Eleven-Year Track Record
There is a particular kind of headline that sounds more alarming than it is. "Worst quarter ever recorded." "Investors lose money for the first time." Take those phrases out of context, and you have a compelling case for panic. Put them back in context, and you have something altogether different: a story about a sector that has, by any reasonable measure, performed with remarkable consistency across more than a decade.
The 4thWay P2P and Direct Lending Index published its Q1 2026 update last week, and on an initial read, the numbers were not as enthusiastic as one would have hoped. January 2026 was the only month in 140 months of index history in which lenders ended the period with less than they started with, down 0.12% over the course of a single month. For Q1 as a whole, returns came in at 0.75%, making it the weakest quarter since the index began in July 2014. It is worth sitting with that for a moment. Not to dwell on it, but to absorb what it actually means. One losing month in nearly twelve years. One quarter below par in forty-seven. That is not a distressed sector. That is a sector that, for the first time, is having a genuinely difficult period, and the scale of the difficulty, when you look at it clearly, is a 0.12% dip over thirty-one days.
The 4thWay index, a fantastic and well-respected tool for monitoring our sector, is transparent about the cause. The losses in Q1 were driven by development lending originated between 2021 and 2023, a cohort of loans across the sector that were written into one of the most hostile environments UK property developers have faced in a generation. Construction cost inflation was running at double-digit rates. Planning systems were under strain. Build programmes extending well beyond original timelines. Debt servicing costs rose as rates climbed. Developers who had modelled their projects on one set of assumptions found themselves completing, or trying to complete, in a world that looked nothing like the one they had planned for. They had to adjust to the new normal, and that period of adjustment has been undertaken in recent years.
This was a situation where Materials that had been priced at one level when a development loan was agreed were 20%, 30%, sometimes more expensive by the time ground was broken, or walls were going up. Labour costs followed. Build programmes that had been modelled on pre-pandemic supply chains stretched as those chains frayed. Developers found themselves burning through contingency budgets early, then running out of contingency altogether.
The Bank of England's base rate went from 0.1% in late 2021 to 5.25% by mid-2023. For developers carrying debt, that is not an abstract macroeconomic event; it is a direct hit to the cost of borrowing, compounding month by month as a project runs over schedule. And projects were running over schedule. End values, meanwhile, softened as buyer affordability was squeezed by the same rate rises. The economics of schemes that had looked viable in 2021 looked very different by 2023. This is not hindsight cynicism. Many of these pressures were not foreseeable in the form they took. But the loans causing pain now were written without adequate protection, whether through LTV headroom that was too thin, GDV assumptions that were too optimistic, cost contingencies that were too light, or monitoring arrangements that were not robust enough to catch problems early.
That context matters because it explains why not all development finance is equal. Loans written in that window by lenders who priced risk in calmer conditions are the ones causing difficulties today. There is a thriving bridging and refinancing market, a huge tell that a vintage problem has occurred rather than a structural one becoming embedded. The sector did not break, and those issues are now working their way through the data.
At Invest&Fund, we did not avoid the 2021–23 period. We were lending through it. But the way we approached credit assessment during those years reflects principles we have held since the business began, and we believe the current data vindicates them. The first is the LTC and LTGDV discipline. When GDV assumptions are stress-tested rather than accepted at face value, the headroom available to absorb cost overruns and value softening is meaningfully greater. Loans written to aggressive GDV multiples in 2021 had nowhere to go when end values fell. Loans written with an adequate margin had room to breathe. And so did we.
None of this is an argument that development finance lending is without risk. It plainly is not. Capital is at risk. Loans can underperform. The 2021 to 2023 sector-wide averages cohort is a live example of what stress looks like in practice. Past performance does not predict future results, and anyone who tells you otherwise is selling something. What this is is an argument for proportion. A sector that has delivered positive annual returns through a global pandemic, a cost-of-living crisis, double-digit inflation, and the sharpest interest rate hiking cycle in a generation has earned the right to be assessed on its full record, not on a single cold, rainy month in January 2026.
The 4thWay index provides a rare thing in financial services: a long-run, independently constructed track record that shows actual returns after costs and credit losses. It is not a projection or a back-test. It is what happened. And what happened, over eleven years, is that investors in online direct lending made money in every calendar year tracked, outperformed the stock market over the full period, and experienced their first negative month only in January of this year.
One bad historic quarter for the sector in eleven years is not cause for alarm. It is a cause for context; in this case, context makes a rather compelling argument for the breadth of the opportunity here.
Invest & Fund has returned over £385 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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