Industry Insights

Is property crowdfunding the easiest way to get into property in 2019?

At the time of writing – and no doubt for some considerable time after that we’re stumbling around in the fog of Brexit uncertainty.

That inevitably has a knock-on effect on the perennial British obsession – house prices. Will they go up? Will they go down? Or will they stay roughly where they are?

As far as 2019 goes, the view you take will likely depend on which pundit or forecasts you use.

However, something that few would dispute is that the long term trend for house prices is up. Between 2001 and 2017, house prices in England and Wales rose by more than 158%. The national housing shortage is well documented, so there is every expectation that prices will continue to rise in the medium term as supply lags demand. In its autumn 2018 Residential Property Forecasts, property expert Savills predicts a total house price growth of 14.8% at a national level over the next five years.

So, if the UK housing market is likely to be subdued in 2019, waiting for some clarity over the Brexit question, it would appear to be a good year in which to invest in property before prices resume an upward trajectory.

The next question for many investors, however, is what’s the easiest way to get into the market?

It certainly isn’t by buying land and building one yourself. While the concept of a house is straightforward, building one is anything but. It requires a mix of highly specialised skills, thorough knowledge of the market and considerable capital.

Easier, but by no means as easy as some of the reality TV shows make out, is buying a house in need of TLC, doing it up and then selling it on for a profit. To make a profit on such projects, you have to ensure that the difference between the resale price and the purchase price is greater than the costs of renovation. A lot of people have had their fingers burned when this turned out not to be the case. Success in this area also demands a shrewd eye for a bargain and a knowledge of the local market.

This is even truer of what has, until recently, been a popular way into the property market – buy-to-let. This too is far from being an easy way into property. Again, the successful investor needs an eye for a bargain and, more importantly, an in-depth knowledge of the rental market, what tenants are looking for in a given area and what they are likely to pay. Then there are the attendant demands of managing tenants and of maintaining a property.

Read more: with buy-to-let tax reliefs going, what are your property investor options?

To add to these difficulties, the government has added a few more. It has reined in the sector with a stamp duty hike, restricted tax relief on interest payments and tighter regulation on mortgages. No surprise then that the results of Belvoir’s Q3 rental index, compiled by TV property expert Kate Faulkner, confirm that landlords are continuing to exit the property market.

While house prices have been steadily growing over the past decade, so too has another market. With the development of the internet and fintech, online platforms have been developed on which large numbers of people can invest together through crowdfunding. These platforms, registered with the Financial Conduct Authority (FCA) and meeting its strict code of conduct, bring investors and investees together.

Forbes magazine estimated that the global crowdfunding economy had grown to be worth more than US$5bn six years ago in 2013, and it's only become a bigger market since.

Much of this money has gone into property investment. It has been calculated that 19% of the total money invested on UK equity crowdfunding platforms has gone to housing and property and globally it has been estimated that in 2015, property debt and equity crowdfunding totalled US$7.8bn.

This is a trend which is likely to continue, as evidence suggests that millennials are likeliest to adopt property crowdfunding.

According to a 2018 survey, more than half (54%) of people who invest in property crowdfunding are aged 18 to 30. This outstrips any other age group, compared to 25% of people aged 31 to 45 and 15% of those aged 46 to 60.

Now property crowdfunding has a number of key attractions for the investor.

For instance, [roperty crowdfunding sites employ a number of routes to investment in specific developments. They include buying equity in a holding company that acquires a portfolio of rental properties. Also, there are peer-to-peer lending sites, which effectively loan money for property purchases. In equity crowdfunding, the platform operator creates a separate company, or special purpose vehicle (SPV), for each development project.

Read more: what is a Special Purpose Vehicle (SPV)?

The SPV is a legal entity created for one particular purpose, which, in property crowdfunding, could be a housing development. It’s usually set up as a private limited company in which investors buy shares, giving them a share of the profit generated by the SPV when the houses are built and sold. Then the SPV is wound up and the investor’s capital is returned, along with any profit.

Advantages are:

  • The investor’s risks are reduced, because, as with any limited company, the shareholder’s exposure is limited to the amount invested. If the project fails and the SPV has to be liquidated, the investor should still get something back, as the original investment would be secured against the value of the land purchased. If, during the completion of the development house prices fell and the houses could only be sold at a loss, there is still the prospect of letting them out to earn the investors rental income until the market recovers.
  • But there’s still the potential for good returns. If the houses sell for more than was projected, then the return for investors can benefit, because the amount returned to investors is a percentage of the profit achieved equal to the proportion of equity held. If, for example, someone invests £5,000 for 1% of the shares in a small development and that development makes a profit of £250,000, then the investor will be entitled to a 1% share of that profit, or £2,500, along with repayment of their original £1,000 investment.
  • As little as £1,000 can be invested in a property crowdfunding project, allowing the investor to test the market and also to build up a diversified portfolio across platforms, geographical areas and types of development.
  • But this low barrier to entry doesn’t mean property crowdfunding shouldn’t attract more sophisticated or experienced investors with significant funds at their disposal. Retail investors, institutional and professional property investors also use crowdfunding sites to develop and diversify their portfolios.

A report for the Investment Property Forum: Real Estate Crowdfunding: Gimmick or Game Changer says:

“From an investor perspective, RE [real estate] crowdfunding increases the accessibility of CRE [commercial real estate] investment in two ways: Firstly, it enables investment opportunities in both debt and equity to be marketed online and viewed by the crowd, not merely those investors known to the selling agent. Secondly, by providing co-investment structures, smaller investors are afforded discretion over their investments. Equally, in bringing divisibility to individual investments, investors are able to diversify their investments and reduce the specific risk associated with RE assets.’’

It also says:

“Governance standards in the industry would appear to be good.”

Each individual investor has to make their own decision, but anyone contemplating investing in the UK property market in 2019 should at least be seriously considering property crowdfunding.

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