CapitalRise Review
Excellent returns over ten years, with lending results comfortably within our expectations even during a very rough economic period for its borrowers.
CapitalRise's Bridging & Development Loans have earned the Exceptional 3/3 4thWay PLUS Rating.
These loans have been paying lenders around 9.44% interest after bad debts.
Visit CapitalRise* or keep reading the CapitalRise Review.
CapitalRise is available to sophisticated/wealthy investors only
To use CapitalRise you need:
- To have invested in an unlisted company in the past 12 months (such as through crowdfunding websites).
- Or an income of at least £100,000, or savings and assets excluding your own home worth £250,000.
- Or be a professional investor or have been one in the past two years.
When did CapitalRise start?
Since launch in 2016, a total of £580 million in facilities has been agreed with borrowers, who are property developers. Developers receive their funding in tranches, so lenders have actually lent out £460 million through CapitalRise* to date.
What interesting or unique points does CapitalRise have?
CapitalRise’s focus is lending to property developers in prime central London, Greater London and wealthier parts of the Home Counties.
With most online property lending looking to other parts of the country, it’s useful to have a provider focusing on this niche.
CapitalRise also completes quite a few short-term property (bridging) loans, often to give developers time to sell newly completed housing units.
Around 6/10 lending facilities are for development projects and the rest are bridging.
Even so, around 9/10 fundraises through CapitalRise are for developments, because each development raises many separate tranches within a lending facility over the course of the building works, as each phase gets signed off.
Getting your head around CapitalRise’s various loan tiers
All your lending here is based on having a legal charge, meaning that if the properties need to be forcibly repossessed and sold then you and all other chargeholders on the property get your money back before anyone else.
Technically, CapitalRise rarely takes anything other than a first- or second-legal charge. Usually, that alone would tell you whether you’re first or second in line among the chargeholders.
But, with CapitalRise, more important than the legal charge is your actual repayment rank based on CapitalRise’s own five categories. The repayment order is as follows:
- Institutional lending (that means other financial businesses lending money through CapitalRise in the same loans as you).
- Senior tier 1.
- Senior tier 2.
- Sub senior.
- Mezzanine (pretty rare).
It’s important to understand that no loan uses every category; for example, you are often the most senior lender by lending in a “senior tier 1” loan, because there was no institutional funding.
CapitalRise very rarely has more than two of those levels in any loan or facility, and it has never had more than three tiers.
Some common combinations are senior tier 1 and senior tier 2; institutional and senior tier 1; and institutional and sub senior.
How good are its loans?
CapitalRise has approved less than 1% of the borrowers that it has screened. It could likely approve a considerably higher proportion of deals before you would notice any substantial change in loan quality and lending results.
Senior versus junior exposure
In roughly two-in-three loans (and 70% of the lent amount), you are the senior lender – meaning you’re first in line to get your money back in the event a loan goes bad. The rest are junior, where you are invariably in the second position.
CapitalRise sometimes approves additional funds later on that tend to be riskier, as it pushes the amount lent closer to the value of the property and sits in a worse position than all the lending before it. These are called mezzanine loans.
Mezzanine loans are small, rare – and have had somewhat patchy results so far.
But for all its other loans CapitalRise maintains very high standards.
Loan-to-value discipline
The most that borrowers can usually borrow is 75% of the current property valuation or 75% of the hoped-for sale price of completed developments, which is good. Yet it’s more usually lending up to 70% and the average is a few percentage points beneath that. A pretty good average.
Junior bridging loans typically have substantial senior debt ahead of you: about £450,000 on a £1,000,000 property. But, with the total lent still generally kept to two-thirds of the property valuation, this risk is contained while there are good lending processes in place. In addition, it’s usually you who lends in the senior loans – and you put more money into your senior lending positions than your junior ones.
Junior development lending would typically have senior debt above it of just £240,000 on a development with a hoped-for sale price of £1,000,000.
Idiosyncratic consistency, granularity risk and hidden non-performing loans
We do a lot of research that we don’t get to share publicly in these short reviews for you, since we need to summarise a lot succinctly. (Our experience and website data has taught us that the vast majority of people tune out if we put in too much detail.)
That’s why we rarely actually publish more than a few words on the unique nature of the loan book (so-called idiosyncratic qualities) and whether those qualities have changed.
We might sometimes write a little more on granularity risk, which is for example when there are 20 loans each worth £1 million and then suddenly the provider approves a whopping £10 million loan.
Hidden non-performing loans is another one that we scrutinise very closely. In other words, concealed arrears and bad debts through can-kicking, rolling over loans into new ones, and “extend-and-pretend” loan extensions.
This time, I’m including more detail than usual to be a little educational. I hope you still make it to the end of the review.
Loan sizes
The development facility sizes in the past 1-2 years compared to prior periods and to CapitalRise’s entire history, are not all that different.
For bridging loans it’s the same. CapitalRise has therefore not leaped into a completely different class of development lending.
Junior/mezzanine trend
Junior lending volume as a proportion of P2P (non-institutional) lending paid out to borrowers in the past 12 months has been virtually identical to the historical average, at slightly over 20%.
However, if you exclude institional lending through CapitalRise and focus on individual (P2P) lenders, the trend is towards more risk. Over the past 12 months 38% of lent amounts were junior lending (including mezzanine). Prior to that, the average for individual lenders was 28% and it had remained steadily around that for many years.
It’s too early to call this a big change in the nature of the loanbook, but we’ll keep an eye on it.
Limit-busting tranches
In the past few years, amid very stressed conditions for developers, later tranches of the development facilities have substantially breached their usual 70% cap on amount lent versus the hoped-for sale price of the development. However, most tranches over 70% are now repaid, with few of the remainder being bad debts or even falling all that late.
Otherwise, the amount lent on developments compared to the forecast sale price hasn’t really changed.
Institutional advantage
Institutions get repaid first (when they take part), even though they supply the cash second. That’s not an unusual structure for financing developments.
But we no longer receive data on the lending rates that institutions are contracted to be paid, so I can’t easily make a call, from that angle, on whether the arrangement is fair on individuals lending through CapitalRise’s online platform.
Can-kicking
Finally, CapitalRise hasn’t been kicking the can down the road in terms of finding ways to hide troublesome debt. It’s not rolling over loans repeatedly by allowing lenders to buy out other lenders, pyramid-scheme style. Nor is it offering repeated long extensions to borrowers beyond reason.
How much experience do CapitalRise’s key people have?
The key decision-maker has held a lot of senior positions in property lending, with all the required experience.
The rest of the impressive team has a huge amount of relevant experience and training, which is far from a given in specialist property P2P lending.
CapitalRise review: lending processes
The checks that borrowers and developments have to go through before CapitalRise will approve a loan are impressive, as expected for loans of this type and a team of this calibre.
CapitalRise focuses on the upmarket end in terms of the property projects it finances, and the best end of the market in terms of how strong the borrowers and projects are.
As usual for developments, the developers get the money needed in phases, as and when inspections show that the developments are progressing well.
However, CapitalRise doesn’t raise all the cash needed for a development project in advance. While this is normal in P2P lending, it’s sub-optimal, as there’s always a chance not enough money is raised to fund later tranches, and the project collapses.
That said, the high quality it offers means lenders are likely to continue supporting it through downturns – as they already have done. Plus, CapitalRise has arrangements with institutions that can pre-fund loans and tranches that are not fully filled through its online lending platform.
How good are CapitalRise’s interest rates, bad debts and margin of safety?
CapitalRise has now had a couple of very small bad debts that led to write-offs. Both were mezzanine loans.
Despite a remarkably tough time for borrowers in this space, there are probably just one or two outstanding loans or facilities that seem like they have serious potential for suffering any write offs.
Stress tests, projections and outcomes
4thWay conducts 1-in-100-year disaster “stress tests” to see whether lenders will still turn out okay in tough times, such as a major property crash combined with other severe economic conditions. Our tests are based on a stricter version of Basel tests global banks have been required to do.
We are currently at the tail end of highly stressed conditions for property developer borrowers that certainly fit that level of severity. As such, many loans have fallen very late or suffered serious issues requiring monitoring, support or other action.
However, CapitalRise’s stressed loans are very comfortably within the projections we set in advance for conditions of this kind. By this point, I am confident it will stay that way for the remainder of this period.
Current lending rates and losses
Across all its loans, interest rates of around 9.44% are highly satisfactory for the risks involved. Any losses in the near future are not likely to truly dent those returns.
CapitalRise’s 4thWay PLUS Rating
All the above is why it retains its 3/3 “Exceptional” 4thWay PLUS Rating, indicating positive returns for existing (and future) lenders even now, with a large margin of safety, when lending two years through CapitalRise alongside at least five other similarly rated accounts and across many loans.
It’s very satisfying that, as we go through a major disaster event for developer borrowers, CapitalRise and most other similar online lending providers we assess are staying within our expectations – but also not so massively inside our forecasts that our projections were overcautious.
CapitalRise’s 4thWay Risk Score
CapitalRise’s 4thWay Risk Score – which unlike the PLUS Rating measures just the risk of bad debts in a downturn and doesn’t account for interest earned – is a very creditable 6/10. That means its estimated at below stock-market risk, despite its stable, high returns.
As CapitalRise’s history deepens, I had been expecting its score to improve further to 5/10, and potentially even 4/10 – a level held by very few providers. For reference, 1/10 is equivalent to the risk of sudden loss when you’re using savings accounts, while 8/10 to 10/10 is roughly equivalent to the range of risk in the stock market.
However, let’s not call that too early.
CapitalRise has made it clear that it’s now looking at options to approve other kinds of loans. Indeed, it has already started approving commercial property developments or refurbishments, such as hotels, rather than its more typical residential property. It has also expanded geographically and wants more of that, as well as finding a way to approve larger loans.
While it expresses its usual caution to expand carefully and has a good record of that, we’ll still watch for impact on risks, as its senior staff are asked to find ways to scale up.
Has CapitalRise provided enough information to assess the risks?
CapitalRise has been extremely transparent with 4thWay. It provides reassuringly full information on almost all aspects of its business, access to its key people and detailed answers to all our questions. The depth and quality of the detailed data it provides to us on a monthly basis are excellent.
CapitalRise does better than many other providers in terms of the information it provides directly to lenders. In particular, it gives you a good amount of information on loans you could lend in and it updates you punctually on a quarterly basis. Its email notifications are sufficient, and it gives you both a number to call and live chat for you to ask specific questions of your own about your loans.
It should provide some more documentation on the loans, such as the actual loan agreement and surveyor report, but it’s nevertheless above average with the information it gives directly to lenders.
Is CapitalRise profitable?
CapitalRise* as a business continues to progress.
Losses have mostly shrunk over the past four years – down dramatically from a peak of about £1.5 million a year.
It has built a large book of loans that earn ongoing revenue. With a little more growth and cost control, I expect it to break out into stable profitability in the coming years.
What is CapitalRise’s minimum lending amount and how many loans can I lend in?
The minimum lending amount is high at £1,000.
CapitalRise approves just about enough facilities against unique property developments for you to diversify by putting your money in over the course of a year.
Development facilities are usually lent in eight separate tranches over the course of the development works, so avoid concentrating your money in lots of tranches to the same development.
With CapitalRise testing the waters for new kinds of loans, you might just be sure that you limit your own exposure to non-residential development lending until it has built a substantial record, that you don’t put much money in especially ambitious building projects and that you largely stick to funding well-established and experienced developers.
Does CapitalRise have an IFISA?
CapitalRise’s loans are available in IFISAs.
Is CapitalRise truly “P2P”?
Peer-to-peer lending is not a regulated phrase. By 4thWay’s definition, any online lending company is peer-to-peer if it structures itself and its loans to offer the same level of protection as direct lending, in order to protect lenders in the event that the lending company itself goes bust.
The most common way to create direct lending agreements is to use what the regulator calls “P2P agreements”, which are sometimes known as article 36H agreements.
CapitalRise uses another legal means of arranging the lending that we’ve seen quite a few times before. For each loan, it sets up a separate company that would survive intact even if CapitalRise itself were to go under.
If this isn’t your first experience in property lending, you may have heard of these sorts of companies: they’re “special purpose vehicles” that don’t conduct any trade, advertising or other operations. They merely hold your lending investments in a way that is bankruptcy remote from CapitalRise.
Lenders using CapitalRise lend to this company by buying bonds from it. (It’s really not important in terms of the actual risks to you whether it’s a bond or some other form of lending, but providers using this sort of structure usually find bonds the easiest and most convenient to setup.)
That company has just one purpose: to lend the money you put in the bonds on to the developer in a secured loan for the development in question and to pass all the benefits of lending on to you.
When these structures are set up and operated correctly, the borrower payments and interest can’t be diverted to pay anyone else, except to cover any agreed or required fees and expenses. It’s entirely as if the borrower owes you personally, while channelling it through the shell company.
This structure is effective, pretty standard and entirely legitimate, having been used in property lending probably many thousands of times. It effects the same risk mitigation as direct lending between you and the end borrowers. So, by 4thWay’s definition of peer-to-peer lending, this is truly P2P.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
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The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.
The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from CapitalRise and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or when you make an investment, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.
