Is this the year alternative finance goes mainstream?
The UK alternative finance market has matured at a speed few thought possible – and along with-it crowdfunded property investment. The Cambridge Centre for Alternative Finance has tracked this transformation for seven years. Here are its latest findings.
The total funds invested in the UK's crowdfunding and peer-to-peer lending market rocketed by 35 per cent in 2017. This remarkable growth has emerged from data compiled by the Cambridge Centre for Alternative Finance (CCAF) as part of its 5th UK Alternative Finance Industry Report – an annual deep dive into the state of the sector.
£6.2 billion was invested in alternative investment platforms in 2017 compared to £4.6bn in the previous year. That makes a grand total of £17.2bn processed by online crowdfunding and peer-to-peer lending platforms since 2011.
But this is just one part of the picture. While CCAF's research shows that the overall value is rising, so the types of investments being offered and successfully fulfilled are changing.
Consumer lending in the alternative finance space was valued at £1.4bn – a crucial part of the market. But investors have for the past couple of years been building out new strategies aimed squarely at business clients especially in the property development area.
CCAF executive director Bryan Zhang told FinExtra in a piece entitled Alternative Finance Platforms Report Stellar Growth:
"This report reflects an industry that is playing an increasingly important role in helping consumers and businesses access finance, whilst growing to become more diversified, sophisticated and institutionalised."
Crowdfunded Equity and Property Investment
A significant area of growth in the business arena comes from UK real estate crowdfunding.
"Our recent experience validates the Cambridge Centre's findings."
Explains Richard Bush, Co-Founder of crowdfunding platform CrowdLords, who also commented:
"Developers are on the one hand relying less on traditional banks for finance, and on the other: investors are diversifying their approach by factoring in crowdfunded equity and debt investment directed at high quality property developments as part of their strategic mix."
The figures speak for themselves. Total UK real estate crowdfunding jumped from £71 million in 2016 to £211 million in 2017 – a whacking 197% increase in money raise for property development projects, the report said. In conversation with us Mr Bush remark on a happy coincidence:
"CCAF began tracking Real Estate Crowdfunding in 2015 – the year we began trading. Since then the model has generated £369 million across all platforms – 57% of which was generated in 2017 alone."
As the crowdfunding industry matures, investors are repeating their business too. The number of repeat fundraisers rose in 2017, from 29% to 57%. Of all investors in real estate crowdfunding, 78% had invested in a previous campaign.
Bush's analysis is borne out by a recent Forbes article entitled The UK's Alternative Finance Sector Grows By A Third In Just 12 Months.
"The growth in business support from alternative finance comes during a period when lending from traditional banks to small and medium-sized enterprises continues to remain subdued."
Forbes said, and continued:
"In the ongoing low interest rate environment, many banks have little interest in growing their lending books and are not competing to attract savings capital. This appears to have created an opening for alternative finance platforms."
Businesses, private investors, and property developers are clearly turning to alternative finance for investments as traditional banks remain unsympathetic to the market's needs.
Regulation has also had a part to play. Senior Research Manager Tania Ziegler told Crowdfund Insider that the CCAF research team had noticed changes to buy-to-let rules affecting investment decisions.
"Some of the platforms surveyed in our study indicated that this change may actually make real estate crowdfunding an attractive option for retail investors [who] want to take advantage of [income-bearing] property assets."
Bruce Davis, Director of the UK Crowdfunding Association, said the UK will need to ensure home-grown providers of investment capital can keep up with burgeoning demand, he told FinExtra:
"We hope that policy makers and regulators alike will think about ways that they can further support the growth of the industry as it matures and diversifies further."
Online Market Maturing Nicely
The CCAF team surveyed more than 75 online alternative finance platforms between May and September last year with the support of the Peer to Peer Finance Association (P2PFA) and the UK Crowdfunding Association (UKCFA). The CCAF report claims to present an accurate snapshot of around 95 per cent of the known UK online alternative finance market.
Business funding of £4.2 billion - 68 per cent of the total market volume for alternative finance - was raised via online platforms in 2017, the research revealed. More than 90 per cent of the online alternative finance for business was in debt, with the balance made up of equity and what the report calls non-investment models.
Institutional Funds Follow the Trend
Forty per cent of the debt funding for peer-to-peer business lending was provided by institutional lenders including mutual funds, pension funds, asset managers, banks, family offices and other financial institutions. Researchers claim this demonstrates the growing institutionalisation of the funding model.
Meanwhile, institutional funding accounted for 39 per cent of the funding in peer-to-peer consumer lending, up from 32 per cent in 2016, reported the CCAF team. It also accounted for 34 per cent of funding in peer-to-peer property lending, up nine per cent from 2016.
The speed of institutionalisation in equity-based crowdfunding has accelerated significantly over the past three years, from just eight per cent in 2015 to 25 per cent in 2016 and 49 per cent in 2017. This upward trend is said to be driven by a surge in co-investment activity on equity-based crowdfunding platforms.
And as the entire industry comes to terms with a new way to fund business, the UK alternative finance platforms have apparently changed their models in 2017 in response. Twelve per cent of surveyed platforms reported they have significantly altered their business model in the last 12 months, while 40 per cent said they had given their model a slight revision.
"This continued trend in making business-model adjustments and innovating product offerings points to an alternative finance market that remains highly fluid and dynamic."
Reported the CCAF team.
Are Crowdfunding Platforms Going Global?
The report also marks the first time CCAF has asked platforms about international expansion strategies and the results offer an intriguing insight into the sector's global ambitions. Research illustrated that just under half of the surveyed peer-to-peer lending platforms have plans for international expansion.
The CCAF research noted significant cross-border activity, with international investors taking advantage of real estate opportunities and new property development projects in the United Kingdom and UK investors looking for profits outside of their home market.
Those platforms that indicated they were looking to expand on an international basis said they were promoting a single global brand. In contrast, 38 per cent of equity-based crowdfunding platforms and 29 per cent of real estate crowdfunding platforms said they prefer to develop a global brand, but with localised iterations in countries they move into.
Drilling down on these facts Mr Bush commented:
"CrowdLords is a part of this trend towards internationalization. We have around 30 investors based overseas. It was always a part of our ambition to service that segment, and so far that has been through organic growth. But as UK property investment opportunities open up to foreigners, we are increasingly ramping up our outreach to them."
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