Innovative companies are taking the equity crowdfunding model and applying it to property
In the space of half an hour, 126 people clubbed together to buy a house via a property crowdfunding platform last month. The £212,900 two-bed flat in Byfleet, a half-hour train journey from Waterloo, was listed on platform Property Partner.
Founded this year, it counts Betfair co-founder Ed Wray as one of its backers and, joining the likes of early entrants Property Moose and The House Crowd, is one of several fast-growing property crowdfunding platforms. These offer the opportunity to invest as little as £50, in turn earning a return on investment in the form of rental income and capital growth. Property Moose, for instance, currently offers around 7.2 per cent net projected returns. But what should a would-be investor think about when considering this nascent crowdfunding subset?
Platforms will purchase buy-to-let properties outright, with a second opinion from a chartered surveyor. Property and outlook information, and often independent analysis, are made available for prospective investors. Revaluations are done regularly, with some portfolios managed internally, and others outsourced to local property management firms. As it stands, no major platform offers geared investment options – like properties leveraged by a mortgage – though it’s something Property Partner is considering, founder and chief executive Daniel Gandesha tells me.
ONE OF A KIND?
When compared to other kinds of crowdfunding, property is somewhat one of a kind. It is equity, but given that it’s an asset class that won’t go away – land – there’s arguably a far higher degree of security. “When someone invests in a startup company, they’re investing in the prospects of that firm – its business plan, management team, the latter’s ability to execute the former. Those things aren’t relevant in property,” says Gandesha.
Different platforms use different models to give investors access to ownership. No more than four people can be listed on a land registry deed, so they set up limited companies for purchasing each property, and then issue shares in the company.
Gandesha’s company holds the shares using a nominee structure, with the full economic benefits passed through to the underlying investors. Property Moose, meanwhile, which focuses on high-yield properties in the north of England, issues full ordinary voting shares in the company. This gives investors a direct interest in their investment, while a nominee structure may provide further security around enforcing shareholder rights.
Property Moose buys residential and commercial properties not available on the open market at a discount (usually around 15 to 20 per cent), with a fixed investment term of two or three years. Given the discount, a couple of years is usually long enough to offset transaction costs incurred by the sale, explains chief executive Andrew Gardiner. Investors can vote on everything from the suitability of tenants to whether it’s the right time to sell, meaning that some properties are held onto for longer, if there is consensus. Property Partner does things differently, operating a secondary market which enables buyers to sell their shares at a price they set – but obviously they will only get a sale if a buyer is interested. It also offers a five-year exit point for each property, with a protection mechanism enabling you to divest even if others choose not to.
Price fluctuations may be a concern to investors. “Of course it happens, but we give investors as much information as possible and revalue properties every week. Investors can see projected property movements, and we benchmark,” says Gardiner. “We haven’t had a capital loss yet. As an investor, you’re putting less in, but all we’re doing is replicating buy-to-let – the risk profile is the same.”
City A.M. has partnered with Crowdnetic for the launch of its suite of UK crowd finance data. It features real-time information on private, UK-based companies publicly raising capital online through securities-based crowdfunding portals.