Industry Insights

An introduction to property crowdfunding

Property crowdfunding can be a rewarding and highly accessible way of growing your wealth.

Slick and easy-to-use platforms enable investors to buy stakes in a wide range of development types, with minimum investment thresholds lower than many other asset classes.

With investors looking to generate a return generally via the rising value of property, this type of investment has become increasingly popular in recent years, among both seasoned investors and complete investment novices.

Here in the UK, this has partly been driven by changes to UK tax rules. Becoming a buy-to-let landlord has lost some of its appeal, with certain tax breaks being minimised and stamp duty on second homes increasing.

Under these conditions, many are turning away from the traditional property investment model, research suggests.

A study by Residential Analysts, for example, shows a 10% year-on-year fall in the number of flats purchased in England and Wales during 2017. Since buy-to-let investors tend to snap up flats to boost their rental income, the study is therefore seen as evidence of reduced interest in being a landlord.

Now equity crowdfunding is not subject to property-specific tax burdens or the responsibilities of being a landlord. It does, however, present the possibility of the strong returns enjoyed by many landlords.

Its ease of use and abundance of opportunities makes for an exciting method of wealth generation, although as with all investments, investors are urged to carefully consider the many options available to them.

And with those options plentiful, where do you begin? Let’s take a look at some of the most notable points to think about before you get started.

Which platform to use?

Choosing a platform on which to invest may seem daunting, given the array of options.

If you’ve assigned a modest budget to your investments, the minimum investment threshold is likely to be important to you. Ranging between platforms and opportunities, the entry level investment can be as little as £1,000 - which when you consider to invest in property via buy-to-let could require a budget of in the region of at least £20,000 or £30,000 (and that's just to secure a mortgage), it’s a fraction of what an investor once had to commit.

Other considerations might include the simplicity of the platform or the level of support and guidance it gives new users – especially if you are looking to develop your knowledge of property crowdfunding over time.

However, in assessing which platform is likely to increase your wealth most significantly, your primary focus should generally be on the quality of the property investment opportunities.

Read more: it's official - property is once again the UK's favourite type of investment

Determining this requires exploring various aspects, from the market need for the proposed property type in the highlighted location through to the accuracy of the development timescales.

It also stretches to the model through which the platform structures a property, too. Behind the scenes, most opportunities use a special purpose vehicle (SPV). This is where the asset will be held and where investor funds are deposited. This approach enables the opportunity to effectively be broken down into shares and ultimately, returns are provided via the SPV dependent on the number of shares held.

Having confidence in the opportunity and all aspects behind it and related to it is key, which undoubtedly includes the platform upon which the investment opportunity is being facilitated. It can appear to be the best opportunity in the world, but if it can't be facilitated in the most suitable way, it can cause unnecessary headaches.

How much to invest?

Sophisticated investors are likely to have a clear idea at the outset of how much they plan to put into property crowdfunding.

For them, this type of investment is often an avenue to diversification, bringing added balance to a portfolio that might also include stocks, startups and properties acquired through more traditional models. They may have tens of thousands of pounds set aside for property crowdfunding opportunities alone, enjoying the potential of competitive returns over relatively short timescales.

But if you are looking to invest more modest levels of wealth into crowdfunding, or are perhaps doing so to bolster savings, you must decide how much you can afford. As with any investments, property crowdfunding does carry a degree of risk and you must be prepared for the worst-case scenario.

As there are so many opportunities available to you, however, the risk can be spread and mitigated relatively easily.

Read more: 4 reasons property investing can be perfect for diversifying your portfolio

What's more, since the barrier to entry is very low, people across the entire wealth spectrum can take advantage of property crowdfunding. And it becomes even more attractive to investors who may be looking to invest for the first time when you realise the time and resource commitment is minimal post-investment.

An extensive amount of due diligence needs to take place before you invest your money, but part of property crowdfunding’s attraction is that it can offer the rewards of property investment without a lot of the hassle. You aren’t a landlord. You aren’t a builder. You’re an investor investing your money in a way that is very much hands-off.

What opportunities should you invest in?

Property crowdfunding enables investment into an array of project types. In theory, anything from a single house to a vast apartment complex can be backed, although it’s often used for joint venture property investing for entire development sites.

In choosing an opportunity, you should be looking for early indicators of a successful return. These include points such as a buoyant market for that particular type of property in that area and a reputable team with an ability to deliver to their proposed plans. For the former, many investors may wish to select properties in areas they are reasonably familiar with to give them that added level of knowledge.

Separately, if you plan to invest regularly on property crowdfunding sites, it is advisable to add different types of opportunities to your portfolio, as this can help to protect you from the fallout of any potential market downturns.

For example, prices for family homes in a particular town or city may fall due to factors affecting only that area, damaging your residential prospects there. However, if you have investments in other locations, of other house types of even perhaps in the commercial property sector, you may be able to offset any returns that weren't as originally targeted.

Of course, it is important to recognise that very occasionally – as seen in the wake of the 2007 credit crunch – the property market can slump across the board.

This is very rare, however, and regulators have since been working hard to eradicate some of the causes of that global crisis. Generally, property is far less volatile than stocks and shares and sees fewer risks than crowdfunding into startups or small businesses (which is why with property you generally don’t see tax reliefs or incentives as you do with startup investing).

How long are you willing to wait for a return on your property investment?

Although secondary sales markets are opening up, equity crowdfunding into property is largely an illiquid investment. This means you cannot easily or quickly exit your investment or sell your stake, unlike stock market investments.

If you choose opportunities that generate income through rental payments, you may receive regular returns on your investment.

But if you are aiming for the more common capital growth returns – powered by the project’s rising value – you are likely to wait much longer (although using the comparison of startup investing again, it's still considerably less than you would expect for a return here - it’s often 18 to 24 months, rather than what’s usually at least five years). You must therefore clearly understand the proposed timescales and make a decision on whether the planned route to liquidity for the property suits your financial goals.

And although we all like to see the positives - and it’s not uncommon for property investments to achieve more than their targeted base case returns - as an investment, it isn’t guaranteed. As such, it’s important you recognise investments may not always go to plan.

What’s key, however, is this doesn’t have to mean your capital will be lost. It is at risk once you invest, but unlike startup investing where if the company fails, there’s no chance of receiving your investment back, with property it can be more a case of needing to wait longer than anticipated, or potentially seeing reduced returns.

Read more: what does 'capital at risk' mean when investing?

For instance, sometimes the construction and subsequent sale of developments can take longer than expected due to market factors outside of anyone’s control. The properties will no doubt be built and sold at some point, but it may be that the base case returns and timescale are missed and instead the downside case is realised.

One of the most important points in relation to this - on the assumption you’re happy with the basic principle that you shouldn’t invest more than you’re able to lose should the very worst happen - is having confidence in the team behind the development. Something that should form a key part of your research and due diligence, an experienced house builder who has weathered all market conditions will be much more confident and able when tackling issues than a new house builder.

A property investment route accessible to most

Property has long been one of the most favourable investment assets, largely given its proven track record of providing attractive returns, specifically over the long term but in many instances, over short and medium terms, too.

But for many years it has needed, at the very least, a large capital outlay - and that’s without taking into account the vast amounts of knowledge and experience that was generally needed.

Today, property crowdfunding offers people on virtually any budget a way of entering the property market and strategically growing and diversifying their investment portfolio.

Vast numbers of opportunities, low entry points and the huge amount of information that’s available (for both specific investment opportunities and property crowdfunding as a whole) has opened up property investing considerably.

As with all types of investment, it’s vital you carry out in-depth research into any opportunity you plan to invest in, but property crowdfunding can undoubtedly be a fantastic way to both start your property investment journey and enhance your portfolio with a range of accessible property investments.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.