Last week, Rightmove reported that average asking price for homes in London were down by 1% year-on-year. Considering that the last time prices went backwards was in the aftermath of the banking crisis, this might have come as worrying news for some property owners.
It’s probably left some Octopus Choice investors with a few questions about how this affects their portfolios, too. But it’s important not to jump to any conclusions.
The decrease comes following 12 months of significant change for the property sector. Increases in stamp duty and a host of new buy-to-let regulations will have put off some would-be landlords. While years of price inflation and Brexit uncertainty has also blunted demand.
It’s not all bad news, though. Real estate expert Savills has touted this to be only a temporary downtown, with the market set to bounce back in due course. London’s property market still grew 4.4% on last month. Whereas experts stress that the long-running supply-demand imbalance in the capital will still provide bullish support for property prices.
First-time buyers are emerging as a reliable source of demand, too. Despite the sky-high deposits required to get on the property ladder, the number of first-time mortgages taken out is at its highest level since 2006.
In fact, Savills has predicted the housing market will have stablised by just next year, and be back to growth again in 2020.
But, despite this, it’s no doubt left some Octopus Choice investors wondering what these drops mean for them and the loans in the London-based portfolio.
How could this affect your loans?
We’re confident that this shouldn’t affect the performance of investors’ Octopus Choice portfolios. Firstly, the movement of property prices won’t influence your returns as long as your loans continue to perform – ie. our borrowers continue to earn rent, and make their repayments.
Also, most of our borrowers are professional property investors, meaning they should be in a much stronger position to shoulder the regulatory changes than, say, an individual considering buying a second property as a long-term investment.
But, in the event that a property does need to be sold, we would still expect to be able to recover all that is owed to you, including your interest.
The loans available through Octopus Choice are made at conservative loan-to-values (LTVs) – the maximum LTV for residential property is 76%, while the current average across the loan book is 59%. That’s a pretty substantial cushion, considering the last 12 months saw a fall of just 1% in asking prices. Although, of course, past performance doesn’t guarantee future results.
And don’t forget, Octopus invest 5% in every loan alongside you, and would lose our money first: putting our money where our mouth is, and protecting your investment before ours.
So, while this might not be welcome news for London’s property equity investors, we don’t think this should be a huge cause for alarm for those investing in property-backed peer-to-peer lending. A slight blip in asking prices shouldn’t affect the ability of tenants to make their repayments. And, if a property does ever need to be sold to fund the debt, the continued strength of demand for housing should mean you get back everything you’re owed. Although this is of course not guaranteed and your capital is still at risk.