Peer-to-peer lending is about to get real — and commercial real estate crowdfunding won’t be far behind.
This week, we learned details of how Goldman Sachs will begin offering consumer loans via online platform. With plans to launch in 2016, there is little doubt the innovators who devised P2P lending will feel the heat.
As commercial real estate investment professionals, we need to pay close attention or risk being left in the dust. Technology is creating new opportunities for institutional investors and owners who are willing to adapt.
Innovators such as LendingClub and Prosper used financial technology (FinTech) to capitalize on a gap in the consumer and small-business lending markets after the Great Recession’s credit crunch. Seeing traditional banks and related lenders withdrawing, these platforms created a market for individuals to borrow small amounts from pools of cash supposedly invested by other individuals looking for new investment opportunities. The result has been billions of dollars in credit extended for debt consolidation, home improvements and other projects.
The concept is based on the idea that individual investors can now buy fractions of their peers’ debts — “peer-to-peer lending.” However, who really is the “peer” on the backside of this $15 billion to $30 billion market? It’s not savvy individuals making smart decisions for direct investing. Banks, institutional funds, and money managers looking for yield have powered the growth rate, funded the loans and have started to package the debt into securities. They are at times assisted by “first look” offers from the originators, and proprietary risk models to analyze the loans.
Most of the “peers” who own these loans are actually institutions, such as hedge funds and other investment pools. The borrower’s true peers likely end up only owning a piece of these loans through shares in a fund placed in their 401k, packaged and sourced by sophisticated institutions.
The standardization of consumer risk scores and credit profiling has propelled this new asset class into the securitization market, which has attracted new and additional capital. In turn, this will likely convert into more products at better rates for consumers.
What is the lesson here for commercial real estate investors? Our industry is on course to create the same type of standardization needed for institutional capital and lending efficiencies. These three factors are shaping the trend:
- Crowdfunding has given real estate owners the ability to market their performance. Soon investors will be able to compare sponsor performance in standardized models.
- FinTech is giving real estate owners the ability easily manage their investor base and post new, accessible offerings.
- Real estate owners can now spend less time sourcing investors and more time managing their portfolios.
Although crowdfunding for real estate is in its infancy, there is already buzz about institutions and banks partnering with platforms to source product. Just like P2P lending, investors will soon find the ability to hold shares of a REIT in their 401Ks that primarily owns “crowdfunded” participations of equity in real estate.