The headline is, of course, from Rudyard Kipling – though not the second part, for which we claim full responsibility.
Kipling’s advice is sound: we’re seeing a huge amount of destruction of value in markets. For the many who have their pensions and savings in those markets, this is a tragedy. The question in these circumstances is, what alternatives are there? What should investors be doing in the midst of the most volatile markets in almost a century?
At the time of writing, the FTSE100 is down more than a third, from its peak of above 7600 to levels not seen in more than a decade. Despite this precipitous decline, everything suggests that we haven’t hit bottom yet. Indeed, in the global financial crisis, it took almost two years for the market to start to recover. This isn’t, we suspect, a market to be buying equities ‘on the dips’, as there may well be more dips than ups.
Unless you’re convinced of your abilities as a clairvoyant, equity markets in these conditions are notoriously unpredictable, and only the very brave or very foolish (often the same thing) will attempt to make money from them. In the words of one market commentator, ‘only monkeys pick bottoms’. If that isn’t you, and you need a secure home for your cash, there are a number of options.
Asset class options
First of all, there is cash itself. However, for savers, the Bank of England’s response to falling markets by cutting base rates to 0.1% – their lowest ever – means cash is a less attractive option than it was before, as lower base rates mean lower savings rates on cash. What’s more, it’s possible that rates could even go negative. If that seems a ludicrous suggestion, it’s worth noting that the Swiss National Bank had negative rates well before the crisis broke. You could be literally paying the banks to hold onto your cash for you. In fact, with January’s inflation rate at 1.8%, in reality that’s what cash savers are doing.
If you are happy to have your assets slowly eroded by inflation rather than commit it to the viscidness of equity markets, that’s fine. But there are other alternatives available.
Gilt trip
The obvious safe haven asset is the government bond. However, recently, even traditional safe-haven assets have taken a hammering. “As fears over the spread of coronavirus intensify, even the safest corner of financial markets has been swept up in the global sell-off,” noted the Financial Times, adding: “Government bonds, typically seen by investors as havens from volatility elsewhere, saw their prices tumble”.[1]
At first glance, this makes no sense: during a crisis, investors seek safety in government bonds. Indeed, this is what happened at the start of the Covid-19 outbreak, with bond yields around the world hitting record lows as prices soared. Then in March, that reversed. The selling in bond markets accelerated, pushing 10-year US Treasury yields above 1.2%, far above the record low of less than 0.4% of 9 March, and the yield on the benchmark UK 10-year gilt blew out to the maximum for the year on the week of 16 March. To date, they’ve trended lower, though not back to their lows of earlier in the month.
On the face of it, this makes no sense: US Treasuries and UK gilts will not default, as their governments pay off the debts in their own currencies, and they own the printing presses. But in times of crisis, cash is king, and this has been no exception. As the FT explains, “As sentiment sours, fixed income funds — particularly those investing in corporate or riskier debt — are under pressure across the board from heavy redemptions. Many such funds may also hold some government bonds, which they are finding easier to sell to pay back departing investors.”
It's not even that investors are being compensated for this additional risk, as the current yield on a 10-year gilt (about 0.4% at the time of writing) is still substantially below inflation. Corporate bonds aren’t offering much greater comfort as, even with yields expanding over the past few weeks, European investment grade debt is still only delivering a yield on a par with inflation.[2] Again, investors have to ask themselves, are they being fairly compensated for the risk?
Lastly, emerging markets (EM) assets – for the past decade a sterling performer for many investors – are also taking a hammering, which isn’t surprising given their higher perceived risk. Since January, investors have taken $80bn (c. £70bn) out of EM assets. To put this in perspective, that’s more than three times the amount of cross-border outflows witnessed during 2008.
Market crashes have been compared to being in a theatre during a fire, with the only way out being if you can get someone to buy your ticket. Fire sales of assets make markets even more volatile and depress asset prices further, as forced sellers all rush for the exit at the same time.
While fixed income assets are less volatile than equities, trading in this environment – whatever the asset class – is enormously volatile. If you can escape the tyranny of market panic, and have your cash invested in quality assets, not only can you ride out the volatility, but you could also make a decent return.
Advantages of P2P
Forced sellers are facing almost guaranteed losses, and trading in and out of investments in this environment is fraught with dangers. However, individual retail investors in most cases won’t be facing the same pressures, and should be able to take a more considered view.
What’s more, for those who have already sold out of risk assets such as equities and looking for a good alternative for their parked cash, peer-to-peer (P2P) investments may be a good alternative. While P2P lending is an investment, and so involves putting your money at risk, it offers a middle ground between the volatility of markets and the inflation-eroding option of cash, instead offering attractive returns without the volatility of listed securities, such as equities and bonds. This is enabled by the efficient and effective purpose-built systems developed by quality online lending platforms, without burdensome fixed costs to cover. Furthermore, these systems not only allow more direct access to those adding value with your investment capital (meaning a greater share of the returns), but also enable easy diversification, either by Self Selecting many loans or through AutoInvest algorithms, which is prudent investment management.
There is a growing realisation that this is an especially attractive alternative under current conditions. It’s already been reported that P2P lending platforms “are braced for a shift to alternative investment,” encouraged by lower savings rates as a result of March’s cut in the Bank of England base rate.[3] Even allowing for depressed inflation rates at this time, people “need to look beyond traditional saving methods if they want to avoid their money being eroded further,” said one report.
Indeed, there are good reasons to “expect P2P returns to outperform other options this year”, given the falls in listed assets.[4]
An additional benefit is the tax efficient lending options from ISAs and pensions. With the impending ISA season close on 5th April, there is the opportunity to invest £40,000 in your ISA account over the coming weeks (£20k in this tax year and £20k in the next), as well as the potential to transfer existing ISA balances in. Taking the CrowdProperty ISA for example, 8% returns in an Innovative Finance ISA are the equivalent of 13.3% outside the tax wrapper for a higher-rate taxpayer – a very powerful proposition when backed by first-charge security on the property assets, from projects which have undergone the rigour that CrowdProperty applies to all lending opportunities.
Be selective
However, P2P is a very broad arena, covering everything from unsecured personal loans to secured lending to businesses, not to mention options of both equity and debt. Some P2P sub asset classes will be higher risk – unsecured debt, for example, or equity crowdfunding, as equity is more volatile and lower down the capital structure – so, if the business does go under, investors are far down the queue when it comes to getting their money back.
If you are a debt investor with first charge security, however, you are right at the front of that queue.
It should be emphasised at this point that such advantages only hold good for those investors who hold their assets over the duration of the loan: P2P loans are not particularly liquid, especially in terms of any secondary market. But for those investors who don’t need to join in this scramble for the exits, this could be a good time to hold such alternatives – especially given the underlying characteristics of UK residential property in particular.
Secured loans are always a safer option, particularly if the LTV is not too high, and the asset is good quality. If this is the case, even in the event of default, investors are well placed to get a full recovery on their investment. Loans secured with residential property are also well favoured, because buyer demand tends to be less impacted by changes in the economic environment than commercial assets such as shops, offices and factories, which is supportive of their values.
Supply and demand
In simple terms, there isn’t enough housing to go around – even with accelerating housebuilding over the past few years, demand exceeds supply. What’s more, this has been the case right throughout the market cycle. Even two years after the global financial crisis, a Parliamentary briefing paper noted: “It has been clear for some time that housing supply is not keeping up with demand” – indeed that “the National Housing and Planning Advice Unit (a non-departmental public body) has said that the recession has increased the requirement for house building”.[5]
The UK housing market remains chronically undersupplied, with a House of Commons briefing paper in March 2020 recording that estimates put the number of new homes needed in England at up to 345,000 a year. To put that in perspective, in 2018/19, the total housing stock in England increased by just 241,000 homes. While this was 9% higher than the year before – and the amount of new homes supplied annually has been growing for several years – it “is still lower than estimated need,” said the report.[6]
Indeed, the residential market has so far remained buoyant – although we monitor it continuously. Strong pent-up demand following extended periods of uncertainty has been evident so far this year, with property transactions nationwide seeing significant year-on-year increases. It’s also entirely possible that the Bank of England rates cut could actually increase housing demand. The cut itself will lower mortgage rates, and wider stimulus efforts announced by the government will also be supportive of demand.
Belt and braces
The case for P2P residential property loans, held to maturity, seems robust. Nevertheless, in conditions such as these, investors will naturally want to take a belt and braces approach. So, come to that, does CrowdProperty. But such measures aren’t things we are rushing to enact in the face of market panic – it is how we have always operated. Investors can be reassured that not only are they getting exposure to one of the best asset classes in this market, but that it is also being stewarded in the most prudent way.
There are a number of reasons to take comfort in the CrowdProperty approach – not least, because all our loans have a first charge security claim on the assets, so our lenders are at the front of the queue in the event of any problems and we control any recoveries processes on behalf of our lenders, should they be necessary as a last resort. Our constant monitoring of each project, too, is designed to highlight and address any problems early on, with a uniquely direct relationship with borrowers.
CrowdProperty does everything we can to make sure that defaults are as unlikely as possible. We are, first and foremost, property experts with decades of experience in this market and exactly the asset class being lent against. Since we started lending in 2014, we have filtered £2.6bn of loan applications down to £65m lent. The rest we turn down, because they do not meet our criteria. That has translated into a 100% repayment record for our investors through over 5 years of lending.
What we’re doing now
That doesn’t mean we are satisfied with our risk procedures in these testing times. We want to make doubly sure that our investors’ cash is as secure as we can make it. So, for example, we have detailed business continuity plans in place. The CrowdProperty platform is cloud hosted and accessible from any location by authorised persons, and all of our employees are equipped and able to work remotely.
We have been in touch with all our borrowers to ensure they are prepared for any possible disruption caused by Covid-19. We have advised all borrowers to review their supply chains and identify any areas of potential impact, and are working closely with them, to ensure we have adequate oversight of these new working practices to ensure, as much as possible, the continuity of development projects during the pandemic. These include:
- splitting teams on site;
- separate amenity blocks;
- staggered travel hours, working hours and breaks;
- provision of hand sanitisers and further hygiene precautions;
- the isolation of an area on site for suppliers to offload materials with separate protected confirmatory signatory area;
- holding an increased number of supplies on site;
- offsite areas to store materials where necessary;
- earlier ordering of supplies with a long lead time, to be held on site until needed;
- alternative points of supply chain so they have a backup should the original supplier be unable to deliver;
- extending build schedules and holding contingency reserves, funded from their own resources
These processes are being reviewed daily and if they need tightening further this will be implemented immediately. We also have clear policies and provisions in place should building and construction work be limited by the Government in the coming weeks/months in the best interests of protecting the NHS. First charge security at modest LTVs and the backing of quality projects being undertaken by quality professionals are again the key here as the fundamentals behind the loan are strong. Our pipeline of quality projects, with all this front of mind, remains strong.
Covid-19 is a human tragedy of global proportions. It is, in turn, producing turmoil in financial markets. But there is no reason to accept capital loss as inevitable, as all assets will not be affected in the same way: those investments that have a strong claim on a quality underlying asset, and where the fundamental supply and demand dynamics are strong, should come out of this in a good position. We believe that these criteria are fulfilled by first-charge secured loans to quality residential property professionals undertaking quality property projects.
[1] https://www.ft.com/content/d78ce2a4-6932-11ea-800d-da70cff6e4d3
[2] S&P Eurozone Investment Grade Corporate Bond Index. https://us.spindices.com/indices/fixed-income/sp-eurozone-investment-grade-corporate-bond-index
[3] https://www.p2pfinancenews.co.uk/2020/03/17/p2p-lenders-banking-on-shift-to-alternative-finance-as-savings-rates-fall/
[4] https://explorep2p.com/coronavirus/
[5] https://www.parliament.uk/documents/commons/lib/research/key_issues/Key-Issues-Housing-supply-and-demand.pdf
[6] https://researchbriefings.files.parliament.uk/documents/CBP-7671/CBP-7671.pdf
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