Market Crash and p2p

There are degrees of "crashes" and different segments in the property market.

At the first sign of a downturn the banks will reduce lending to any property that hasn't got a good prospect of income (ie pre-lets, pre-sold houses or tenanted properties). This will mean that the number of buyers for the remainder drops dramatically and the prices drop as everyone remaining senses a bargain. In particular undeveloped land declines precipitously as this is valued based on the price for the end product minus costs of building it and a developers profit. The costs won't initially vary much and there will be less competition and certainty for developers so their required profit increases while the completed value falls. As a result land can become all but unsaleable in many locations.

Many property loans are not for the full time required to sell the completed development. These rely on refinancing the loans. Refinancing may not be available at a time when there is nothing saleable so the loan will default. In a fire-sale the amount achieved for the property will fall (especially as there may be little value in any warranties from the seller) so many loans will not be covered by the amount realised from the security. It remains to be seen how the P2P companies manage this. The bank will sometimes enter into a contract with a developer to complete the development for them to maximise recoveries.

That said, in a minor dip, only some sites might be affected and demand might hold up sufficiently to allow everyone to be repaid in most locations.

Bad debts will hit all sites, the quality of the underwriting will be revealed as will the investors appreciation of risk. It always amazed me on Zopa how badly many otherwise rational investors over reacted to bad debts. We may see a exodus from many sites that exceeds the drop in acceptable loan options, we might even see rate rises. In a severe recession, development projects will be put on hold and deal flow might fall relative to the remaining investors appetite.

Basically its all unknown, but I suspect the loss of confidence will lead to some platforms being wound down. I suspect a severe recession might put RS into a resolution event as there is little evidence that its PF has the funding to cover significantly increased defaults. Basically it would be required to fund the shortfall from current loans. This would require continuing lender support. It may be that sufficient lenders are so passive to not consider the risks and so funds would remain, but I am not sure at all. 

Landbay have an interesting independent stress test document on their website. (link, at bottom, pdf download). In the case of Landbay a 25% houseprice fall and unemployment at 12% would see a loss of 0.48%.

I'd love if all platforms would conduct such independent tests.

Without making any judgement on LandBay (I am not a user and know nothing about it) or the author of the report, nor casting any aspersions on either party, nor on the veracity of this specific report, nor implying any inappropriate relationship between the specific parties in this case, personally generically I tend to treat 'independent reports' commissioned by the party being reported on with not so much a pinch of salt as a good fistful. Unless I happen to be closely acquainted with both the assessor and the assessment process. Especially where my own money is concerned. 

**Personal view**

It's worth bearing in mind that when banks were dumping property portfolios in 2009-2012, they were selling at very large markdowns - anecdotally I know of salesmen willing to take 50% of "value" when selling property assets in order to get cash through the door. This is because banks just wanted to de-risk and were willing to take the hit. 

P2P is a different situation and the question is whether lenders are willing (or can be compelled) to hang on for longer to avoid fire sales. I'd certainly be more concerned on sites that don't allow me to sell out at a discount, simply because if I can only sell at face value there may be no exit for a long, long time unless someone very naive comes to buy me out.

I think this is the key point.  When the next property crash comes, I fully expect that markdowns on a lot of development property will be of the order of 50% for a quick exit.  If platforms/lenders behave like the banks, then some (certainly SS) will be toast.  If platforms/lenders are prepared to wait (probably for several years) to get their capital back, and accept the inevitable loss of interest (plus cost of carry in property insurance, security etc where borrowers go bust), they should survive. 

My prediction is that the platforms will decide to wait as much as they can, because that is in the best interests of their lenders and puts the least pressure on their provision funds (for those that have them), but the cost of carry will constrain them because the platforms have minimal resources of their own and they will struggle to get the lenders to cough up.  This, plus the loss of liquidity and confidence, may well cause them to fail anyway as new lending volumes plummet.

The platforms that will survive are those that have not put all their eggs in the property basket, or have been conservative in the kinds of property lending that they will do.

[crossed with registerme and somewhat edited/expanded]

I think it could, but I don't think it will if the hunt for scale / volume / simplicity wins out - too many "widows and orphans".  Of course, if it becomes a "sophisticated investor only" sector, then that means a) it won't manage to scale (blowing some equity valuations out of the water), b) some platforms will have to change their approach, significantly, and c) it won't ever disintermediate the banks.

One of the things I love about the sector is that, at least to an extent, I can get exposure to asset classes, risk and returns that were previously unavailable to me as a retail (sophisticated or otherwise) investor.

Pre-p2p:-

* for property exposure beyond my own home, I could have gone down the BTL route, I could have bought housebuilder equity, I could have bought REITS, I could have bought a commercial property fund.  
* for non-equity (tiny) SME exposure, I would have had to put my money in a bank. 
* for trade / invoice finance I could have gone to some specialised outfits, but I wouldn't have known about them had I not dipped a toe in p2p waters.
* for aviation finance I would have had to put my money in a bank.
* for unusual asset classes (eg containers!) I would have had to put my money in a bank.
* the list goes on........

Now, you could argue that you might have been able to gain access to invest in asset classes like those I list above via hedge funds, private equity, private banks and even shadowier parts of the shadow banking system and I wouldn't argue with you.  But a) those doors have high barriers to entry (barriers I am looking to knock down), and b) they would cost.

All in a world where HSBC have just told me that they are reducing the interest they pay me to 0.25%.  Which is hardly a surprise, neither is it, imho, any inducement to stay with the banks beyond my basic transactional requirements.