Invest and Fund has predicted there will be an increase in investors moving into the peer-to-peer lending market from more established asset classes, such as Real Estate Investment Trusts (REITs).
Pointing to the Monetary Policy Committee’s recent hike of 50 points to the base rate, the lender noted the rates had seen nine consecutive increases, putting them at a 14-year high.
Inevitably, this will influence the positions investors take.
“They may look at companies that derive their profits from the credit industry, consider floating rate bonds to minimize volatility, or focus on any investment where rates can be locked in,” the P2P property lender said in its latest mini-blog on trends ahead of 2023.
“On the same note, certain assets become less attractive as rates begin to rise, and one of those historically is a REIT.”
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Invest and Fund said that despite the argument that higher rates equal higher yield, historically, investors will trade out of publicly traded REITs and back into the bond market or a fixed-interest government-backed position when there is uncertainty in the property market.
This is due to concern over non-performance, as even diversified trusts see returns diminish quickly if a proportion of the underlying assets acquire rental voids. And REITs also incur management fees, regardless of yield.
REITs must generate enough yield to service all the shareholders and cover the fees, so many are made up of hotels, large commercial buildings, and office blocks, as they will have a high enough rental yield to service all the investors, the lender explained.
However, people may use hotels less and work from home more in a downturn. With P2P backed by the construction of the residential housing market, arguably it is more suited to weather a downturn as the production of residential homes remains necessary despite the wider economic climate.
As such, the lender expects an inflow of investors into the P2P market from many of these more established asset classes, as savvy investors see the broader picture regarding home building and how that differs from exposure to real estate yield.
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Invest and Fund said P2P offers “headroom protection”, whereby the developer’s profits, the lenders profits, and the investors profits are all factored in. By contrast, with a REIT, investors’ earnings are reliant on the success of that one business.
In addition, Invest and Fund argued that P2P has a highly active resale market, so compared to non-traded REITs, it is liquid, and free from fees associated with non-performing assets.
“The government has to stimulate the UK homebuilding market; houses have to be built, and essentially, in P2P backed by real estate, you’re benefiting from that support”, the lender noted.
“A downturn that affects the existing market may reduce prices, but it could also reduce costs in the development market; at the point of writing, build costs were down month on month, according to the BEIS. The increased cost of materials ultimately stagnated the market, and that situation is now starting to change. As they have begun to come down, construction levels are anticipated to increase, strengthening the value proposition of our asset class into 2023.”
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