Industry Insights #12: Mike Bristow – CrowdProperty

Mike Bristow Crowdproperty

In one of our most detailed and revealing interviews yet, we caught up with Mike Bristow, the CEO and Co-Founder of Peer to Peer lending platform CrowdProperty.

1 – Let’s start on a personal note: your career seems to have been always linked to entrepreneurship, consultancy and real estate. Is it fair to say that with CrowdProperty you achieved a state where all the skills you have been gathering are at the pinnacle of their utility? 

Thank you, it’s a great observation.

From founding, growing and selling my first business at university through investing in real estate for 17 years, through working as a strategy consultant for nearly two decades advising leading international companies and private equity funds on M&A and corporate strategy across many sectors, through investing in proptech businesses pretty much from when proptech started emerging as a sector, through sitting on the Pi Labs Investment Committee (Europe’s first and most prolific venture capital fund investing exclusively in early stage ventures in the proptech vertical) and being part of investment bodies such as the London Business School E100 captive angel network (where I did my MBA), I’ve seen a lot.

That’s what I’m bringing together at the helm of CrowdProperty which is my absolute passion and focus. We’re building the best property project lender in the market, efficiently and effectively delivering strong secured returns to investors, both retail and institutional.

It’s easy to underestimate how complex the collective elements of building and operating a competitively advantaged business in our sector takes, and we’re at the forefront, recognised through being elected to the board of the Peer-to-Peer Finance Association (P2PFA) as the only property project lender, countless awards, listings in the Peer2Peer Finance News Power 50 list in 2018 and 2019 and, most importantly, our exemplary lending track record through over 5 years of lending, which is all independently verified.

We take a very strategic approach to the sector, building crucial elements of differentiation, a brilliant team/culture, a well-resourced but sustainable cost base and absolute focus to build a world class, long-term business.    

2 – CrowdProperty works as a marketplace for real estate investments, aiming to bring together investors and property professionals seeking investment for their property projects. Where did this idea come from? Did it come from a need you saw on the market or pure ambition? 

CrowdProperty is run by property experts – we have incredible depth of understanding of the asset class and the pains that property professionals face when organising finance for their projects.

We know because we’ve been there and that is why the three co-founders, with 75 years collective hands-on property investment and development experience, set the business up.

This also represents the leading experience of the relevant asset class of any platform founding team in the market which has proven itself with a 100% capital and interest payback track record through over five years of lending (since 2014).

We are solving major issues being experienced on both sides of our marketplace. On the one hand, property professionals are receiving appalling service from traditional funding providers, especially in terms of ease, speed, expertise and access to decision makers, all of which are pivotal to our proposition.

On the other hand, the general public are mostly getting sub-inflation returns on their savings – according to the Bank of England there is £1.3tr in savings accounts earning on average 0.8% interest (although it’s important to note that peer-to-peer lending is not an equivalent product to savings as capital is at risk and is not FSCS covered).

The big reason we can offer higher returns up to 8% is because of our technological economies of scale and value-chain disintermediation driving the most efficient matching of the supply and demand of capital as possible, delivering structural cost advantage over both traditional and alternative sources of funding.

We don’t have the high cost bases of traditional lenders, which include, for instance, branch networks, origination costs, legacy IT systems and regulatory cost of capital.

We have purpose-built technology underpinning both very efficient and expertise-led systems and processes and even against the new alternative finance sector have delivered proven structural cost advantage in particular via strategic disintermediation of the finance broker channel.

Furthermore, the UK has a housing supply crisis and whilst the Government identifies small and medium-sized developers developing smaller parcels of land as a crucial part of the solution, traditional lending institutions either won’t lend or make it very hard to borrow, despite significant and more strategically important demand.

We know this because as property professionals, we’ve been there. We understand these frustrations through decades of personal investing and developing experience through multiple economic cycles.

CrowdProperty is a proptech/fintech peer-to-peer lending innovator with 100% capital and interest payback track record, directly matching the supply (retail investors) and demand (property professionals) of capital for quality property projects – delivering a better deal for all and development of more homes for our under-supplied nation.

3 – Does CrowdProperty work solely with investments in the UK?

We are absolutely focused on further building deep and sustainable competitive advantage in the UK market – we’re a business that believes that focus is critical to building a world class product. 

4 – The inevitable Brexit question: do your investors come mostly from the UK? In any way do you expect to be hurt by the current political situation? 

Our lending criteria have only ever tightened through 5+ years of lending, building ever-stronger due diligence processes, decades of experience and an ever-growing market sample set of applications direct into the CrowdProperty platform running at £2bn per year.

Added to this, there is a fundamental under-supply of housing in the UK to serve mainstream domestic demand. The market which we serve, and in a market of up to £20bn of finance, we have proven to attract and select the best from that large sample. 

Over the past three decades, two recessions (2007-09 and 1989-90) have been linked to residential property, with significant negative effects on its valuation. We’ve put our loan portfolio through a stress test that matches – indeed, goes beyond – both, to gauge the impacts.

Publishing a resilience test is part of the best practice criteria of leading industry body, the Peer2Peer Finance Association. We believe that all platforms should be doing this. 

At the trough of the 2007/08 crisis, UK house prices dropped on average 18.7%, to March 2009, and took until August 2014 to recover to the same level. In the trough of the 1989-90 crisis, house prices dropped by 12.3% and took until January 1997 to recover.

Our analysts applied these conditions to our loan book, at a granular geographic level, to determine what economic conditions would compromise the security underpinning our loans. Importantly, the analysis from these tests have been built into our due diligence processes, to ensure the portfolio’s increasing resilience.

We ran three different scenarios, reflecting progressively worsening market events.

In Scenario A, we applied a repeat of the 2007-08 crisis onto our complete loan book. We looked at how our loan book would be impacted at the end of the loan term, six and 12 months post loan term, and during the trough of the crisis at granular geographic and property type levels to see high-level averages and local and sub-sector effects.

Here, not a single loan on our loan book passes 100% owed at exit to GDV at any point. That means if we had to take possession of the development to redeem our lenders’ capital, that capital would still be fully covered.

The average owed at exit to GDV percentage assessed before launch was 58% across our entire loan book. In this scenario, the average owed at exit to GDV was 69% at the end of the loan terms, 71% at the six months post loan term position, 72% in the 12 months post loan term, and 67% during the trough of the crisis.

The highest owed at exit to GDV percentage was 98% on a historical loan that has already been paid back in full (clearly demonstrating our tightening criteria).

Scenario B is a more severe version of scenario A, combining a more severe version of the stagnation in house prices after 1989-1990 with a decline of the same magnitude as 2007-08 – the absolute worst of both worlds. Here, two of our historical loans exceeded 100% owed at exit to GDV, both of which have already paid back in full.

One of these two loans was in 2015, very early in the lifetime of CrowdProperty. If this loan was funded today, we would offer less to the borrower, as our lending criteria have tightened since 2015 – and, as a policy, only ever tighten.

With our current active loan book, not a single loan exceeded 100% owed at exit to GDV in the 12 months post loan term position. The average owed at exit to GDV percentage with the adjusted GDV values across our entire loan book were: 71% at the end of the loan terms, 75% in the six months post loan term position and 78% in the 12 months post loan term position.

The final scenario – C – is a continuation of scenario B and is a test of how long our loan book could last under the conditions imposed under scenario B, by calculating the level of exposure on both interest and capital as well as calculating the expected lender returns.

Scenario C shows the exposure of our loan book, assuming all of our loans went late at the same time, in the same adverse conditions of scenario B where GDV values are adjusted accordingly – including a measure of expected lender returns, adjusted for exposed interest.

As the graph below shows, total lender capital would never become unsecured and lenders would maintain a return of their capital between 8% and 5.5% even when our loans have accrued unsecured interest at a period of five years late. 

CrowdProperty Exposure

Our Property Director Andrew Hall believes it would take us, in a worst-case scenario, a maximum of 12 months past loan end date to sell a property at market value.

The breakdown of this would be: a 45-day period, where the borrower is given time to sell the property; a 90-day legal process to exercise our first charge security; and a maximum of six months to sell the property.

There is therefore flexibility to make the best decisions in the best interests of lenders by adding consideration for market timing into any recoveries process, should that be required. 

We monitor our loans closely and are therefore aware of any that may go late well in advance of their due date, through a wide array of market data and continuous communication with the borrower throughout the project.

In addition, we are mindful of the vulnerabilities of the market on a forward-looking basis, specifically, where it looks vulnerable to a correction.

In current market conditions, that means not focusing on macro-economically sensitive areas, such as prime central London, which are considerably more volatile and less dependent on predictable supply and demand fundamentals – it’s a market that’s really about a few foreign buyers, which are inherently unpredictable, rather than mass, under-served domestic demand. Instead, we back projects supplying fundamental domestic demand, under-supplied for decades, at mainstream property end-values.

While it’s true that past performance is no guide to the future, we have combined the worst combinations of cycles and recoveries against our portfolio, and factored in the lessons from this into our loan selection, to make sure the portfolio is both robust now but also for the future given this analysis’ inclusion in our loan due diligence processes.

5 – Do you see a pattern in the kinds of homes that the property developers are interested in? 

As we see about £2bn of applications each year, we get an eagle-eye view over the whole SME development market. This gives us strong insight into the major trends among SME developers.

To reinforce this, we conducted the largest SME property professional survey ever to give property professionals a strong, collective voice – and, of course, to give us a greater insight into our market. What we’ve learned is it’s far from plain vanilla build out there – it’s an incredibly inventive and innovative market.

Some of the many things that we see SME developers are doing more and more of in the market, all of which we fund:

  • Build/Convert to hold – it’s the new buy-to-let with quicker capital recycling in a low capital growth environment (many investors are now moving into value-adding projects)
  • Portfolio purchases from tired landlords – and some complex ones involving rolling refurbs, exiting some, getting equity capital out and holding to cashflow (taxation hikes, of which we haven’t yet seen the full extent, are driving portfolio exits, presenting opportunity)
  • Joint ventures – price expectations for sites are not aligned; working together can get everyone what they want (and we’ve just released a first-to-market dedicated product for this)
  • Modern Methods of Construction/Modular – it doesn’t solve all challenges but it’s ‘must have’ knowledge in the toolkit to future-proof development businesses (and we’ve just released a first-to-market dedicated product for this too)
  • Air Rights + Modular – a powerful city strategy which we’ve backed (what’s more, it’s rife for a joint venture structure too… Air Rights + Modular + Joint Ventures + CrowdProperty = big gains from 4 powerful strategies compounding together). See the video case study below.
  • Price point arbitrage – a very purposeful strategy to take properties from illiquid price points to liquid ones (e.g. converting large expensive houses where the market is much more stagnant into Help to Buy territory)
  • Build a brand and a targeted product – differentiate, know the customer well, but always have a plan B. This is one way to build differentiation vs volume house builders and create character to stand out. Develop for the target customer.
  • The Cookie-Cutter strategy – do one thing and get better and better and better. Just like we are doing. That’s how to become world class.

6 – What was the biggest project you had available for investment? Anything particularly large or unusual? 

Our largest funded project is a £5.3m GDV project near St Albans in Hertforshire, lending just under £3m with a 59.4% loan to GDV including rolled up interest (ie the amount owed at the end).

It’s a strong project with strong security and highlights how with first charge security, which we always insist on, the capital can be very well protected from pretty much every scenario.   

7 – How often do you reject project applications and according to what criteria? Do you remember any of the most peculiar ones that could not be accepted on your platform? 

The 12 specialists in the borrower team have over 80 years’ property experience and the Investment Committee then has over 100 years’ property experience. All team members have a fundamental passion for property, from economics through process, capabilities, financial risk, development risk, exit and recoveries, led by Property Director Andrew Hall.

The governance structure utilised by CrowdProperty is set up to be both thorough and impartial, with detailed board approval packs designed to show the merits of a project objectively and dispassionately, assessing and independently presenting thorough project information, which is followed through to lender representation on the platform.

All relevant information is presented to lenders and, furthermore, we enable lenders to hear directly from and question borrowers via webinars on each and every project before launch. This independence is vital to very successfully building the CrowdProperty trusted brand, which is the core pillar of our strategy and results in projects being funded in minutes or seconds on the CrowdProperty platform.  

We have a 57-step underwriting due-diligence process that has been built utilising our team’s decades of experience and the knowledge acquired in the 5+ years of operating CrowdProperty.

We’ve only ever tightened our criteria and have tightened elements right in the detail after diagnosing and reviewing where issues have been faced in loans. We continuously iterate our processes, analytics, models and due diligence procedure as we strive to get better and better every day. 

Projects are assessed on a deal by deal basis. Our proprietary appraisal process has been developed over a number of years based on decades of property development and investment experience (including experience through multiple economic cycles). 

We assess on:

  • Quantitative factors through hard appraisal modelling and leading market data / analytics
  • Qualitative factors requiring expert judgement
  • Qualitative factors assessing the borrowers’ capabilities, team and motivations through the uniquely deep interactions and relationship building enabled by our disintermediating model
  • Leading market data and analytics
  • RICS Red Book Valuation
  • Borrower company and director checks (credit, criminal, KYC, social, press, etc)
  • Other unique factors (where the project requires)
  • Legal due diligence
  • Property Director then Credit Committee Review of proposal

The key quantitative metrics that projects are analysed against are: profit on cost, initial LTV vs the secured asset, and amount owed at exit (i.e. capital plus interest) to GDV (Gross Development Value as determined by a RICS-qualified independent chartered surveyor).

We use our experience, leading benchmarking and billions of pounds worth of development project data to verify the development costings – ensuring that relevant contingencies are put in place to protect the lenders’ interests in a project.

All projects that require planning permission must have this in place before application for project funding can progress and a loan can commence. We require the legal First Charge on every property via title land registry to be able to intervene should a development default.

We also look at qualitative factors that can affect project outcomes including location, demographics, supply, demand, project type, developer experience and exit strategy to name but a few.

Our technology platform serves many leading sources of third-party data to present the best possible data to our expert reviewers and decision makers. Automation, data, analytics and expertise assessing quantitative and qualitative factors are all critical elements of the efficient and effective appraisal processes.

To date, the business has assessed £2.1bn of projects, is receiving an annual run rate of £2bn of applications and has funded a total of £55m of projects – i.e. 3% of total applications have been funded. This demonstrates our expertise in attracting applications and the thoroughness of our assessment, especially with a policy covering key criteria that have only ever tightened over time.

We grow by continuing to improve our origination in terms of both volume and quality, not by relaxing criteria to chase growth.

This 3% conversion is not, however, perfectly representative as whilst we can reject some projects quickly, property lending is dependent on many forms of evidence that take time to collate, and project timelines are longer and more specific than say a consumer or business requiring a loan.

Therefore, we have many applications in progress at various stages at any one point (currently >£230m). We expect a long-term average of 5-10% of applications progressing through to being listed and funded after our strict due diligence processes, with increases in this number only being delivered by more, higher quality origination through direct applications.

8 – Your auto-invest tool is widely advertised on your website. How popular is it among your investors? 

We’ve seen extremely high demand for our AutoInvest tool. The functionality allows for automatic diversification – which is a fundamental principle of controlling risk when investing – meaning that lenders can automatically pledge to projects (with ‘skip next project’ and cool-off period functionality).

This is a product that is constantly evolving having worked with pension providers to enable the feature for pensions and introduced AutoReinvest.

Whilst the minimum AutoInvest account investment is £500, lenders can now participate in projects from £50 by requesting that is spread across at least 10 projects, whereas our SelfSelect model is a minimum £500 investment.

This may also suit lenders with smaller pots to invest now the FCA’s 10% rule has been introduced, ensuring that even with just £500 investments can be easily diversified.  

9 – Peer-to-peer lending is one of the main differentiation factors between your company and the traditional lenders. How big is P2P lending in the UK? Is it a growing trend? 

Actually it’s not. The main differentiation is that we are property people providing property finance – building exactly the lender proposition we wanted as investors and developers ourselves.

As mentioned earlier traditional lending institutions either won’t lend or make it very hard to borrow, especially for the strategically important SME property professional segment, whose single greatest pain and barrier to building more homes is funding.

We’re building the best property project lender in the market, one of the sources of capital happens to be retail investors, alongside institutional capital. 

The P2P market in the UK is growing, gaining popularity with both lenders and borrowers since it gives both parties a better deal: lenders receive more of the returns that are created by those adding value to that capital when they are matched with greater efficiency and fewer intermediaries, while borrowers can finance their growth quickly and easily with purpose built propositions, technology and service functions, better aligned to needs than traditional sources.

P2P platforms are more efficient that traditional sources of capital and returns given far lower overhead costs than incumbent traditional lenders, but they must come with asset-class expertise to deliver lending effectiveness too.

At the end of the second quarter of 2019, more than 150,000 UK lenders were invested in 321,483 loans facilitated by Peer-to-Peer Finance Association (P2PFA) platforms – a record level of involvement in the sector.

During the three-month period between April and June 2019, £800 million of new loans were facilitated through P2PFA platforms, as cumulative lending enabled through the Association’s eight platforms broke £11.3 billion (compared to £3.7bn in 2017).

10 – What does the future hold for CrowdProperty? Any big plans or announcements you would like to let our readers know? 

We are working on several exciting projects but can’t disclose details as they are competitively sensitive – watch this space.

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