assets that are used to justify the valuation. But frequently they are not that comparable ... I've seen the value of 4 bed detached houses with good sized gardens used in the valuation of a mid-terrace with practically no garden.
I've spent a fair bit of time recently dissecting a few of the valuations. The current MT loan for a plot of land in Retford was valued on a residual value basis at £790k, was being purchased for £725k and after more research (see my post) I've concluded those probably represent fair value for the land irrespective of who purchases it.
Over on FS, there is the strange case of a Llandudno Hotel whose valuation of £1.5m contains at least £1m of hope value that it will get planning change of use from Hotel to retirement apartments; and the bizarre case a derelict tram shed in Birmingham whose valuation (£800k) is roughly 4 times what a brownfield site of its size in Birmingham is shown in government figures to be typically worth, and this security would need significant investment to generate rental income for its as is planning usage. On the other hand the FS Liverpool Business Centre security is currently fully let after refurbishment generating £124k pa of rent, a 15.5% yield on its valuation of £800k.
At present a significant number of property backed p2p loans are gambles. Whilst the economy is stable or growing lenders can probably get away with it, as most will go to plan, but when the economy turns almost all the gambles will fail IMO. A careful read of the valuation reports, sense checking the facts, and determining your own worst case valuation of the security is a prudent step before investing in a p2p loan.
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adrianc
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Post by adrianc on May 3, 2016 13:09:42 GMT
The Brexit doomsayers can't have it all ways. Watch 'em try...
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Post by GSV3MIaC on May 3, 2016 13:59:24 GMT
It's not quite a matter of "what answer did you have in mind?" but it's not far off. Always read the assumptions in a valuation very carefully and understand who has commissioned it. Yep, It's often a question (exactly!) of 'are you buying, or selling?' which will affect the answer you get a lot. Nor is it unique to commercial property, although that does have more than average scope for variation, depending on how good a fit it is to what the buyer wants it for.
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Post by chielamangus on May 3, 2016 14:05:23 GMT
The Brexit doomsayers can't have it all ways. Watch 'em try... Well, I can believe it. I must reply some day to your comment in another thread - something about Herefordshire. I had been in that county that week, househunting (on the basis that it was about the most rural county in the southern half of England) but when I came back & saw that it was your backyard, well, that was the end of that!
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shimself
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Post by shimself on May 3, 2016 15:30:09 GMT
There seem to be lots of P2P firms bidding for our Business, just wondering, which offers the best Return for the least risk ? I was think of 6 month loan for my funds, rather the 1 month style available on Ratesetter ciraca 3-3.5%, but have seem it as much as 13% ??  Any thoughts ?? Rates of 12-13% are, in part, compensation for future capital losses, and you should expect to lose roughly half of this return.
Rates on provision fund backed accounts are typically 3 to 7% and give an indication of what mathematical modelling and a awful lot of assumptions suggests is a plausible return after capital losses on a well diversified portfolio of p2p loans.
It is impossible to answer your question, but I'd say AC's QAA at 3.75% (this month only 4.25%) is probably a contender for best return / least risk, and I know you've dismissed it but RS's rolling at 3 to 3.5% would be another. The point is these are short term accounts that are provision fund backed - by keeping an eye on the provision fund coverage ratio you MIGHT be able to exit the market before the provision fund is depleted to a level that would put your own capital at risk.
Only zopa has traded through a recession, but in the absence of other data it should be assumed that returns will be negative on non-provision funds backed p2p loans during recessionary years, and at the start of the next economic cycle.
Wellesley is worth a mention here. A particular point in their favour is that they coinvest and take the first loss
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Post by dualinvestor on May 3, 2016 16:42:22 GMT
I appreciate there can be variations in valuations. What I don't understand is why don't P2P companies and or banks get second references/opinions rather then relying solely on one valuation?
........................... At present a significant number of property backed p2p loans are gambles. Whilst the economy is stable or growing lenders can probably get away with it, as most will go to plan, but when the economy turns almost all the gambles will fail IMO. A careful read of the valuation reports, sense checking the facts, and determining your own worst case valuation of the security is a prudent step before investing in a p2p loan.
Agreed Fundementally you have to remember that anyone prepared to pay APRs of 33% plus (excluding arrangement and other fees) does not have a bankable proposition. Funding from conventional sources with adequate security, even for bridging loans, will cost at most a third of that. Therefore any proposition for borrowing from a P2P site is akin to pawnbroking, except that a pawnbroker will usually lend a maximum of 25% LTV no matter how good the security. This does not necessarily mean that they will all, or even a high proportion, of them will default but it does mean that they could. Realising security is a time consuming and expensive process, it is extremely unlikely that once court, receiver's, agent's and legal fees are taken into account that more than 75% of even a realistic valuation will be made. When the other factors mentioned above are taken into account it is more than possible that on some loans there will be a total loss even in benign times. If interest rates rise or any other cause for a general turndown in the economy highly leveraged assets will suffer exponentially more than the economy as a whole and although unlikely despite what someone said above it is not without the realms of possibilty that whole portfolios could be wiped out.
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webwiz
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Post by webwiz on May 4, 2016 7:23:38 GMT
There seem to be lots of P2P firms bidding for our Business, just wondering, which offers the best Return for the least risk ? I was think of 6 month loan for my funds, rather the 1 month style available on Ratesetter ciraca 3-3.5%, but have seem it as much as 13% ?? Any thoughts ?? Rates of 12-13% are, in part, compensation for future capital losses, and you should expect to lose roughly half of this return.
Rates on provision fund backed accounts are typically 3 to 7% and give an indication of what mathematical modelling and a awful lot of assumptions suggests is a plausible return after capital losses on a well diversified portfolio of p2p loans.
It is impossible to answer your question, but I'd say AC's QAA at 3.75% (this month only 4.25%) is probably a contender for best return / least risk, and I know you've dismissed it but RS's rolling at 3 to 3.5% would be another. The point is these are short term accounts that are provision fund backed - by keeping an eye on the provision fund coverage ratio you MIGHT be able to exit the market before the provision fund is depleted to a level that would put your own capital at risk.
Only zopa has traded through a recession, but in the absence of other data it should be assumed that returns will be negative on non-provision funds backed p2p loans during recessionary years, and at the start of the next economic cycle.
Can you expand on your oplnion that we should expect to lose half our interest in capital losses? Suppose I invest £10k in 100 loans of £100 reinvesting on the same terms as loans repay for a period of 5 years. Total interest is £6000 so on your assumption capital losses are £3000. Say ave loss is 50pc of loan or 70pc of valuation so £50. So number of losses is 60. 60pc of defaults seems pessimistic, or am I missing something?
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Post by dualinvestor on May 4, 2016 8:23:10 GMT
Rates of 12-13% are, in part, compensation for future capital losses, and you should expect to lose roughly half of this return.
Can you expand on your oplnion that we should expect to lose half our interest in capital losses? Suppose I invest £10k in 100 loans of £100 reinvesting on the same terms as loans repay for a period of 5 years. Total interest is £6000 so on your assumption capital losses are £3000. Say ave loss is 50pc of loan or 70pc of valuation so £50. So number of losses is 60. 60pc of defaults seems pessimistic, or am I missing something? Depending on your own position mrclondon is taking a realistic or pessimistic view of the likely realisation from the security the platform holds in respect of any particular loan. Although the LTV might be 70% it is entirely possible, for reasons discussed on this thread and elsewhere, that the realisation will be nil or neglible. In the current benign interest rate environment that is less likely but if circumstances were to change it might become probable not only over a single loan but a wide range of them.
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bigfoot12
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Post by bigfoot12 on May 4, 2016 9:58:28 GMT
Rates of 12-13% are, in part, compensation for future capital losses, and you should expect to lose roughly half of this return.
Rates on provision fund backed accounts are typically 3 to 7% and give an indication of what mathematical modelling and a awful lot of assumptions suggests is a plausible return after capital losses on a well diversified portfolio of p2p loans.
It is impossible to answer your question, but I'd say AC's QAA at 3.75% (this month only 4.25%) is probably a contender for best return / least risk, and I know you've dismissed it but RS's rolling at 3 to 3.5% would be another. The point is these are short term accounts that are provision fund backed - by keeping an eye on the provision fund coverage ratio you MIGHT be able to exit the market before the provision fund is depleted to a level that would put your own capital at risk.
Only zopa has traded through a recession, but in the absence of other data it should be assumed that returns will be negative on non-provision funds backed p2p loans during recessionary years, and at the start of the next economic cycle.
Can you expand on your oplnion that we should expect to lose half our interest in capital losses? Suppose I invest £10k in 100 loans of £100 reinvesting on the same terms as loans repay for a period of 5 years. Total interest is £6000 so on your assumption capital losses are £3000. Say ave loss is 50pc of loan or 70pc of valuation so £50. So number of losses is 60. 60pc of defaults seems pessimistic, or am I missing something? I think that you are missing something. You seem to have compared a five year number with an initial number. Also those early losses won't provide any income in subsequent years. Very roughly I see a 5.5% annual default (with 50% recovery) reduce a 12% gross interest to 7%. 8.2% annual default being breakeven. I don't expect a 5.5% annual default, I expect that most years it will be much lower, but then there will be a year or two when it is much much worse (and recovery lower). I still hope to do better than 7% over five years, but I don't think that it is obvious that I will.
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Post by mrclondon on May 4, 2016 10:45:50 GMT
Can you expand on your oplnion that we should expect to lose half our interest in capital losses? Suppose I invest £10k in 100 loans of £100 reinvesting on the same terms as loans repay for a period of 5 years. Total interest is £6000 so on your assumption capital losses are £3000. Say ave loss is 50pc of loan or 70pc of valuation so £50. So number of losses is 60. 60pc of defaults seems pessimistic, or am I missing something?
As bigfoot12 has just commented your logic seems to have gone slightly astray. If we are talking of 1 year property bridging loans, then assuming no losses you would have invested in 500 different loans over the 5 years, not 100, so based on your calc the percentage of loans defaulting would be 12%.
However whilst the theoretical yield in your scenario is £6000, this is ignoring the fact that defaulted loans in the portfolio will be accruing interest for the two years or so it takes to realise the security but this interest will not generally be covered by the realisation proceeds. If we make a further assumption that all interest received during the 5 years is removed from the platform (to fund spending) then the capital losses once realised will further reduce the ongoing ability to earn interest as the invested capital will be less than £10k. You've also probably ignored the 5-10% of legal fees and costs associated with the realisation of the security i.e. significantly less than £3k of actual capital losses on the security could reduce the interest received by £3k
As an aside its worth noting that your original calc of 60pc defaults after 5 years is not that far adrift of reality when considering SME's (see this thread)
Since I wrote the post you quoted, a further very important piece of learning has occurred. AC's Anglesey loan recently held a vote with 3 options for how to proceed with the security realisation - A) Accept offer 1 for the security as recommended by the LPA receiver B) Accept offer 2 for the security as recommended by the LPA receiver C) Reject the LPA receivers recommendations [and continue to market the security]. Option C was chosen by the lenders, but it turns out that such an option is not practicable in the context of p2p, as rejecting the recommendation of the receiver means full liability of the lenders to the borrower for any undershoot if the security is subsequently sold for less than the previously recommended offer(s) by the receiver; as well as the ongoing costs of maintenance and insurance etc etc. i.e. p2p lenders have to accept an LPA recommended offer for the security which will be the best achievable after a reasonable period (12 months plus) of marketing (the AC vote was subsequently rerun to remove option C)
Turning back to the post I made yesterday:
FS Llandudno Hotel - loan £852k / hope valuation £1500k / current value as a non-trading hotel < £500k; If this drops 50% from its current valuation to £250k the capital loss will be 71% before legal fees etc
FS Birmingham Tram shed - loan £500k / potential yield valuation £800k / current value as c. 1 acre brownfield site £200k If this drops 50% from its current valuation to £100k the capital loss will be 80% before legal fees etc
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Post by meledor on May 4, 2016 14:16:41 GMT
Can you expand on your oplnion that we should expect to lose half our interest in capital losses? Suppose I invest £10k in 100 loans of £100 reinvesting on the same terms as loans repay for a period of 5 years. Total interest is £6000 so on your assumption capital losses are £3000. Say ave loss is 50pc of loan or 70pc of valuation so £50. So number of losses is 60. 60pc of defaults seems pessimistic, or am I missing something? I think that you are missing something. You seem to have compared a five year number with an initial number. Also those early losses won't provide any income in subsequent years. Very roughly I see a 5.5% annual default (with 50% recovery) reduce a 12% gross interest to 7%.
I don't expect a 5.5% annual default, I expect that most years it will be much lower, but then there will be a year or two when it is much much worse (and recovery lower). I still hope to do better than 7% over five years, but I don't think that it is obvious that I will. Surely if you do the maths a 5.5% annual default (with 50% recovery) reduces a 12% gross interest to 9.25%?
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bigfoot12
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Post by bigfoot12 on May 4, 2016 14:31:21 GMT
I did say very roughly, but even so I do seem to have made a mistake. I didn't correctly compound the interest over 5 years. But no meledor I don't think it is as simple as you state. You don't earn interest on the loans that default. Still it is much higher than I had it, probably just over 8%. |
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Any thoughts ?? 