Choices

In this week's blog, we begin the first in a series of counterargument pieces, comparing our asset class to the wealth of other options in the market, many of which will hold a place in our client's portfolios. We fundamentally believe that P2P backed by UK real estate has earned its place in a diversified portfolio, and we know our seasoned investors have a wide range of views and positions in the market; however, peer-to-peer (P2P) lending backed by real estate has gained such traction as a compelling proposition, offering comparatively higher returns to bonds, tangible asset backing, and more significant diversification opportunities for retail investors, it's deserved of some further unpacking! This article looks under the hood and examines the credit risk, returns, liquidity, macroeconomic considerations, and operational risks. For this initial illustration, we are comparing it as a standalone product to the traditional bond market.

One of the strongest arguments for P2P lending is the significantly higher return potential than bonds, particularly in a market where rates are anticipated to track lower. Government bonds (gilts) in the UK offer minimal yields, often below inflation, eroding actual returns. Corporate bonds offer higher yields but at greater credit risk, frequently not surpassing 4–6% annually. High-yield (junk) bonds may provide better returns, but their speculative nature makes them unsuitable for conservative investors. In contrast to this, typically, P2P real estate lending provides returns surpassing those available in the bond market. Crucially, this form of private credit is secured against real-world assets, such as our clients' development schemes and real estate, offering the security of physical collateral. This asset class could be considered a superior option for investors seeking income and risk mitigation.

P2P lending allows for diversification at a granular level, which is not as easily achievable in the bond market for retail investors. While bonds can be diversified across issuers, maturities, and geographies, significant capital is required to build a diversified portfolio. Investment-grade bonds and gilts provide limited diversification against economic risks, as their prices often move uniformly during major financial events. In contrast, P2P platforms typically allow investors to allocate small amounts to individual loans, enabling broad diversification across multiple projects, borrowers, and geographic regions. P2P lending democratises diversification, allowing even small-scale investors to reduce risk through exposure to various loans and borrowers.

P2P real estate lending is less sensitive to interest rate and inflation fluctuations than bonds; bond prices are inversely related to interest rates. When rates rise, bond prices fall, leading to potential capital losses for investors holding long-duration bonds. Inflation erodes the actual value of fixed bond coupon payments, making them less attractive in high-inflation environments. In contrast, P2P loans typically have short durations (12 months to 2 years), reducing exposure to interest rate volatility. Since P2P lending rates are higher, they tend to outpace inflation, preserving investors' purchasing power. This means the lending provides higher returns less impacted by interest rate movements and inflation, ensuring better protection of capital value.

While P2P lending is often criticised for being comparatively illiquid and limited to private resale markets, this characteristic can work in an investor's favour. Bonds are generally liquid, particularly government and investment-grade corporate bonds. However, liquidity can be a double-edged sword as it exposes bond prices to daily market fluctuations driven by economic or geopolitical events. P2P investments are typically comparatively illiquid, with funds locked until loan maturity. However, this illiquidity shields investors from the volatility in sizeable secondary markets, creating a more stable investment experience. We offer a secondary market, providing limited liquidity options for investors who must exit early, as do many of our peers, that provides potentially the best of both options. While bonds offer liquidity, P2P lending provides stability and protection from the knee-jerk reactions of volatile markets, which can be advantageous for long-term investors.

P2P lending platforms often provide greater transparency and control over investments than the bond market. Bond investors rely heavily on credit ratings and issuers' financial disclosures, which may not always give a complete picture. Changes in ratings or issuer defaults can be unexpected and disruptive, with retail investors having limited input in the decision-making process once a bond is purchased. Unlike these options, P2P platforms often provide detailed loan-level information, including borrower profiles, project details, loan-to-value (LTV) ratios, and interest rates. This allows investors to handpick loans based on their risk tolerance and investment goals, offering a level of control rarely found in bond investing.P2P lending empowers investors with greater insight into their investments and the ability to tailor portfolios to their preferences actively.

With particular relevance over the last few years, P2P lending backed by real estate has proven resilient during economic fluctuations. Economic downturns often lead to widened credit spreads and lower bond prices. Default risks increase, particularly for corporate bonds, during recessions or crises. While safer, government bonds provide minimal returns, making them less attractive during extended economic stability or growth periods such as what we may be transitioning into. Real estate-backed P2P loans are less correlated with traditional markets, and tangible asset backing reduces the risks of total capital loss during economic downturns. High-quality assets and conservative LTV ratios can mitigate risks even in volatile property markets. They offer higher returns with risk more isolated from broader market movements, making it a robust choice in diverse economic conditions.

To conclude our comparative run-through, while bonds remain a staple for conservative portfolios, their low yields and susceptibility to market volatility make them less attractive in today's environment. P2P lending, with its tangible asset backing, tailored investment options, and resilience, offers a compelling alternative for investors ready to embrace innovation and capitalise on modern financial opportunities. For those willing to conduct due diligence and manage platform-specific risks, P2P lending represents a smarter, more rewarding way to grow wealth.

Invest & Fund has returned over £200 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.

To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com

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