As Brexit draws nearer, markets have understandably had a bit of a bumpy ride. Coupled with signs that the property market is slowing down – recent reports show that house price growth is at its slowest in five years – it’s no doubt left some Octopus Choice investors wondering what effect this could have on their portfolios.
It’s something that is very much on our radar. And we wanted to take a few minutes to explain briefly why our investors should be confident the Octopus Choice loan book is well prepared for whatever market conditions arise as a result of Britain’s exit from the European Union.
Our performance so far
First off, it’s worth taking a look at how the Octopus Choice loan book has performed already in this initial period of uncertainty – although this is of course no guarantee of future results.
Up to 29th October, just 5 of the 443 loans we’ve ever made have been passed to collection. And, in all closed cases, investors received all their initial investment back, and the interest that was due to them. You might sometimes see loans get put on hold in your portfolio, or on the app. This is an expected part of the business model, and we work as hard as we can to get them back on track.
A lot of this comes down to our rigorous underwriting process, and the nature of the loans we make. It’s worth remembering that all Octopus Choice loans are made at conservative loan-to-value (LTV) ratios, meaning there’s a substantial cushion against a fall in the value of the property. Our maximum LTV for residential property is 76%, while for commercial it’s 65% – and the current average across the loan book is 62%.
As an example, let’s take a look at one loan we made in South London that went into collection. The borrower made all their repayments on time, however when they got to the end of the term, were unable to pay off the rest of the loan. At the time it was put up for sale, we set our price expectations at such a level to secure a quick sale and recover investors’ money as quickly as possible.
In the end, every investor got what was owed to them, including us. Remember, Octopus invests 5% in every loan we make and, because we take first loss, not only do you have an extra 5% headroom, but we’re just as eager to get our money back as you are.
But it’s our commitment to conservative underwriting which is why we’re so confident we’ll be able to recover what’s owed to our investors, should it get to that point. And we’ve got plenty of experience at it, too. Since 2008, Octopus Property has lent over £3.5 billion to property borrowers, making them one of the largest non-bank lenders in Europe. During that time they’ve had losses of only 0.02% – although past performance is not a reliable indicator of future results.
How is Octopus Choice dealing with uncertainties surrounding Brexit and the property market?
An expert’s view – Steve Matthews, Head of buy-to-let (Octopus Property)
“Recently reports from the Bank of England that house prices could decrease by 35% in the event of a no deal Brexit of course need to be paid attention to. However, it’s important to be clear that this was not a forecast. Instead, it was a prediction of what could happen in a worst case scenario, factoring in a number of different complexities.”
“At Octopus, we remain confident in our conservative approach to lending and the robust way we decide whether to lend. We take into consideration a number of different factors: does the borrower have a track record? Do underlying market trends support their business model? Where is the asset located?”
“On top of that, we’ve capped LTVs at a maximum of 76%, while our average LTV is actually closer to 62% . We’ll continue to monitor the market closely and adapt our lending criteria accordingly.”
“For investors, it’s important to remember that a fundamental part of residential property investment – which underpinned strong performance in the sector throughout the credit crunch of 2008 – is that interest returns rely on borrowers paying their interest. In the case of buy-to-let properties, which form a large proportion of the Octopus Choice loan book, this means borrowers earning rent.”
“This is further supported by investors having the means to cover any mortgage payments in the event a tenant leaves the property or doesn’t pay the rent.”
“So far, the rental market has proven to be a strong performer. Landlords have reported demand for rental properties is currently exceeding supply in a number of regions across the UK, backed up by recent figures from the Royal Institute of Chartered Surveyors, showing there’s still strong demand from tenants. Indeed, RBC’s latest Capital Markets report on UK speciality lenders (September 21st 2018) suggests that, despite current uncertainties, the amount of loans in arrears is actually improving.
"Not to mention, this quarter, Octopus Property made over £100 million of loans to property professionals – a record-breaking quarter for us, and a sign of continued strong demand."
What our investors are saying
“I don’t tend to like taking much risk with my money. But after the recommendation of my financial adviser and my own research, I was very impressed with the Octopus Choice model. The conservative loan-to-values and diversification across numerous loans gave me a lot of confidence. And, considering this, you can earn an exceptionally good return!” – Ruth Horton
“I was impressed by the fact that Octopus have skin in the game, and they’re prepared to lose their money before investors lose anything. And also, by investing in bricks and mortar, they still have hold of the asset should something go wrong .” – Steve Hall
No one can predict the future, but you can certainly take steps to prepare for it. This is why we try to mitigate the risks to our investors as much as possible. Alongside making conservative loans and investing in the loans ourselves, every investment is automatically diversified to spread the risk, too.
From day one, your investment is split across ten to sixty loans, however this will grow over time as loans redeem and your interest is reinvested – on average, our investors currently have 130 loans in their portfolio.
But, of course, nothing can be guaranteed. It’s the risk you have to take when investing your money. So, if you’re unsure about whether you’re comfortable taking these risks, you should consider whether or not investing your money is right for you.