The Covid-19 virus is causing a significant economic downturn around the world, which has had an impact on people’s personal finances. Many alternative investors that invest in P2P lending rather than in stocks or funds have had a turbulent week.
Some of the alternative P2P lending platforms shut down their operations or paused until the coronavirus situation is over. Millions of investors’ funds are now locked-up in various European P2P platforms.
Many investors executed a so-called “bank run” on the P2P platforms last week, which caused severe liquidity issues. Even P2P lending sites that promoted instant withdrawals could not keep up with the high number of withdrawal requests.
What’s the current situation on P2P lending platforms?
The fear of losing money causes many investors to make impulsive decisions, which ultimately decreases the returns from their investments.
Many are using the secondary market on various platforms to sell their investments with considerable discounts to avoid potential defaults.
P2P lending opportunists are purchasing those deals to increase their returns.
As P2P lending is done via online platforms, the coronavirus did not impact the operations of the platforms themselves as the staff continue to work from home.
Investors can find the latest news about how their investments are impacted during the outbreak at P2P comparison and news sites such as P2P Empire that published updated information from more than 20 European P2P lending websites.
What will happen to investors’ funds?
What the future will look like is highly dependent on the business model every platform is applying. P2P investments can be categorised into four groups.
Investing in consumer loans, real estate loans business loans and rental properties. Each category comes with different challenges and risks.
Those that invest in consumer loans should look into the latest announcement from the loan providers. In this case, the platform does not bear any risks. Many loan originators expect a decrease in consumer spending as borrowers’ appetite for purchasing non-essential goods is decreasing during the ongoing quarantine. Investors can expect delayed repayments as well as higher default rates as many borrowers lose their jobs.
Real estate loans
These are much better off as the loans are secured by mortgages. In most cases, the average Loan-to-Value (LTV) is below 60 per cent, which makes the investment much more secure during volatile market activity.
Also, the demand from creditworthy business and real estate developers is increasing as they seek alternative funding methods to pursue their business ideas. Long-term investors will be much less affected as their investments are secured by property, whose value isn’t as volatile as consumer finances.
These can put investors in difficult situations. Loans that funded before the outbreak will have a much higher default rate. Also, the reputation of P2P lending platforms is very much damaged by potential Ponzi schemes run by Kuetzal, Envestio, or Monethera. Investors have already lost millions of euros. Investing in business loans might be a high-yielding opportunity; however, the choice of potentially trustworthy platforms is almost non-existent.
Rental properties are a very different type of investment as the return is generated by monthly cash flow from rental agreements.
The negative impact on tourism in Spain caused a temporary cancellation of all bookings within the short-term rental space. The Spanish P2P lending platform Brickstarter reported that big local holidays such as Fallas in Valencia and Semana Santa were being postponed.
This is going to have a temporary negative impact on the returns generated by investors’ short-term rental properties. Luckily, those properties have a very low fixed cost, a 600 euro security deposit, and no debt, which means that investors’ funds are still covered by the value of the property.
What can investors do to protect their funds?
The chances of withdrawing investors’ funds are getting slimmer every day. A sell-off on the secondary market can cause severe losses.
Trustworthy P2P lending platforms safeguard investors’ uninvested capital on segregated bank accounts.
If investors cannot bear the risk that comes with P2P lending, an option could be to pause the current investments and see how the situation develops in the coming weeks. This will help lower the potential losses from the discounted sale on the secondary market.
This strategy is only valid for investors that have a well-diversified P2P portfolio as the diversification generally helps cover small default rates.
It is recommended to follow local authorities and blogs of individual P2P lending sites. Many governments are financially supporting small and medium businesses, which should lower the negative economic impact and help pay back outstanding loans.