Posted on 04/03/2020 11:33:03   by   Richard Knight

Looking for options to get onto the property ladder? See how crowdfunding could help!

In a nutshell

For anyone who watches the news with any regularity, they'll be familiar with a topic that crops up fairly often.

The UK's housing shortage has entered our national vocabulary over the last decade. However, despite it sounding like a fairly recent problem from over the last ten years or so, this is, in reality, slightly misleading.

As it's only been the last few governments since the early 2000s who have used it as a bargaining tool in manifestos, before failing to address it adequately when elected, it tends to create the impression that the housing problem is a relatively new phenomenon.

In truth, it's been around far longer than people think and we're just now seeing its worst consequences. Put simply, there are too few homes available and those homes that are on the market are far too expensive.

Understandably, this makes it especially damaging for young people hoping to buy their first home, and there's only a limited number of avenues to help these aspiring first time buyers.

When did this housing crisis start?

Throughout the 1980s, council houses were sold in their millions. However, since the turn of the millennium, due to a lack of funding, public bodies have all but abandoned large scale housing construction projects.

The expectation, of course, was that the private sector would fill the gap in the market and make up the shortfall, but, for a variety of reasons, this hasn't quite materialised.

Firstly, Britain is a small island with relatively few areas that can be regarded as suitable for large property development programmes. For the most part, people want to keep the exclusive community of their neighbourhoods intact, while building on green-belts and areas of outstanding natural beauty invokes genuine ire in many people all over the country.

After all, one only has to remember back to the Opening Ceremony of the London 2012 Olympics to see how important the countryside is to British people. The repercussions of building on it would be complicated and lengthy.

What are the effects of the housing crisis?

The main knock-on effect of the housing shortage is that the increasing demand for residential properties pushes prices up to levels which are just not affordable for the majority of first time buyers.

Adding to the frustration of struggling financially to get a first foothold on the housing ladder are the almost stagnant wages and low interest rates we've seen since the global financial crisis.

Logically, this makes saving for a deposit seem like an almost insurmountable challenge and more and more people are turning to rental properties just to get a roof over their family's heads.

However, as with anything in business, heightened demand leads to rising costs and we're seeing rents all over the UK increase above inflation levels.

To sum up, rather dishearteningly, each year accommodation costs consume an increasingly large chunk of a family's income, affecting people's quality of life.

What does the data say?

Property experts This is Money released some telling facts in Property Prices Britain 2020 which are worth taking on board;

  • House prices increased by 33.7% on average in Britain in the last decade.

  • House prices are forecast to rise by an average of 15.3% over the next five years.

  • The average house price has increased by £47,647 - equivalent to 27% - from January 2010 to the end of 2019. This is based on data from Halifax, Nationwide Building Society and the Office for National Statistics.

  • Nationwide's house price index revealed that, in January 2010, the average house price was £163,481. This was £215,734 by November 2019. This is a difference of 32% – or £52,253. This is based on its own lending data.

  • Meanwhile, ONS' UK house price index, previously referred to as the Communities and Local Government index, showed that, in January 2010, the average house price was £207,159. However, the latest ONS release shows that house prices in October 2019 stood at an average of £233,000 - a difference of £25,841 or 12%. This is based on actual sold prices.

  • Halifax's index reported that, in January 2010, the average house price was £169,777. In November 2019, it said that the average house price was now at £234,625. This is a difference of £64,848 – or 38%. This, like Nationwide, is based on its own lending data.

What's a viable way of getting involved in property investment?

All of this can seem slightly dispiriting when analysed and with house prices forecast to increase further in 2020, first time buyers could be forgiven for thinking the outlook is gloomy.

This begs the obvious question;

"What's a good way of getting into the market?"

To dispel one common myth, despite what numerous programmes on television like to sell to us, the idea of buying a run-down house on the cheap before doing it up and selling it on for a profit is far from an easy solution.

To make a profit on projects like these, you have to ensure that the difference between the resale price and the purchase price is greater than the costs of renovation. Many 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, besides time and energy.

So, is there any answer?

Well, there may be. Although house prices have been steadily growing over the last twenty years, so too has another market.

Historically in business and commerce, wherever there have been constraints and curtailments, people have sought solutions.

Along with the development of the internet, online Property Crowdfunding platforms have evolved to meet an obvious need in the property market.

People can invest in property via the crowdfunding method, resulting in development projects and much needed Buy-to-Lets or PBSAs being built all over the UK.

These platforms bring lenders and borrowers together for the potential mutual benefit of everyone.

Borrowers have quicker access to the funds they need to carry out the construction, and lenders can gain potentially higher returns on their investments when compared to what they generally receive from the banks, although investors should bear in mind the higher risks involved in this type of investment activity.

It's a growing mode of alternative finance, and The Cambridge Centre for Alternative Finance (CCAF) states that within the past three years, there has been a 12 month period where the volume generated by Property Crowdfunding increased from £71m to £211m, almost 200%.

This is a trend which is likely to continue as evidence suggests that millennials are the likeliest demographic to become involved in Property Crowdfunding.

Recent data suggests that the young adults between the ages of 18 and 35 form the majority of property crowdfunders, and according to research carried out by Shojin Property Partners, over a third of investors in the Property Crowdfunding sector is under 30 years of age.

Property Crowdfunding platform UOWN goes even further, stating that according to their data, over half the people that invest in Property Crowdfunding is aged between 18 and 30.

Some advantages of Property Crowdfunding

Property Crowdfunding has a number of key attractions for investors looking to become involved in the property market.

For instance, Property Crowdfunding platforms provide a wide range of different investment types from investing in debt-based investments to full equity in the developments.

What's more, with equity-based investing, although your original invested capital is always at risk and projected returns cannot be guaranteed, there is still the potential for some good returns.

If the properties sell for more than initially projected, then investors can really benefit as, depending on how the deal is structured, the amount returned to them is generally a percentage of the profit achieved in proportion to the amount of equity held.

For example, if someone invests £1,000 in a small development and that development makes a profit of £250,000, then the investor will be entitled to a proportional share of that profit, along with the repayment of their original £1,000 investment, minus any applicable fees.

Entry amounts do vary depending on the platform however. Some platforms have minimum investments amounts from £1,000 whereas others allow investments from as low as £1.

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 and professional property investors also use Property Crowdfunding sites to develop and diversify their portfolios.

The scope available to invest in the market is wide ranging and investors are empowered to include property crowdfunding as part of a diversified portfolio across geographical areas and types of development.

Each individual investor has to make their own decision, but if you're contemplating investing in the UK property market in 2020, you may like to seriously consider Property Crowdfunding.