An Introduction Property Crowdfunding
Almost everyday I meet people who were directly affected by the financial crisis of 2008/9. In one way or another it impacted all of us. But one good thing to come from it is the birth of the Alternative Finance Market.
It may be relatively new, but every year since 2012, when it had reached £267m in the UK, it has doubled in size and is expected to have passed the £4 Billion mark in 2015. That includes all types of Alternative Finance to all sectors, not just property. But property is the area, if we follow the trends seen in the US, expected to grow faster than any other over the coming years.
Before focusing on investing in property it’s worth just explaining the different types of Alternative Finance that’s available. Essentially it consists of two main groups and they are Peer-to-Peer Lending and Crowdfunding.
The Different Types of Platform
Peer-to-Peer lending means, as the name suggests, individuals or businesses lending directly to other individuals or businesses. The most well known platforms are Zopa, which lends to individuals and Funding Circle, which lends to businesses. But there are many others, serving different niche audiences or operating in slightly different ways. What they have in common is that the Lender receives a fixed interest rate, which can be anything from 3% to over 10%, usually paid monthly and the principle is repaid during the term or at the end of the term. Just like a bank loan.
Crowdfunding, on the other hand, is different. Here Investors (note I haven’t referred to them as Lenders) provide funds to businesses or social causes in return for something of value. It can be a pure donation where the return is a positive emotional feeling; it can be a product as popularized with Kickstarter and others; or, as in property and business start-ups, it can be equity where in return, the Investors receive a share of profit.
Whilst the number of people lending and investing in this way in the UK is in the hundreds of thousands, this is still a very small proportion of society. A recent study by NESTA found that whilst 58% of people said they were aware of at least one type of platform, only 8% had used one themselves. So there’s a long way to go before it becomes the norm.
The picture was similar when they surveyed small businesses with 56% being unaware of their existence and only 9% had approached a platform for funding. Those that had tried it did so because they expected a greater willingness to take risks and for them to be more flexible, more accessible and quicker than the banks. And indeed, that has been my experience too.
What’s available for would be property investors?
The property sites vary significantly both in what they offer as well as in how the funds raised can be used.
Within Peer-to-peer there are some who offer Bridging Loans, or Development Loans and others who specialise in Buy-to-Let mortgages. The rates available vary considerably as do the criteria in terms of LTV and the need for personal guarantees. All P2P loans in property are secured via a first or second charge against the property and reported default rates are very low.
Funding Circle offer commercial property loans for a broad range of needs from development finance to a buy-to-let mortgage re-mortgage.
Interest rates start at 6% and are based on the risk band and the term of the loan and so in reality they tend to be between 7-12% on these loans, all of which will require asset backing.
LANDBAY specialise in Buy-to-let mortgages for experienced Landlords though they do lend to first time Landlords if the interest cover is 135%. At the moment they only lend on properties in England and Wales and in areas with consistently strong rental demand.
Their website says they will fund mortgages from £70,000 - £500,000 provided this represents less than 80% of a property's value.
Perhaps the more interesting platforms for property investors are the Property Crowdfunding platforms. Currently there are two types available. The first are not much use to you if you’re looking for funding, but are a great place to invest if you are attracted to Buy-to-let but would rather not do it yourself, as they are one-sided platforms.
These platforms like Property Partner are essentially operating as Property Management Companies. They source, buy, let and manage properties funded by the crowd. Each investor has a small share in a property and in return they take a share of income and they share in any capital growth over the term of the investment. The challenge with these platforms is diversification in that they tend to operate in a single asset type around their local area.
Others, like CrowdLords, are two sided platforms (similar to CrowdCube and Seedrs which raise equity for businesses) and we exist to raise funds to help Developers carry-out more developments or professional LandLords to increase or refinance their existing portfolios.
If you’re an experienced LandLord or Developer, CrowdLords enables you to raise Equity Finance for either Developments or for Buy-to-let properties. In return for their investment, Investors receive a share of the income (quarterly) and capital growth (at the end of the term) if it is a Buy-to-let and a share of the profit for a Development.
Developers and LandLords are required to invest at least 5% of the required sum and the funds raised can be used alongside other forms of debt.
Developers who might look to High Net Worth individuals to do a Joint Venture with them, can achieve the same thing by doing a JV with the Crowd who in return would receive a share of the profits. We handle all the legal paperwork, corporate governance and the distribution of profits whilst the Developers focus on what they know best.
Similarly, LandLords that lack the 30% deposit or the funds for refurbishment for their next acquisition, they can raise the funds they need from the Crowd and share their income and the capital growth in return.
What are the advantages of Property Crowdfunding?
When you compare Property Crowdfunding with either P2P lending or Equity Crowdfunding for small businesses it has a distinct combination of advantages for Investors:
Compared to P2P Lending:
- it delivers much higher projected returns
- the value of your investment is linked to the property market and so you benefit from any growth
- you can choose between income, growth or both
Compared to Equity Crowdfunding:
- you are investing directly in a tangible asset
- the valuation is a true market valuation rather than being based on future potential value
- investments are for a fixed term so you know when you will get your capital back
- you can expect the vast majority of investments to be successful, whereas in start-up crowdfunding you expect the majority of your investments to fail
So what about the future?
There’s no doubt that this is just the beginning for alternative ways of funding property. We know this from looking at the US market, which is a couple of years ahead. Over there, the top 3 sites between them funded more than $3 Billion worth of property in the last 3 years. And there are over 140 other property sites operating in the same markets. So we know the segment will grow.
The use of technology to enable efficient lending or investing, along with the direct connection between investors and property professionals means that everyone benefits. Investors and savers get much higher returns and LandLords and Developers enjoy the accessibility, speed of decision-making and the larger appetite for risk compared with the banks.
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