The Old World
Investing in property is often seen as one of the safest and most secure long term investment options available. In the UK many are looking to expand their investment portfolio with a buy-to-let property.
The buy-to-let market was born in 1996 when the Government introduced specialist landlord loans. Over the next decade their popularity slowly grew because savvy investors saw an opportunity. Both from earning a regular yield from property and capital growth of the investment. This can occur if the value of the property increases over time.
The opposite however being equally likely. One of the major drawbacks of buy-to-let is the high barriers to entry. Landlords require a deposit to purchase the property and the income to cover multiple mortgages should a property be vacant for a period of time.
Furthermore, the buy-to-let market has been seen as a major driving force behind the high growth of house prices. As a result, in 2016 the Government introduced new legislation levying an additional stamp duty of 3% on any new buy-to-let properties. This has the potential to smother the buy-to-let market as an investment route. The burgeoning property crowdfunding industry however is deemed a useful investment alternative for many.
The New World
Property crowdfunding is typically facilitated by an online platform. Property crowdfunding platforms in the UK are required to be regulated by the FCA. The platform is responsible for identifying potential investment opportunities. These opportunities can be residential, commercial, land based or even industrial.
A key differentiator for platforms is obtaining these properties at a competitive value with high growth potential. Therefore, it’s critical that investors look for an experienced and respected platform. This is by no means a guarantee for a successful investment but should be a consideration nonetheless.
Once a platform has identified a property to invest in there are a several variations to the model. Initially, a Special Purpose Vehicle (SPV) investment company is set up. This company will usually hold the actual asset, i.e. the property. Investments by the investors will be made in to the SPV company. This allows the platform to break up ownership of the property investment so it can be sold to smaller investors.
Some platforms may buy the property outright via the SPV with their own finance. Whilst others may place a deposit down on the property and underwrite the investment. Investors that use the platform are then invited to invest for as little as £50 per investment. The minimum investment may differ from platform to platform.
The investors are often required to hold the investment until the platform decides to sell the property. Their shareholding value will fluctuate in accordance with the property value. If the price of the property goes up so will the share value but if the value decreases, this will incur to the investment value.
Investors need to be fully aware of potential investment failure due to market conditions and other external factors. The investment is very illiquid unless the platform offers some form of secondary market. A secondary market allows investors to trade their shares with other investors. This can allow an investor to release their investment to another buyer.
The full investment plus any capital gains can be released if the property is subsequently sold by the platform. Platforms may also take a fee on completion of the sale but this again depends on the business model.
The Future of Property Crowdfunding
It is hard to predict for certain how the industry will evolve due highly unpredictable market. If at any point we see a prolonged reduction in property prices investor confidence in this asset class could be negatively affected.
Regulatory Changes – A major factor to consider will be the regulatory and taxation landscape. The Government is clearly attempting to limit buy-to-let investments and this asset class is seen by many as a means to circumvent the current increases in taxes on these types of properties. The industry could be severely impacted if additional taxation or regulation is introduced.
Expansion and Specialisation – The market is very buoyant despite the existing risks. The potential for this industry to allow for thousands of investors to access the property market for the first time would be a real step forward. The number of platforms could continue to grow and there is an expectation that more specialist property crowdfunding platforms will begin to form. These platforms could focus more on the commercial sector given the even higher costs involved in the development of these types of properties. Whatever the future holds for the industry there will be a huge focus and interest given the British obsessions with property.
Please head over to our detailed guide on Property Crowdfunding to find out more.