British Pearl offers investors a lower risk mortgage product that will compete with Landbay
The range of European P2P sites is growing quickly. We are aware of several new and innovative P2P investment sites that are planning to launch in the coming months. British Pearl is one of these new types of sites that is seeking to offer investors something a little different. While Explore P2P will continue to be primarily focused on helping investors explore P2P lending opportunities, it is clear to us that the boundaries between the different types of investment offers will get increasingly blurred in the future. In the current market conditions, where stocks are trading at record multiples, and bonds at record low yields, these alternative investment options look increasingly attractive.
British Pearl is a fairly new British site that has received considerable backing from some well known investors. Unlike a normal P2P platform, it is an asset manager that identifies real estate assets with good prospects, and then creates investment products to fund those properties. Investors can invest in a loan secured against a specific property, or they can purchase shares in an SPV (company) that owns the property.
We think that British Pearl’s loan product is going to be competing against the ‘buy-to-let’ P2P specialist Landbay. So why is British Pearl worth considering over Landbay? Well, interest rates are around 1% higher (currently 4-4.4%), and LTV’s are around 10% lower. However, British Pearl is a younger platform and we think it is appropriate for investors to expect slightly higher returns and lower LTVs as a result. The lending product is most suitable for investors looking for a fairly safe place to park cash for a long time, and earn significantly higher returns than a deposit.
British Pearl’s equity product is something entirely different. This is effectively a leveraged bet on the future direction of British property prices, and the ability of the British Pearl team to source assets that have the potential to generate a reasonable rental yield, and out-perform the UK property market. There are not many investment products focused on UK residential properties currently available on the market. We think this could be potentially most attractive to two types of investors. Firstly those who may feel their investment portfolio is ‘underweight’ UK real estate, and want to hedge against rising house prices. Secondly, those investors who want to take a bet on prices increasing in the future, without the hassle of owning, funding and managing real estate directly.
On balance though we think the lending product offers the better risk adjusted returns. The British government has a very penalising tax regime for owners of real estate investments now, in particular initial stamp duties, and this has the potential to dilute the returns of equity investors, in addition to the corporation taxes and dividend taxes that will also affect post-tax investor returns.
To learn more and review the options available, click here.
Interview with Ali Celiker, Founder and CEO of British Pearl
Hi Ali, please tell us who is behind British Pearl?
British Pearl was founded by myself, Kobi Lehrer and Anj Latif. I am a finance professional and entrepreneur and have spent the last 18 years in financial services. Prior to establishing British Pearl, I worked within the global capital markets as a trader and salesperson.
Kobi Lehrer is responsible for our legal and compliance functions as well as working with the Property Team. He has worked in the property sector for 14 years, including ten years as a solicitor specialising in real estate disputes, most recently at leading real estate firm Berwin Leighton Paisner LLP.
Anj Latif is the Chief Technical Officer. He is responsible for the design, implementation and administration of our IT infrastructure, including information security. Anj has extensive experience in IT management and networking and two decades’ experience in the SME sector.
When did you start and what has been your progress so far?
British Pearl was founded in 2015. It took us 13 months working full time to obtain our FCA permissions and client money status. We then spent more than 12 months developing our enterprise level technology and trading system. Our cloud-based software enables property investment through both our primary market and (imminently) through our resale market with full automation. Our technology is built to scale easily.
After extensive testing by more than 100 users investing over £200k in our first property, we have recently brought British Pearl to market fully with a further two properties on the platform. We recently closed our Series A funding round (£2.75 million). The business has raised approximately £5 million in equity and £2 million in debt to date. We have been nominated for several awards including being a finalist at MIPIM Proptech Europe (the largest Proptech start-up competition globally) beating over 70 applicants from 22 countries.
You are offering something a little different to the normal types of P2P products – can you explain what investments British Pearl is offering investors?
British Pearl is the first property investment platform to offer both share and loan investments in individual properties. Investors can buy shares in properties they select and can also be mortgage lenders in their own right. When making loans, investors receive a fixed interest rate of up to 4.4% p.a. paid monthly. Their capital is secured with a first charge against the property just like a high street mortgage. With Loan-To-Value ratios of between 50% and 70%, investors can expect a safe source of income.
Our share investments generate a monthly net rental income for investors, who also benefit from any capital appreciation of the property. At the end of the investment period, the property will be sold (unless investors wish to renew) and, once the loans have been repaid to Loan Investors, any remaining capital is distributed to Share Investors. Those wishing to exit prior to the end of the investment term have an opportunity to do so through the Resale Market. British Pearl has opened the door to effective, reduced-risk and diversified property investment.
Who owns British Pearl?
British Pearl has a broad shareholder register consisting of angel investors with both financial services and property backgrounds. Notable investors include Lord Stanley Fink, Peter Wakeham, Tim Theakston, and Charlie Green.
When is the business forecast to reach break-even / profit?
Some platforms in our space choose to get to market as quickly as possible, with minimal investment upfront: they may become an appointed representative of an FCA authorised firm, they may buy a white label software platform or may hold all their client money with 3rd party account providers. This means they get to market quicker, but the cost per transaction is very high. In a high transaction business such as this, it is crucial to minimise those costs.
As a result, this is not the approach British Pearl has taken. We have built our own technology, gained our own permissions directly from the FCA and have client money accounts with Barclays. While the initial outlay is higher, our cost per transaction is a lot lower and we have built a hugely scalable business. Due to the increased investment up front we will not be profitable until 2020-21; however the company is well funded and our business plan is on track to deliver this.
Your loan investments are quite long term – 5 years and potentially longer. How active and reliable is the secondary market if investors need their funds before the maturity date?
Our investment terms will vary over time on a deal by deal basis. While our initial buy to let properties investment term is 5 years, our development offering will be around 2 years, which is launching a little later on our roadmap. The reason we prefer a 5 year investment term is that property generally performs better over the medium to long term as well as to avoid any short term fluctuations in the property market.
Investors who would like to exit before the end of the investment term will have the option of listing their shares and loans on our Resale Market. While liquidity is not guaranteed, from monitoring competitor platforms we believe that investors will be able to transact with each other sufficiently – particularly as we scale into a larger customer base and greater number of investment offerings. We have aimed to build the most comprehensive and advanced resale market available in this space including incorporating an open API so that we can work with 3rd parties to provide additional liquidity.
You are a new platform. What backup servicing plans are in place, in case British Pearl is not around in the future?
Each property is owned by a segregated limited company referred to as a Special Purpose Vehicle (SPV). This means that should one investment lose value, there is no contagion across a customer’s other individual investments. British Pearl ensures each SPV has its own internal insurance pot – referred to as the SPV Reserve – to ensure that it is in a position to meet its liabilities such as void periods and unexpected maintenance costs.
In situations where the SPV Reserve is insufficient to meet its short term liabilities as a result of a number of expenses occurring at the same time, British Pearl has its SHIELD fund, to provide cashflow to help good investments overcome a bad cashflow period. Finally, investors should take further comfort in knowing that their uninvested funds, held in a British Pearl wallet, are FSCS protected up to £85k with Barclays.
In addition to the above, in the unlikely event that British Pearl is unable to manage the investments – there are business continuity plans in place with regard to the ongoing management of the SPV companies. We have taken advice from leading accounting firms to ensure that these plans are more than adequate and to ensure that we have taken into account the interests of all Share Investors and Loan Investors.
How would you compare your loan investment product against similar P2P products such as Landbay? What are the advantages over Landbay?
Landbay is a market leading P2P platform, we admire so much of what they have achieved in a relatively short space of time. However first and foremost British Pearl is not a P2P platform, although we may operate under similar FCA permissions with similar products. British Pearl is an asset manager, therefore we directly manage all of our property investments.
Today the term “P2P” covers many different models but investors must be aware of the specific risk they are being exposed to. When investing, it is important to bear in mind whether you are able to recover your loan should the borrower default. Most P2P mortgage/loan companies act as an intermediary between lenders and borrowers, meaning the loan repayment is subject to the performance of a third party, as a result, investors can be exposed to the full credit/counterparty risk of a borrower who is independent of the platform provider.
British Pearl is different. With British Pearl the borrower is an SPV that holds an individual property. The lender is only exposed to the credit/counterparty risk of that vehicle, which is managed by British Pearl, an FCA regulated company (Alternative Investment Fund Manager) operated by property and investment professionals with a successful track record. There is no third party such as a developer on the receiving side of the loan and the loan-providing customer holds a first charge over the property.
What authorisations have you received from the FCA (the UK regulator)?
There are two main permissions which we have from the FCA which enable our core activities. Firstly, the Alternative Investment Fund Management (AIFM) permission for our equity and secondly, Operating an Electronic System in relation to Lending for our debt. From the HMRC, we are an ISA Manager for the IFISA (Innovative Finance ISA) for our debt products.
Is there a potential conflict between the interests of your loan investors and your equity investors?
As for conflicts of interest, we aim to reconcile this as much as possible by providing low LTV levels of between 50 – 70%. The ongoing success of both share investors and loan investors is essential for us and based on British Pearl offering sound long term property investments. While the risk/return profiles of the underlying share and loan investments may differ, in order for them both to deliver against the expectations of our investors, consistency is required in terms of monthly cash flow generation and capital strength. To meet those needs we work hard to identify properties that we are able to secure discounts using our liquidity, offer strong rental prospects in terms of region and property specifics, and remain attractive over the medium term for resale
It is not the case that loan investors can benefit at the expense of share Investors or vice-versa and, while a share investment is riskier than a loan investment, they both require British Pearl to provide all investors with strong property investment opportunities.
Even so, how will you manage potential conflicts if property prices are lower in 5 years?
Should the investment team decide to sell to crystallise a gain, or minimise losses, then they are authorised to do so. This decision would be taken bearing in mind the same criteria as the initial buy decision – focusing on the share investor and loan investor requirements for monthly cash flow and capital strength. Should the property price have depreciated at the point of sale, the share investors will bear the first loss since the loan investors’ capital is repaid first.
Naturally, the trade off for the risk taken on by the share investors is that they reap all the rewards from the equity gains generated by any increase in property price, whereas loan investors do not get to share the capital gains.
What strategies do you have to try and generate returns that are higher than the UK average (i.e redevelopment, careful geographic selection etc)? How do you decide which properties to purchase?
We have an expert property investment team with over 50 years of experience in the property market. All investment decisions are made against a detailed macro and micro backdrop, comprising economic outlook, interest rate expectations and ongoing management costs. These national drivers are crucial to understand, but then we also have to look more closely at the regional property markets that have their own characteristics of supply and demand. While parts of central London have seen property prices fall over the past year, other areas — particularly those around regional city centres — have seen relative strength in their property prices over the same period. Before we buy any potential property we like, we make sure it fits in with our strict investment criteria guidelines. We also like properties with a strong story, that are aesthetically appealing, while also delivering good returns. Other factors to consider are large, impending infrastructure projects. Take HS2, the planned high-speed railway link from London to Birmingham, the East Midlands, Leeds and Manchester. Homes close to stations on this route may become more attractive as they become increasingly accessible, driving prices up in turn. These issues can help regional markets to buck the national trend.
To visit British Pearl, click here.