Financing real estate projects gets a whole lot easier with P2P lenders

Industry

Published: 09 Sep. 2016, 20:41

Financing real estate projects gets a whole lot easier with P2P lenders

Kim Ki-myung, 61, recently visited a savings bank to apply for a 500 million won ($ 454,000) loan to build a low-rise apartment building with 10 units in Sinrim-dong, southern Seoul.

He was denied because the cash Kim was putting into the project was less than 20 percent of the total construction cost. Kim tried to borrow from private lenders, but they wanted an interest rate exceeding 20 percent.

Then Kim was introduced to Tera Funding, a peer-to-peer (P2P) real estate lender. He was able to borrow the money he needed in just four days. Annual interest on the loan is 13 percent.

P2P loans for real estate have become an alternative to traditional financing after the financial authorities lowered regulations on them in hopes of boosting the fintech industry.

P2P loans can be borrowed online without having to go to the bank.

For a 500 million won loan to be used to construct a property, the P2P company will attract investors willing to participate in the loan. When the loan matures, the P2P recovers the loan with interest and pays back the investors.

The P2P takes 1 to 3 percent of the total interest rate plus a 1 percent commission of total loan value from the investors.

According to the Korea P2P Finance Association and industry insiders, loans for real estate provided by P2P companies amounted to roughly 100 billion won from last year through the end of August. Total P2P loans including non-real estate loans amounted to 226.6 billion won. Real estate P2P loans accounted for 45 percent of the total.

A real estate P2P loan come in two types: one that is lent without collateral and a more typical mortgage in which the real estate being bought is the collateral.

Most real estate P2P loans are the type without collateral.

These loans are growing rapidly among customers who don’t have collateral or who have low credit ratings.

In the past, people turned away from banks had to borrow loans from nonbanking financial institutions with interest rates exceeding 20 percent. But P2P loans offer interest rates between 11 and 13 percent.

As the real estate market has been lively since last year, there has been growing demand for borrowing to build low-rise apartment buildings.

P2P loans don’t require a lot of documents or strict credit checks.

“In many cases, banks turn down loan requests for construction projects that are less than 10 billion won when the person applying either has scant collateral or a low credit rating,” said Yang Tae-young, founder and CEO of Tera Funding. “P2P companies base their decisions on on-site evaluations. They look at the surrounding areas’ commercial district, prices in the neighborhoods and the possibility of preconstruction sales.”

In the case of banks, a person has to invest more than 20 percent of their own money in a small real estate development, while P2P loan providers only ask for 15 percent. It only takes a week for a loan decision, while a bank normally takes 2 to 3 weeks.

For mortgages, banks only lend 70 percent of the value of the property, whereas P2P providers give up to 90 percent. P2P loans are also attractive to investors thanks to their pre-taxed annual profit of around 10 percent.

Market experts expect P2P loans to continue to grow.

“Housing supplies have been increasing as demand for cheaper low-rise housing units has been growing due to the jeonse [long-term deposit rent] crisis,” said Lee Jong-a, a senior researcher at the KB Financial Group research institute.

BY KIM SUNG-HEE [ebusiness@joongang.co.kr ]