Never Mind the Bus Pass

‘Safe as houses’ is usually taken to mean that houses are a safe place to park cash as an investor. But as financial historian Niall Ferguson has pointed out, the epithet may be better suited to the frieze of a bank board room. Houses are among the safest places to park capital as a lender, because they cannot run away

This is why it’s good news that the peer-to-peer banking revolution - which breaks down the boundary between investor and lender - is spreading to property. Zopa, the oldest peer-to-peer platform, only makes small consumer loans, as does rival website RateSetter. Yet Funding Circle and ThinCats, two outfits that specialise in small-business loans, are starting to broker commercial mortgages, and one start-up, Relendex, will deal in nothing else. Thanks to these and a few other companies, private investors can lend directly to landlords for the first time

Relendex is a new peer-to-peer lender that allows you to lend to commercial property owners. The Real Estate Lending Exchange – Relendex – enables you to lend against business premises, and also commercially-operated residential properties worth at least £500,000. To be clear: small-time buy-to-let landlords and homeowners need not apply for a Relendex loan

All the loans are secured against shop, office, industrial and leisure properties that are rented out by the owners. The rents earned are used to pay the interest on your loans. Anyone willing to invest £5,000 can join the platform

The Relendex platform has several advantages. Savers know where their cash is going. They wield considerable power, too. If the borrower gets into trouble, the group of savers (rather than Relendex) votes on whether to grant more time to pay the interest or to foreclose. If it works, borrowers will get a good deal: because Relendex uses an auction model, sought-after properties will be able to access money more cheaply as lenders bid down the rate. In a typical deal borrowers will pay around 6% interest and savers will receive around 5%. Relendex takes a 1% matchmaking fee

Interest is paid to you quarterly and you need to pay tax on it through your tax return

At present 20% of the interest is withheld for HM Revenue & Customs in advance, although Relendex has applied for relief on this. That’s possibly because, according to Relendex, pension companies are going to be lending pension savers’ money through its service. In that event, you might have the opportunity to lend through a pension, which means you won’t have to pay taxes on the interest you earn

Through a pension, a 5.25% interest rate will be the equivalent of a taxable rate of more than 6.5% for a basic-rate taxpayer, and nearly 9% for a higher-rate payer. You’ll have to pay the pension provider’s costs on top though, so it will work out less than this

How much does it cost?

The borrower pays an arrangement fee, which is typically 2%. Relendex charges the lender, by taking some of the interest. You can expect it to take around 1% or perhaps more. If your money is lent at 7%, for example, you could receive 6%

Getting out of your loans early

Unlike other peer-to-peer services, with most Relendex loans the money you lend – the capital – is not repaid until the end of the loan; it’s not repaid gradually at the same time as the interest payments. This could be a plus point, since you don’t have to keep reinvesting your capital as it’s gradually dripped back to you

You can get out of the loan early, however. As with other peer-to-peer services, you can re-sell your loans through Relendex’s website at no cost if you need to get your money back. At first the loans will be re-sold at the same value that you put in, but later, depending on demand for the loan, you might receive more or less of your starting capital back to leave the loan early

Borrowers can repay their loans to you early. Relendex charges them a penalty for this. You, the lender, receive most of this penalty, which could be the equivalent of, say, 0.85% of the loan part that is repaid early

If you lend through Relendex, you need to pay in at least £5,000 to open an account, and you have to contribute at least £1,000 per loan. This differs from the more established players, which let you lend as little as £10 to individual borrowers to spread out your risks. However, you could spread the risk more by lending to different types of borrowers: those renting out office space and those renting out retail space, for example

As with Zopa and several other peer-to-peer services, you can lend automatically in order to build a more diverse portfolio more easily. You can set a minimum interest rate you want to lend at, and choose what risk ratings you’ll lend to, based on Relendex’s own criteria. You can also set the length of time you want to lend for

Risk controls

Relendex ensures that you are paid your interest from property rents before the borrower – the commercial-property owner – gets the difference

Relendex refers to its “highly experienced property lending team”, including former senior lending officers with Rothschild Banking Group. It specifically mentions Peter Johns as chairman, who it describes as former Head of Banking at NM Rothschild. There is as good as no information about him on the internet!

Relendex says it holds your unlent money in a segregated client account at Royal Bank of Scotland, Guernsey

In the event that a borrower defaults, lenders will get to vote on the action to be taken. Those who have lent the most have the largest say in the matter.

Unlike most investments, you currently have no protection under the Financial Services Compensation Scheme when you invest in peer-to-peer loans, although that’s likely to change soon for UK-based services. Relendex is based in Guernsey and it’s not part of a Guernsey compensation scheme either. You also can’t complain to any financial ombudsman, as peer-to-peer services are not regulated yet

Consider all your options

There are other ways to invest in commercial property, such as through property investment funds or commercial property bonds. They offer a different balance of risk and rewards, and the types of risks are a little bit different

NMTBP would be surprised if peer-to-peer lending didn’t generate the odd scare or scam story over the next few years. These tend to be a by-product of exponential growth, which the industry is certainly enjoying. Yet a fresh source of high yield can only be a good thing for private investors. Just try to adopt the dour mentality of a pre-boom bank manager and - as always - remember the golden question of investment: what could go wrong?