Investing in Developments - Understanding the risks and the rewards
For people looking for short term investments with potentially high returns, taking an equity stake in a new build development or conversion can be a good option, as long as you understand and consider the risks.
20 years ago the SME sector supplied this country with about 40% of the new homes. In 2013 that was down to 25%. The main challenge the smaller developers face, having secured a property or a plot, is how to fund it. Being small businesses they often lack the capital required to secure development finance from the banks.
For many years, the only solution has been Joint Ventures with High Net Worth Individuals who, in return for providing the equity, take 50%-60% of the profits.
CrowdLords enables those property developers to convert those Joint Ventures into "CrowdVentures", reducing the cost of capital and opening up the opportunity to invest to a much wider group of potential investors.
So what are the risks?
As with all property investments there are potential risks, and the complexity of developments means that there are more things that could go wrong. This is reflected in the projected returns, but it is important that you understand the risks before considering investing.
These might include:
Planning risk
If full planning approval has not yet been granted then this could mean that the development might not go ahead and it might be difficult to sell the plot or the existing property for the price paid.
Contractual risk
Developments usually involves the use of a main contractor and multiple sub-contractors and each of them represent a potential risk.
Market risk
Developments are usually budgeted on the current market values. If the market falls during the construction phase it could be that the units have to be sold for a lower than planned amount.
Time risk
It is possible, once the work has been started, that unexpected issues are uncovered delaying the development. Or it might simply be that the end product takes longer to sell than was expected. Time delays will not only diminish your expected annualized return, but, because of the use of debt to fund the development, the extra finance costs can easily eat into the profit.
Financial risk
Most development investments make use of finance provided by a lender that has a First Charge over the development. If things go wrong, they have the right to take over the project and its assets.
How we illustrate our risk analysis
So what's in it for you?
With so many potential risks you might wonder why anyone would invest. The reality is that these are only potential risks and it is not uncommon for things to go smoothly and for the project to end up being even more profitable than expected.
Indeed, there are some very strong reasons to consider investing in property developments on CrowdLords platform:
Short investment periods
Usually between 12 months and 24 months meaning that you not only get your returns sooner, but you can reinvest the returns to compound your gains.
Substantial projected returns
Typically between 18% and 25%, often with a minimum preferred return that is paid before the developer takes any profits.
Potential Market Growth
The potential to also share in any market growth during the construction phase. It’s not unusual for a 5% increase in market values to increase profits by 20% or more.
Low entry point
You can often invest from as little as £1,000 which means that it’s easier to spread your risks across a number of developments.
Full Transparency
The ability to make your own assessment of the developer, the location and the project before deciding to invest. We are also happy for you to contact the developers directly so that you can hear the facts first hand.
Many people find investing in property development projects on the CrowdLords platform both interesting and rewarding with the added bonus that they know they are helping the supply of housing we so desperately need.
If you like the idea, why not check out our current developments using this link now.
- Is post-war property a good investment?
- Can post-coronavirus unused office space resolve a nation's housing crisis?
- Are you an optimist or a pessimist in Property Crowdfunding?
- Need a hand with puzzling alternative finance jargon?
- Seven myths and one truth about Property Crowdfunding
- Understanding Loan to Value (LTV) - Part II
- Understanding Loan to Value (LTV) - Part I
- Construction workers given the green light to work despite the Coronavirus pandemic
- Is Coronavirus likely to slow down growth in the UK's property market?
- How the decline of UK's High Streets is opening the way for UK property developers
- Who should you turn to for investment advice before Property Crowdfunding?
- Is property crowdfunding a viable way to get onto the property ladder these days?
- The importance of liquidity in your investment portfolio
- FCA guidance changes ring in the new year
- Gender stereotypes in Alternative Finance; are women playing catch-up?
- How does CrowdLords compare?
- Brighton Road - Meet the Developer
- Property Crowdfunding; A Global Appeal for UK Platforms?
- Does the future of Property Crowdfunding lie in the hands of Millennials?
- Meet the Developer - Jo Hagan (5 Mentmore Terrace)