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UK online alternative finance market grew to £3.2 billion in, 2015 Real estate is the single most popular sector

In 2015 the UK online alternative finance sector grew 84 per cent, facilitating £3.2 billion in investments, loans and donations, according to a joint report published today by the Cambridge Centre for Alternative Finance at the University of Cambridge and UK innovation foundation Nesta, in partnership with KPMG and with the support of CME Group Foundation.

This is a significant increase in volume, but growth of the online alternative finance market is slowing down, with the annual growth in 2014/2015 being nearly half the 161% growth from 2013/14. “Although the absolute year-on-year growth rate is slowing down,” the report said, “the alternative finance industry still recorded substantive expansion across almost all models.”

The report also highlights the rapid expansion of donations-based crowdfunding, the perceived risk of fraud and malpractice by the industry,and increasing institutionalisation – as around a quarter of P2P (peer-to-peer) loans are now funded by institutional investors, including traditional banks and government through organisations such as the British Business Bank.

Andy Haldane chief economist of the Bank of England has also been quoted as saying, "The mono-banking culture we have had since the 1990s is on its way out. Instead, we are seeing a much more diverse eco-system emerging with the growth of new non-bank groups offering peer-to peer lending and crowd-funding which are operating directly with a wider public."

Key findings of Pushing Boundaries, a survey of 94 crowdfunding and P2P lending platforms, include

Increased share of the market for business finance: in 2015 it is estimated that online alternative finance platforms provided the equivalent of over 3% of all lending to SMEs (small and medium-sized enterprises) in the UK. For small businesses - those with a turnover of less than £1 million a year - P2P platforms provided an amount lending equivalent of 13% of all new bank loans.

Institutionalisation is taking off: 2015 saw increased involvement from institutional investors in the online alternative finance market. The report shows that 32% of loans in P2P consumer lending and 26% of P2P business lending were funded by institutional investors.

Donation-based crowdfunding is the fastest growing model: although starting from a relatively small base (£2 million), donation-based crowdfunding is the fastest growing model in the 2015 study, up by 500% to £12 million.

Real estate is the single most popular sector: in 2014/2015 the most popular sector for online alternative finance investments and loans was real estate, with the combined debt and equity-based funding for this sector reaching £700m in 2015.

The largest segment of the peer-to-peer business lending market is for real estate mortgages and property development, which accounted for £609 million in 2015, around 41% of the total volume of peer-to-peer business loans. Overall, peer-to-peer real estate lending financed over 600 commercial and residential developments in the UK in 2015, mostly by small to medium sized property developers.

One of Britain's largest property portals Zoopla recently invested, in alt fin start-ups, like Trussle, an online mortgage adviser and Landbay, a peer-to-peer mortgage provider most recently. 

Expected growth Volume following the introduction of IFISA by FCA in 2016 by models.

An independent British business, we’re dedicated to offering our customers attractive interest rates. 

Their model is simple but different, they call it ‘The Wellesley Way’. 

First, they combine your money with funds from other investors, then they add our own money alongside yours, now that’s unique! Wellesley lend that combined pot of money to borrowers they trust, individuals and small businesses investing in property and they use the interest payments paid by them to pay competitive rates to you. 

Wellesley experienced Credit Committee accesses our borrower’s ability to repay their loans, because  Wellesley secure these loans against a property asset and only ever lend up to a percentage of a property’s value, Wellesley can sell the property to seek to recover their loan if a borrower can’t repay and we experience a loss. 

Zopa is the world's oldest and Europe's largest peer-to-peer lending service having now lent over £1 billion. Zopa peer-to-peer lending works by bringing together individuals who have money to lend, and individuals who wish to borrow money. Instead of going through traditional banks, borrowers looking for low rate loans are matched with lenders looking for better returns on their money Founded in 2004 and launched to the public in 2005, likened to eBay and Betfair by the UK press, Zopa was one of the first companies in an emerging group of peer-to-peer services enabled by the internet. It was set up by a management team drawn from many of those that founded Egg in the UK. The company is based in London and backed by Benchmark Capital, Wellington Partners, Bessemer Venture Partners, Augmentum Capital and Arrowgrass Capital.

Growth Street is another alternative finance startup helping ,businesses grow by offering fairly priced, straightforward finance, as well as guidance to improve the financial procedures vital to growing businesses.

Outside Downing Street for, APR4SMEs campaign 

They  believe like many all commercial finance products targeted at SMEs should carry an APR.Hoping to bring more transparency and competitiveness to the commercial finance sector, grow businesses , boosting the economy and employment.

The equity market is growing fast: the second fastest growing area of the alternative finance market is equity-based crowdfunding, up by 295% - from £84 million raised in 2014, to £332m in 2015. Excluding real estate crowdfunding, in 2014/2015 the equity-based crowdfunding sector contributed to £245 million worth of venture financing in 2015 – equivalent to over 15% of total UK seed and venture equity investment.

The industry is generally satisfied with current regulation: when asked what they thought of existing regulation, more than 90% of P2P lending and equity-based crowdfunding platforms stated that they thought the current level was appropriate.

The biggest risk to market growth is fraud or malpractice: when asked what they saw as the biggest risk to the future growth of the market, 57% of P2P lending and equity-based crowdfunding platforms cited the potential collapse of one or more of the well-known industry player due to fraud or malpractice.

Warren Mead, Global co-lead of Fintech at KPMG, said:“After years of pushing boundaries, 2016 will be the year where ‘alternative’ financial options finally join the ranks of the mainstream. From the recognition of regulators, to industry pioneers being bestowed with New Year’s Honours: it’s clear the market has come of age as an integral part of the lending landscape."

“But while this evolution gives the industry the platform to grow, it also brings its own set of challenges. Being part of the financial establishment doesn’t sit well with its original social purpose. Incumbents are also playing catch up with their own digital investment, and are closing in on the disrupters’ lead. Meanwhile, platform failures within these growing networks are inevitable. So the question is, will the hard won enthusiasm for these platforms start to wane?”

Robert Wardrop, Executive Director of Cambridge Centre for Alternative Finance said: “The substantive growth of alternative finance in the UK last year is not surprising, given that these new channels of finance are increasingly moving mainstream. One of the key drivers underpinning this development is the growing institutionalisation of the sector. The Cambridge Centre for Alternative Finance is proud to shed light on this fascinating and dynamic industry, to help inform policymakers, regulators and the general public about how these areas of finance are increasingly becoming part of our everyday economic life.”

Stian Westlake, Nesta’s Executive Director of Policy & Research said: “2015 has seen another year of remarkable growth for Alternative Finance in the UK. Little more than a collection of plucky startups just six years ago, the sector now does £3.2 billion of business a year. As the sector grows and matures it is sure to face challenges - investors will be keen to see returns, and another financial crisis would certainly test the robustness of P2P lending. But, as Nesta’s continuing research into the industry has found, the ability of platforms to harness the power of the crowd to connect savers, borrowers and businesses has been powerful. We look forward to seeing how the sector advances and changes again in the year ahead.”

Jim Oliff, Chairman of CME Group Foundation, said : “Today’s research offers a detailed snapshot of how the emerging alternative finance sector in the U.K is driving growth and creating opportunities for business and individuals alike. The Foundation has a long track record of supporting cutting edge research initiatives relevant to the financial industry which uncover and promote future trends to help move the sector forward.”

The report was led by Bryan Zhang, a Director of Cambridge Centre for Alternative Finance, and Peter Baeck, Principal Researcher at Nesta. It has been supported in part by funding from audit, tax and advisory service KPMG and CME Group Foundation, the foundation affiliated with CME Group, the world’s leading and most diverse derivatives marketplace.

The 2015 UK Alternative Finance Industry Report

Pushing Boundaries is a joint research project between Cambridge Centre for Alternative Finance and Nesta, in partnership with KPMG and with the support of CME Group Foundation. 

Nesta has received no funding from either organisation for its contribution to the report.

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