Exit reading mode

Octopus's view on the current property market uncertainty

Posted on 30/10/2018, by Joe Jones

As Brexit draws nearer, markets have understandably had a bit of a bumpy ride. Coupled with a prediction from the governor of the Bank of England Mark Carney that, in the case of a no deal Brexit, house prices could drop by up to 35%, 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, of course, past performance isn’t a reliable indicator 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 all the interest that was due to them.

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%.

Also, we don't invest in development loans, and tend to avoid properties that are less 'mainstream'. It mean the loans we make tend to be more liquid in nature.

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 decided to adjust our price expectations in an effort to recover investors’ money as quickly as possible.

The result was that every investor got what was owed to them, including us – remember, Octopus invests in every loan we make, so we’re just as eager to get our money back as your are.

It’s due to our conservative underwriting commitment and ten years of property lending experience that we’ve so far been confident we’ll be able to recover what’s owed to our investors, should it get to that point. Although we cannot guarantee this, of course, and it’s possible investors will get back less than they initially put in. Remember too that, should a property be put into collection, you won’t be able to access money invested in that loan until it has been sold.

To read more about what happens if one of your loans is put on hold, check out our blog. Or take a look at our statistics page for greater detail on our performance.

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)

“The recent Bank of England report is of course one that needs to be paid attention to, however it was clear that house prices reducing by 35% is only speculation of a worst case scenario. “

“At Octopus, we remain confident in our conservative approach to lending. We’ve currently capped LTVs at a maximum of 76%, while our average LTV is actually closer to 62%. But we’ll of course continue to monitor the market and adapt our lending criteria accordingly.”

“However, it’s worth noting that a reduction in house prices shouldn’t be the main concern for Octopus Choice investors. The success of a peer-to-peer investment relies instead 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.”

“And, so far, the rental market has proven to be a strong performer. Landlords have reported demand for rental properties is currently exceeding supply, reducing the amount of time they might be left empty, as tenants are tending to keep hold of their properties. Indeed, industry reports suggest that, despite current uncertainties, the amount of loans in arrears is actually improving.”

Looking forward

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. We follow closely all changes to the market, and respond in the way we think best – after all, we have skin in the game, too.

But nothing is 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.

If you have any other questions about your account or the Octopus Choice loan book, then just let us know.