Octopus Choice Review
This post is a condensed version of our ‘Octopus Choice Investment Report’. We produce these in-depth reports to support with due diligence of the peer to peer lending (P2P) market. This report is designed to help investors, as well as financial advisers, get comfortable with Octopus Choice. If you have any questions, whether investor or adviser, please get in touch, [email protected]
The full Investment Report and Executive Summary can be downloaded by clicking the buttons below.
The report includes the following chapters:
- Investment Security
- Adviser Considerations (for financial advisers)
Octopus Choice (“Octopus” and “Platform”) is a UK-based peer to peer lending (P2P) platform offered by Octopus Co-Lend Ltd, a subsidiary wholly owned by Octopus Capital Ltd (“Group”). Octopus Choice is the innovation of the Octopus Group and is distributed to financial advisers and DIY investors. Octopus Choice directly connects UK property professionals with investors seeking a secure and stable return.
The insights detailed below derive from loan book analysis conducted on Octopus Choice’s historic loan book, with data correct at 16th October 2018.
The platform offers an “auto-bid/auto-lend” product where investors’ capital is automatically allocated to a mix of loans, creating a portfolio comprising approximately 10-60 loans. Octopus initially funds loans approved onto the platform, before transferring loans to investors as their capital flows onto the platform. This reduces the time it takes for funds to be lent out as there is a pool of available loans, it also ensures borrowers receive funds in a timely manner. Investors do not have the option of building their own portfolio of loans – Octopus holds discretion over the underlying assets invested in, and the asset allocation.
Table 1: Investment Details
All Octopus loans are secured against tangible assets, with a first legal charge over residential or commercial property; 97% of loans are secured on residential property. Octopus makes conservative loans, with an average loan-to-value (LTV) ratio of 62% and with a maximum LTV of 76% for residential loans and 65% for commercial loans. Octopus also invests alongside investors in up to 5% of each loan in a ‘first loss’ position, meaning the platform would lose capital and interest before any investors should a borrower default and the asset securing the loan fails to recover the debt owed.
The minimum, average and maximum loan-to-value (LTV) ratios for the varying loan types can be found below.
|Loan Type||% Total Loan Book||Min. LTV||Avg. LTV||Max. LTV|
Table 2: Min, Max, Avg. Loan-to-Value Ratios. Source: Orca Analysis of Octopus Loan Book.
Octopus Choice (Octopus) has facilitated over £315 million worth of loans since launch in 2016. The chart demonstrates an increase in origination year on year, with significant growth 2016 to 2017 (167% growth); while growth subsided 2017 to 2018 (33% growth). As loans repay, the Principal Repaid metric will begin to outweigh the Principal Outstanding metric. For 2018, 91% of loans are live, in circulation, this compares with 2016 where 74% of loans have redeemed (completed).
Chart 1: Principal Outstanding v Principal Repaid. Source: Orca Analysis of Octopus Loan Book.
Investors can expect a target rate of return of 4% per annum (p.a), which is gross of tax, and paid monthly with the option of re-investing interest for compound growth or withdrawing for income. The actual rate of return depends on the individual loans held within the investor’s portfolio and can vary over time as new loans are automatically invested into. The chart below confirms Octopus Choice’s ability at forecasting their returns accurately. The platform has narrowly exceeded the target return each year, demonstrating the stability in their returns.
Chart 2: Octopus Choice Net Returns v Estimated Returns. Source: Orca Analysis of Octopus Loan Book.
Octopus loans are predominantly Buy-To-Let (BTL) – 55% of total historic loan book value – but the platform also offers Bridge-To-Let (B2L), Bridge and Commercial loans. Commercial loans typically include shops, mixed use properties, pubs, industrial units, etc. Borrowers typically borrow £500,000 or more; the average borrowed according to the historic loan book is £681,755. The range is £55,300 to £7,602,000.
The chart below displays the breakdown of the loan book by loan purpose.
Chart 3: Loan Type Breakdown. Source: Orca Analysis of Octopus Loan Book.
Defaults & Recovery
Octopus Choice does not model an expected default rate into its interest rate calculation for investors. The platform will review its position on this when the regulator (FCA) and peer to peer lending industry define a standard definition for defaults.
Octopus defines a ‘default’ as a loan in which the borrower has missed two calendar months of interest payments, or the loan has run over its initial term. In this event, investors cannot buy or sell loan parts. Octopus investors have suffered no capital losses since the platform launched. However, past performance is not a reliable indicator of future results.
Chart 4: Default Rate. Source: Orca Analysis of Octopus Loan Book.
Click below to view
All Octopus loans repay the principal investment at the end of the term, when the loan matures. This means an investor’s capital (principal) is tied up for the duration of the loan, unless they choose to sell their holdings early to withdraw cash; selling loans early is subject to liquidity.
NB: Loans are typically short term, with an average term of 26 months across 463 loans (total loan book).
There is no minimum investment period, therefore investors can request to withdraw at any time, subject to liquidity, without incurring charges. Loan parts will usually be sold to new investors in order to facilitate withdrawal, but Octopus may buyback loan parts to ensure quick access. 95% of liquidity requests have been processed within 5 days, however, there are no guarantees.
There is a section in the report dedicated to helping advisers evaluate Octopus Choice, paying particular attention to the adviser-friendly features of the product but also the considerations of recommending such a product.
In summary, some of the benefits include:
- Strong securityLoans underwritten with 1st charge over physical assetsOctopus invests in 5% ‘first loss’ position on each loan
- Exposure to varying property loansBuy-to-let loans account for 55% of the loan bookBridge-to-let loans account for 24% of the loan bookBridge loans account for 12% of the loan bookCommercial loans account for 9% of the loan book
- Client-friendly interfaceAdvisers & clients can login to a centralised dashboard to view client accounts
Some of the considerations advisers should evaluate include:
- No FSCS protectionP2P loans are not protected by the Financial Service Compensation Scheme (FSCS)
- Market concentrationAll Octopus loans are made into the UK property market, typically buy-to-let
- Client suitabilityOctopus offers support to advisers regarding client suitability assessment
If you’re an adviser, click the button below to read the full report, paying particular attention to section 9.0
Download Full 'Octopus Choice Investment Report'
Octopus Choice has made impressive progress since launching in 2016. Fairly young, relatively speaking, the platform has already facilitated over £300m worth or property loans, with zero losses (past performance is not a guarantee of future results), delivering on their target 4% per annum returns. For advisers, Octopus Choice is the P2P provider most will heard of and, indeed, most will use. The platform is part of the Octopus Group; a major presence in the intermediary market, delivering products and services for the past 20 years. A platform’s stability is a primary concern, and Octopus Choice appears as if it will stand the test of time due to its backing, but also its demonstrable ability to deliver stable returns while lending conservatively. Concerns around market concentration should be considered, and also the lack of Financial Services Compensation Scheme protection on lent funds, of course.