Industry Insights

Could property crowdfunding be the best way to get into property?

Property must always play an important part in any investment portfolio.

Here in the UK - a crowded island, with a growing population - it has long been a particularly attractive investment. While rises in values have never been uniform, for a long time, the trend has been upwards, and the Department of Communities and Local Government records that the average UK house price has rose from £4,640 in 1969 to £223,405 in 2007.

And prices seem likely to continue to rise as the UK faces an acute housing shortage.

Kate Barker, in her Barker Review of 2004, warned that at least 245,000 homes needed to be built in England every year to avoid a housing crisis. However, in the following 10 years only 115,000 a year had been built – less than half her recommended target.

An update of the review 10 years later said:

"There can be no doubt that the housing crisis facing the country in 2014 is far greater than that discussed by Barker in 2004."

The economist and journalist, Liam Halligan, has pointed out that, over the past 30 years, the UK built about three million fewer homes fewer than required.

It is against this background that property expert Savills, in its autumn 2018 Residential Property Forecasts, forsees a total house price growth of 14.8% at a national level over the next five years.

Given all this, the question for anyone building a balanced investment portfolio shouldn't necessarily be 'should I get into property?', but rather, 'what’s the best way to get into property?'

And the highest of levels, the ways can be divided into two broad categories - direct involvement or indirect, that done at arms' length.

Read more: can we solve the housing crisis with property crowdfunding?

The simplest of the direct ways is to buy land and build a house on it. But you need money. There are wide variations in prices around the country, but, as an indication, it’s estimated that the cost of building a house ranges from £300 to £3,000 a square metre.

Recent analysis has found that the average living space in a UK house is now 67.8sqm. That doesn’t include hallways and staircases, so it could probably be rounded up to 70sq m, which gives an average build price of between £21,000 and £210,000.

There’s also the risk element. Prices tend to rise over the long time, but there are periods of stagnation and even slump and, if you commit yourself to buying and building in one of these times, you could be facing the choice between taking a big loss or leaving your capital tied up until the market recovers.

This isn't so much of an issue for house builders who can weather the storm, but for individual property investors and developers? It can be extremely challenging.

Alternatively, you could buy a house and sell it, but the same issues of cost and risk apply.

Or, you could buy a house in order to let it. In the 1990s, soaring property values combined with low interest rates made buy-to-let a highly attractive proposition and it became an extremely popular form of investment.

Eventually, however, the government stepped in to damp down the market. An additional 3% Stamp Duty charge was introduced for second homes, making the purchase of investment properties more expensive. So, whereas to buy a £200,000 property in which you live yourself will carry a Stamp Duty bill of £1,500, buying it as an investment will land you with a tax bill of £7,500.

Now the returns are less generous and there is evidence of smaller landlords deserting the sector.

Read more: what is property crowdfunding and why is it so popular with millennials?

Indirect ways of entering the property market require less capital commitment and less experience and expert knowledge. You could buy shares in a listed house building company, being paid a dividend based on any profits made and benefiting from a rise in the value of the shares as the property market rises.

Or you could invest in a property fund, which buys shares in companies that operate in the sector. You might also buy shares in a Real Estate Investment Trust (REIT). Most of the UK’s largest property companies have converted to REITs, which are limited companies and so escape much of the tax on residential lettings.

The drawback with the indirect or arms’ length methods of investing is that while the risks are lower than with the direct approach, the amount of capital commitment required is much lower and the potential returns are correspondingly less attractive.

There is, however, now a third way to invest. With the development of the internet, online platforms have been developed which allow large numbers of investors to invest together through crowdfunding.

Crowdfunding platforms, which are registered with the Financial Conduct Authority (FCA) and must meet its strict code of conduct, bring the investor and investee together. Start-ups and start-up investors were among their earliest adopters. The property sector has followed, but in this case earnings are related to property value (or rental income) rather than business performance.

Property crowdfunding sites use various ways to enable investment into specific developments. They include buying equity in a holding company that acquires a portfolio of rental properties, and there are peer-to-peer lending sites, which effectively loan money to those looking to acquire properties, perhaps for buy-to-let. In equity crowdfunding, the platform operator creates a separate company for each investable opportunity.

There are a number of benefits to property crowdfunding:

  • Online platforms enable investors to quickly build up a diverse portfolio of property projects. By using multiple platforms, investors can further spread their risk.
  • With minimum investments often from as little as £100, investors can test the water on a small, low-risk scale before investing larger amounts.
  • Investments are usually backed by the underlying assets of the company through a debenture. This gives the investor the security of an asset-backed investment, without the high costs of buying and managing the property.
  • Any return on a development investment is usually realised as growth rather than income, with the return on investment delivered from the profits made on the development after all fees are paid according to the equity share held. This means investors can realise a capital return, which normally requires holding an asset for years, in a much shorter time frame. Also, their returns are taxed as a capital gain rather than income.
  • If the project outperforms the forecast return, this is shared with the equity investors alongside the developer or portfolio manager.
  • If the properties cannot be sold immediately for a profit, they can be retained and rented to provide a return through rental income.
  • Investors are supporting UK housebuilding by providing developers, held back by limited bank lending, with a vital source of investment. This can directly help to tackle the national housing shortage.

Making steps towards property crowdfunding

Property crowdfunding gives the novice investor and sophisticated investor alike an opportunity to get into the property market without committing large amounts of capital to one project, but still having access to decent potential capital gains.

An option for every property investor, it can be an extremely beneficial route for all involved - and with it growing in popularity considerably, it's highly likely you'll be able to discover a property investment opportunity through property crowdfunding to meet your specific portfolio needs.

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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.