Property valuation risk
Conflicts of Interest policy
Our aim is to become a trusted funding provider for robust property development projects run by experienced developers that will provide attractive risk-return profiles to investors and generate expected returns to developers.
Lending to property companies and property developers can be very rewarding, but it involves a number of risks which mean that investors may not get back what they put in. Like all marketplace lending platforms, we are not covered by the Financial Services Compensation Scheme (FSCS).
Nevertheless, protecting investors’ money is our number one priority. It is our responsibility to address each of the risks involved to mitigate their effect in the best ways possible. As a precaution, we recommend that our investors do not participate in second charge lending without full understanding of the risks and being comfortable that they can afford to lose the whole of their investment without altering their standard of living. For added security, we also recommend that our investors diversity their investments by lending across a range of different projects and developers.
Underpinning our whole approach to risk mitigation is the CrowdProperty Shield, a three-tiered risk management system, which protects investors’ funds and benefits borrowers too. The three tiers are:
Rigourous Due Diligence
We endeavour to launch only the most lucrative, secure and profitable projects on our platform
2nd charge security
We only write 2nd charge loans when they sit behind the 1st charge security offered by CrowdProperty, and no loans are junior to a 3rd party lender
Our hands-on experts and assist in the success of our projects
In order to minimize risk to capital, we recommend investors diversify their investment portfolio across numerous project types, geographic regions, and loan phases. In the event of a developer failing to repay their interest or loan capital, this diversification will reduce the potential impact on an investor’s Extended Internal Rate of Return (XIRR), the calculated return on investments used where there are multiple transactions taking place at different times.
Property valuation risk
Property prices can go up and down as a result of a wide range of economic factors on a national, regional and local level. Different property types may be more or less susceptible to reduced or negative growth.
It is the mainstay of our business, however, that we understand the factors affecting property value fluctuations, so that we can identify properties that are the most secure investments.
For every investment opportunity, our in-house property experts assess the property’s full details. We assess the desirability of the local area in terms of inward investment, business growth and employment; good transport links and local facilities and amenities. All these changing factors affect a property’s initial and final value.
We also commission an independent ‘red book valuation’ of each specific property by a member of the Royal Institution of Chartered Surveyors (RICS) – the world’s leading professional body for standards in property and construction – to confirm the specific project values for loan security purposes. Every property is different.
Based on the existing and projected final value of a property project, our experts calculate what Loan To Value (LTV) finance ratio we will agree. This calculation is a fundamental part of how we protect investors’ funds, whilst also supporting borrowers by understanding the full potential of their projects.
The LTV figure is a measure of how much of a buffer the developer has to mitigate any adverse events, such as a property price decrease. Our loans will not exceed the maximum assessed LTC, which includes rolled up interest, thus providing a buffer to weather any adverse events.
For some larger loans, we may split the loan into separate phases. If this is the case, it is clearly marked on the project that it will be a multi-phase loan. We use LTV as it is the most relevant metric of the type of loan we provide. We also use Profit on Cost (POC) and Loan to Cost (LTC) in analysing all deals.
There are several factors that may result in a borrower defaulting on their loan repayments and thereby jeopardising investor returns. To mitigate this risk, we undertake rigorous due diligence. This is to ensure that the loan agreement is affordable for the borrower, as a default is not in the interests of our investors or the platform.
Rigorous Due Diligence
We work closely with each developer that approaches us for a property-project loan to confirm their identity through a process called Know Your Customer (KYC) and we establish their integrity and viability through Anti-Money Laundering (AML) searches and extensive credit checks.
We scrutinise the viability of their proposition from every perspective. We evaluate whether each borrower’s loan-repayment schedule and their exit strategy (either the sale of the developed property or refinancing) is realistic, to ensure the most profitable and secure route of action is followed. For every loan that we provide, we employ lawyers to work with the borrower’s legal adviser.
We use several metrics to determine how much a borrower can receive through our platform. Firstly, we review the borrower’s financial plan, examining the projected costs, estimated build duration and the run off time to redeem the loan in full. Then we seek third party advice from a registered RICS valuers who provide us with a full report on market dynamics, the purchase price, the out turn value when the works have been completed, and an appraisal of the developer and the build costs. From this, we understand the estimated profit the developer will make. See here how we calculate LTV.
Second Legal Charge
CP Capital will only write 2nd charge loans when they sit behind the 1st charge security offered by CrowdProperty. Nor will we write a 2nd charge CP Capital loan that is junior to a 3rd party lender. The reason for this is that it gives us complete control over the security of the project, a full understanding of the project dynamics, and the ability to assess that the borrower can deliver.
CP Capital will only write 2nd charge loans where we are completely satisfied with the 1st charge proposition, have had sign-off from our external Legal team, received full RICS and IMS due diligence, and all Finance Agreements have been executed.
All 2nd charge loans are secured by means of a 2nd legal charge, as registered with the Land Registry and secured against the property asset. However, the 2nd charge position will always rank behind the 1st charge position, so any 2nd charge secured loan is paid back only after the capital and interest commitments of the 1st charge have been fully redeemed.
Investors should fully understand and be comfortable with the fact that investing in a 2nd charge loan is significantly riskier than investing in the 1st charge secured lending offered by CrowdProperty, so that if external market dynamics tighten or the project hits a financial problem before maturity, the 2nd charge position will be compromised compared to the 1st charge position.
If a borrower needs an extension or further advances on the loan, we carefully assess the issues before agreeing to an extension. This is sometimes necessary due to factors beyond their control: for instance, delays with planning permission or with the sale of the finished property. Generally, in the event that a project overruns, the borrower will pay a higher interest rate from the original due date up until the loan is settled. At the completion of the extended loan, the additional interest will be paid along with the original capital and pre-agreed interest.
We monitor the progress of the project constantly, until its successful completion and the repayment of the loan. If the borrower requires a drawdown from the facility during the loan period, the IMS will inspect the works, report on progress, and recommend the amount that can be provided to the borrower. Using third party professional inspections strengthens our own procedures and raises our awareness of any potential problems during the build out.
Although our robust due diligence does not completely remove the risk inherent in property investment, our track record indicates that it has a major impact on securing investors’ funds.
Any investment made through the platform will be highly illiquid and investors will not be able to withdraw their money before the end of the investment term. This is because there is no active secondary market for loans to investee property development companies. The only way to realise an investment is if the investee company is sold or, at the end of the investment term the property is sold or refinanced, with a different loan being concluded.
If a developer fails to meet their interest or capital repayments on time, the loan is classed as in default and the developer will be charged a higher rate of interest from that point until payment has been made in full. Some of this additional interest rate will be passed on to investors, the rest will be payable to CrowdProperty to cover additional costs, such as fees for solicitors, LPA receivers and other professionals.
Second charge loans will typically have all interest rolled and paid at exit with no interest reserve in place.
Past performance is no indicator of future performance and we make all our judgements on a project-by-project basis. The internal calculations and opinions of CrowdProperty are subject to change at any time.
CrowdProperty do not offer any advice to lenders or borrowers. We recommend investors seek independent third-party advice and conduct their own due diligence on any project before deciding whether or not to invest. CP Capital projects are high risk and therefore only available to High Net Worth and Sophisticated Investors.
An Innovative Finance ISA (IFISA) is a tax-efficient means of investing, with no tax on property gains or income. As with all marketplace lending, capital is at risk and is not covered by the FSCS. Past performance is not an indicator of future results. Tax treatment depends on individual circumstances and may change.
CrowdProperty does not deduct any tax at source, whether that is capital gains tax upon the sale of a project, or income tax on interest payments to investors. We cannot provide advice on how much tax is owed to HMRC or when it is payable. Individual circumstances will be different and investors and developers should speak to a professional tax adviser to find out how their tax status could be affected.
CrowdProperty has comprehensive insurance policies in place that are tailored to our business, covering fraud, crime, terrorism, and contingent buildings insurance for our loans. Should a loss be suffered on a loan as a result of fraud or crime, we will, where possible, seek to claim on the insurance policies in an effort to return any shortfall to investors.
Central to our business model at CrowdProperty is our technology platform, which is designed and supported in-house by our technical experts. This provides us with the flexibility and nimbleness to continually improve the services for both Lenders and Borrowers. Our platform is robust, scalable and secure as verified through our control framework, regular security testing, data encryption and multi-factor authentication. We are fully integrated into the systems of our banking providers to give our customers the best experience possible.
Marketplace lending platforms are not covered by the FSCS. In principle, if a platform were to fail, or become insolvent, their investors could lose all of the money they have pledged. However, as CrowdProperty is regulated by the Financial Conduct Authority, we are required to protect investors’ money in several ways if the platform was to fail.
All FCA-regulated marketplace lending platforms are required to hold capital reserves (extra cash) to help mitigate any business and financial risks. This is something we have always done.
Investors funds that have not been lent to borrowers are protected either through being held in a segregated client account with an independent banking provider, or by being held in an account in the clients own name at Goji, our external payments provider. These funds are completely separate from CrowdProperty’s own money and we cannot use client money for our own business purposes. These funds do not form part of our assets, which means that they would not be available to creditors in the event of our insolvency.
We also have a back-up servicing arrangement in place, which means that, in the unlikely event that CrowdProperty ceases to trade, the back-up service provider would take our place in operationally managing and administering existing loan contracts between investors and borrowers. It would continue to receive loan repayments from borrowers, and to process and distribute these payments to investors. In practice, this means that if a platform does fail, all existing loans would be unaffected. Our ISA management is outsourced to a third party which ensures that loans held within a CrowdProperty ISA would retain their tax-free benefits.
The first legal charge that we take out on all property projects would still stand, should CrowdProperty became insolvent. This would continue to safeguard investors’ money, so that if the project developer was to default on repayments, the back-up service provider would operate on investors’ behalf and take over the project to extract and pay back investors’ funds in the best way possible.
Platform wind-down plan
For more information on what would happen should the platform fail or CrowdProperty become insolvent, please refer to our Wind-Down Plan.
Conflicts of Interest
Due to the nature of taking funds from investors and lending them to developers, CrowdProperty is exposed to the potential risks that the interests of some clients may conflict with the interests of other clients. There are also the risks that the interests of the firm may conflict with those of clients. However, CrowdProperty will always prioritize its reputation for transforming property finance and giving our investors inflation-beating interest.
For more information on how we manage actual or perceived conflicts of interest, please refer to our Conflicts of Interest Policy.
Consumer Duty policy
To read how we treat our customers fairly and ensure good outcomes for retail customers, please refer to our Consumer Duty Policy.