Crowdfunding Enters the UK Residential Property Industry
Getting a foot onto the property ladder in the UK remains a difficulty for many first time buyers. The London markets in particular have increasingly become investment markets as price booms throughout 2014 have created niche markets of buyers and sellers. Traditional solutions to correct imbalances in the market have not delivered the dramatic changes to ‘fix’ the issues. However, a fresh way to raise finances has entered the UK property industry to open up ownership and investment to the masses: crowdfunding. We discuss the latest trend and whether crowdfunding is the next big affordability solution.
Crowdfunding in the UK
Crowdfunding in the property market first began to pick up speed in January 2015 after several years of success across other industries. As crowdfunding has started to capture the attention of mainstream audiences over the past 12 months, investment proposals have shifted from creative projects and start-up ventures to brick and mortar assets.
After steady annual growth reports of more than 100% over the past three years, a leading crowdfunding platform, Funding Circle, hit the $1bn valuation mark following a completed $150m fundraiser. Crowdfunding is regularly marketed as a hassle-free, low-risk investment opportunity without long-term obligations. The combination of peer-to-peer lending and the booming buy to let sector has led to an increase of quick-ticket landlords looking for a way into the housing market. The fact that these specialised platforms now must be authorised by the FCA has heightened credibility and interest within the industry.
Crowdfunding offers the chance to invest in residential property and receive a rental income based on your ownership proportion. Whereas traditional financing for a business or project often relies on a small pool of wealthy backers, crowdfunding allows large volumes of people to contribute a small amount in exchange for a modest share stake - current property platforms have recorded payments of just £50. The first to operate under Financial Conduct Authority regulations, Property Crowd, allows investors to enjoy a small slice of sought-after London property for just £5,000, while others require a minimum payment of several hundred pounds. The most successful platforms have capitalised on tough new mortgage rules and low mortgage rates that are alienating people from the property market.
According to Danny Dorling, a professor at the University of Oxford, London’s property prices were 15.7 times more than the average income in March, 2015: a record high. Despite claims from the Organisation for Economic Co-operation and Development (OECD) that price predictions are overvalued to include risk, London price rises of over 18% in 2014, the average price of a London home is now a lavish £417,500.
The rise of alternative property asset classes in the property market – an increase of 140% since 2010 – has coincided with the rise of alternative finance providers that offer a different avenue to the high risk weights that dominate high street lending. Predictions suggest that small businesses could receive £2bn in additional funds over the coming year while the UK alternative finance market will grow from £1.7bn in 2014 to over £4.4bn by the end of 2015. The rise in student property investment is testament to how the property industry has embraced the alternative in recent years.
A mixed reaction
Many are starting the question the viability and volatility of the crowdfunding market for investors. As property crowdfunding is still largely based on speculation, the industry has not been tested in relation to adverse changes. As a result, the sustainability of online platforms and how customers would be protected in the event of another recession are difficult to forecast. If there was to be a downturn in the current market, substantial amounts of money could disappear. Unlike stock exchanges, a large percentage of equity raised through crowdfunding cannot be sold on to a secondary market to manage risk more effectively.
Buy-to-let property crowdfunding is at the centre of the industry and is a staple on crowdfunding websites. As properties are offered online across the industry, investors have little control throughout the process; from choosing tenants, how costs are managed and how much to charge each month.
While crowdfunding has created multiple success stories, its growth into new markets has created a huge six-month authorisation backlog at the FCA. As thousands of hopeful businesses await approval, 114,000 outstanding appeal cases in England and Wales still remain unresolved. If anything were to go wrong on your investment, regaining your share could be, according to a report from the Council of Mortgage Lenders, “difficult, time consuming, complicated and risky”. The FCA raised the issue of negative risks in a recent crowdfunding valuation, stating that negative risks should be outlined clearly on property crowdfunding platforms.
The involvement of the FCA has helped the fledgling industry to gain momentum, however, as the recent BrewDog record-breaking £25 million crowdfunding scheme proves, ventures can easily raise funds away from FCA regulations. The ‘Equity Punks’ scheme simply asks investors to “be cool” with any risks involved, yet it is the investor who will lose out most.
An innovative and enterprising method of alternative funding in the property market or a risky emerging market that has little benefits to the investor? 2015 will be the year that the UK decides whether crowdfunding has a place in the property market for the foreseeable future.
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