Crowdfunding is becoming wildly popular, within and beyond the property space. For potential property investors, and operators, it’s a particularly exciting concept, as so often property projects are dependent on substantial financial investment.
As so many are interested, here’s 5 facts you need to know if you’re interested in investing in – or funding – a property project using this very modern approach to finance.
1 – There are several types of crowdfunding, including donations-based (charitable contributions) and rewards-based (that’s the “invest £10 in my steel water bottle company and I’ll send you a bottle with this exclusive, investor-only pattern” style investment). But for potential property investors in the small and medium sized part of the market, there’s two main types of crowdfunding which are most relevant. They are often lumped together – but they’re different, so let’s start there:
- Equity-based crowdfunding brings small investors together to buy shares in a company. As an investor, you are buying shares in a property-owning company, usually a Special Purpose Vehicle. As with any equity-based crowdfunding, if a company performs well, good returns can be made, but if it fails the investor’s money could be lost. The risks, and potential rewards, can be high.
- Peer to peer (P2P) lending matches potential investors who want to invest, with borrowers (people or businesses) who want a loan. A loan is very different to equity. It’s a specific amount of money, repaid over a defined term, and investors earn a return through interest payable on the loan. Often, potential rewards (and risks) are more modest with peer-to-peer lending, and less variable. An increasingly popular approach to P2P lending is via the ‘Innovative Finance ISA’, which offers buy to let property investors the prospect of cheaper or more flexible alternatives to mortgages, and offers investors tax advantages on their investments, without the intermediary of a bank, meaning it is more ‘efficient’. Innovative Finance ISAs are still a small fraction of the overall ISA market, but they are growing fast as the word gets out to both investors and operators.
2 – What links crowdfunding and P2P is sophisticated technology. The platforms are web-based and the business of matching investors to loans, or bringing together a large number of small investors to buy one property asset, is done thanks to the power of the internet and high-speed computing. Only a few years ago, this sort of tech-powered alternative finance (‘alt-fi’) would not have been possible.
3 – Because of technology, and because the onus is on investors to do their own research, equity crowd funding and peer to peer lending can be much quicker than traditional approaches to funding projects. There’s fewer restrictions on what can be done, whereas traditionally many aspiring property owners or developers have come up against restrictions based on the risk appetites of banks, who might not like a particular type of project. As a result, with a more traditional approach, sometimes the ‘computer says no’ on the basis of characteristics, and not the specific merits of a deal, developer or operator.
4 – Some crowdfunding and P2P platforms attempt to address the issue of illiquidity in traditional property investment by establishing secondary markets, to resell the investment. For example, Property Partner’s secondary market gives an average time for investors to sell their property shares through the platform as 3.31 days, as of December 2018. That a whole lot quicker than the average 102 days to sell a UK property, quoted by recent Post Office Money research. So investors can potentially get in and out of a deal in a timescale more similar to a stock market trade, than to a traditional property acquisition or sale.
5 – You don’t need a huge deposit. Entering into Buy To Let property investment, for example, has always needed a substantial pot of funds. The legal costs alone can be thousands of pounds. Property crowdfunding sites don’t require a deposit and make investing accessible from as little as £100 upwards. The potential returns lower than buying your own property, but as you are able to spread small investments over many properties, the risk across a portfolio of investments should, at least theoretically, also be lower.
If this blog post has whetted your appetite for property crowdfunding and you’d like to find out more, this kind of alternative finance is something I’m especially interested in, as a big believer in the power of opening up access to investment to those who might not otherwise have this.
I’m in the process of exploring it commercially through my business, and have some exciting podcast discussions coming up soon, including with the CEO of the UK’s leading property crowdfunding site, and a leading developer who has funded millions of pounds worth of deals via crowdfunding.
Watch this space!