Property Crowdfunding; A Global Appeal for UK Platforms?

Are UK Property Crowdfunding platforms expanding their operations globally?

In a nutshell

Property Crowdfunding is now a significant segment of Alternative Finance. It has grown consistently year upon year over the last decade, and according to the Cambridge Centre for Alternative Finance's 5th UK Industry Report, it grew by a further 200% to £211 million by the end of 2017. It is now a heavyweight within the broader Crowdfunding market and continues to grow.

However, in the same Cambridge report, just 29% of Property Crowdfunding platforms would be open to international expansion, with localised domains in additional countries.

Considering how popular Property Crowdfunding is in the UK, this relatively low percentage seems surprising when taking into account the commercial world in which we live, often seen more as a globalised market than a planet.

So, what exactly is stopping UK Property Crowdfunding platforms from branching out to foreign markets and crowdfunding properties overseas?

It should be noted that Alternative Finance in Europe is a thriving industry, and though on a much smaller scale than the UK, growth in certain European countries is accelerating rapidly.

According to Forbes, the market as a whole in Europe grew by 101% during 2016, and:

"France, Germany and the Netherlands are now the three largest alternative finance markets outside the UK, followed by Finland, Spain, Italy and Georgia."

In fact, according to the Cambridge Alternative Finance Report, the UK's share of the European Alternative Finance market fell from 81% to 73% in 2016 solely for the reason that other countries are expanding at a faster pace than the United Kingdom.

In addition to the data, there are some very reputable Property Crowdfunding platforms that have been set up all over Europe which do choose to operate internationally. One example is Housers, a Spanish Property Crowdfunding platform which allows its investors to crowdfund property not only in Spain, but also in neighbouring Portugal and Italy.

The investment opportunities are reported as being attractive, allowing investors to crowdfund and develop property in rapidly expanding and attractive cities like Barcelona, Valencia and San Sebastián, with a broad range of projects available from housing and flats, to hotels and shops. Users on the platform can invest in Buy-to-Let, Buy-to-Sell and Development Loan Opportunities and they even offer a secondary market, thus increasing the liquidity of the property as investors can buy and sell their shares from existing projects.

Estateguru in Estonia is another such popular platform gaining a reputation outside the country's borders. Offering investment projects in all of the Baltic states of Estonia, Lithuania and Latvia, it has lent more than €92 million across 603 loans with relatively encouraging default statistics; 3.3% defaulted loans and 6.5% late payments of loans. The average interest returns are around the 11% p.a. mark and the platform promotes accessibility by setting its minimum investment amount at €50.

There are other highly-praised and reputable Property Crowdfunding platforms based in Europe which are easily found with very little effort using any search engine, and although the big hitters are still all in the UK, European Property Crowdfunding is a thriving sector of Alternative Finance worth keeping an eye on.

Having established that there is an appetite for Property Crowdfunding in Europe and beyond, and also knowing that the sector is extremely popular in the UK, the logical question is the following;

Why don't UK Property Crowdfunding platforms expand internationally?

Firstly, the most obvious barrier where international commerce is involved, is that of the language. However, in a world where English is the lingua franca to such an extent that you can go almost anywhere and see English being marketed, is this really a viable problem in 2019?

Although language barriers and cultural misunderstandings can be an issue, they pale into insignificance when compared against the sheer cliff-face of international bureaucracy. International bureaucracy alone very possibly discourages most UK Property Crowdfunding platforms from international expansion as there are almost countless hurdles to clear in cross-border legislation.

In commerce, depending on the product you sell, you will always have to deal with different export and travel regulations as well as tariffs and other trade barriers which you may not be aware of.

Focussing on Property Crowdfunding however, the bureaucratic stepping-stones you must traverse don't stop once you get past the border. Solely within the European Union, which, for many things, implements one regulation for all 28 member states, does not have standardised processes for funding property development, and the regulations change in most countries.

Even within the United Kingdom, although the FCA regulates for each nation, if a loan hypothetically defaults, the recovery processes differ in Northern Ireland and Scotland from those in England and Wales. Therefore platforms must employ specific lawyers to operate in both Northern Ireland and Scotland, separate from English or Welsh lawyers.

Essentially, in order to operate a Property Crowdfunding platform from the UK, but fund foreign property developments, the requirements are numerous and the timescale to complete these requirements is lengthy.

You would need to have a licence from the government from the country in which you plan to operate granting permission to commence this specific mode of Alternative Finance, as well as the green light from that country's version of the Financial Conduct Authority in order to confirm that your platform is fully regulated.

You also need to set up an entity in the country complete with sufficient capital and approved offices. Then, working internationally usually means that you need to recruit local employees to assist with the localised running of the platform. However, it's remarkable how much employee law that governs how you can hire, fire, and manage employees differs around the world. You need to be willing to invest in acquiring that kind of knowledge before taking the plunge in making hiring decisions or face potentially severe repercussions down the road.

Exploring the possibilities

Before completely extinguishing any flame the reader may have to set up a Property Crowdfunding platform abroad though, this article does not set out to state that the task is impossible.

Eureeca is a good example of a positive story. When attempting to set up his British Equity Crowdfunding platform with offices in Dubai, Amsterdam and Kuala Lumpur, although CEO Sam Quawasmi recognises that it can be extremely difficult to tackle global regulations, he does also embrace the challenge;

"How can you build a platform to allow a Brazilian investor, with regulations that apply to Brazil, to invest in a German company in a seamless way? That's by far the most challenging part of the business but it's what also gets us out of bed every morning. These are uncharted territories and nobody has done it before."

As a result, Eureeca is the first multi-regulated crowdfunding platform in the world, and Homes or Houses, a UK-based Property Crowdfunding platform, set the record for the largest equity crowdfunding amount raised on Eureeca, raising $611,000 in fewer than 30 days, including a $200,000 investment from an institutional investment firm based in the United Arab Emirates.

Another success story is Funding Circle, a British P2P platform that allows investors to lend money directly to small and medium-sized businesses. As of May 2019, Funding Circle has facilitated over £7 billion in loans to small and medium-sized firms, and has proved so successful in the UK that it now operates in the UK, US, Germany and the Netherlands.

They have had to adapt in order to evolve however, and the business model as well as some of the functions have changed over the years, regarding how you can manually diversify your portfolio, or how much businesses can borrow depending on which country they are based in.

As regulators differ greatly across borders, often platforms which attempt to operate overseas face complicated situations regarding the authorities and regulators playing catch up with the FCA in the UK, who are seen as a pioneer on a global scale. As other countries tighten up their regulations, British crowdfunding platforms setting up their foreign entities have to keep up.

Will it become easier in the future?

Whether or not it will become a simpler process for British platforms to operate abroad in the future is hard to tell. At the time of writing, it is still unclear how Brexit will turn out, and that is restricted solely to European bureaucracy, although there is potential that leaving the European Union could facilitate Britain's means of commerce on a global stage.

What is clear is that there is a rapidly increasing interest for Property Crowdfunding in Europe, the United States and the Far East, thus the potential market could, hypothetically, be extremely lucrative. Unfortunately though, access to the biggest market available naturally comes, as one would expect, with nightmarish regulatory burdens.

As globalisation consumes terra cognita and the planet seems an ever smaller place, it seems inconceivable that this far into the 21st century, it would solely be bureaucracy and paperwork that prevents people from trading with one another. However, whilst remaining as apolitical as possible, what with governmental shake-ups and radical changes of cabinet in the White House and 10 Downing Street, evident surges away from the middle ground in the US and the UK have seen a rise in Nationalism and Separatism, which indeed builds barriers instead of eradicating them.

As Catalans, Scots, Bavarians and Herzegovinians all debate their political futures as possibly independent nations, it seems increasingly likely that there will only be more border controls we'll have to queue at in the future, rather than fewer. This doesn't necessarily bode too well for UK Property Crowdfunding platforms wishing to set up abroad.