Over the past several months, the peer-to-peer and marketplace lending industries have faced some challenges and criticism. The news media have reported on some of the struggles the industry has faced, especially in the arenas of credit card, student loan and other forms of unsecured debt. While these reports can understandably raise questions about the industry’s ability to perform for investors, they are not reflective of all types of marketplace lending investment vehicles. In fact, now more than ever, marketplace lending platforms can offer investors prime investment opportunities in secured debt, such as commercial real estate.
Differences between investment in unsecured and secured debt
Traditionally, marketplace and peer-to-peer lending platforms have focused on unsecured debt, offering investors the opportunity to invest in credit card debt, car loans and retail installment contracts, among other asset classes. While these types of investments offer broad opportunities, they also open investors up to a higher level of risk, as there is no collateral taken as security against non-repayment.
More recently, marketplace lenders have transitioned to offering investors opportunities to break into the secured debt space, specifically through commercial real estate debt. Investment in this type of loan carries less risk for the investor, as lenders will place liens on the properties until the loan is repaid in full. If the borrower defaults, the lender can work out the loan and recoup investors’ money. As a result, this model offers investors the ability to garner strong returns on their investments, while enjoying more security.
Investing in commercial real estate via a marketplace lending vehicle
For investors looking to invest in commercial real estate via a marketplace lending or peer-to-peer platform, there are a variety of options to consider depending on the type of loan and level of risk the borrower is looking to absorb.
An equity investment in commercial real estate offers a plethora of opportunities for investors across property types and regions. Because of the increased demand for these types of investments, many platforms offer this opportunity to investors, giving them choice in the type of platform with which they would like to engage, as well as the type of investment they would like to make. Investors should be careful to consider an exit strategy for equity investments, however, as most investments are only able to be recovered when shareholdings are sold to other investors or when assets are liquidated or sold.
Commercial real estate debt investments, which are offered by fewer platforms, can provide more certainty in return on investment for involved parties. Because these types of loans, typically either bridge or permanent products, set out clean repayment schedules and terms for borrowers, they translate to steady and scheduled returns for investors. Additionally, these loans are often secured by a first-priority lien against the property, enabling the platform—and ultimately the investors—an avenue to efficiently recoup funds should a borrower go into default on payment. For many, this type of investment is seen as a lower-risk, higher-reward opportunity.
What this means for investors
Despite many of the reports about the state of the marketplace lending industry, there remain great—and secure—opportunities via investment in commercial real estate loans. As investors interested in marketplace lending vehicles begin to look for more stable options for their money, there will likely be significant growth in commercial real estate-focused platforms. Coupled with the increased need for commercial real estate debt financing among borrowers, the industry is poised for increased expansion, development and creation of opportunity for investors.
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