Property crowdfunding platforms allow people to join others in buying stakes in property investments, sharing the profits and spreading the risks. This model has boosted the ailing buy-tolet market, which was squeezed by rising property prices and falling rental yields following tighter regulation and new tax rules. But is the crowdfunding option a robust long-term proposition?
A typical crowdfunded property investment allows individuals to buy shares in a residential or commercial property via an online platform. It should not be confused with peer-to-peer lending, where investors loan money to property developers on which they earn interest, usually of between 8 and 12 per cent.
With property crowdfunding, investors buy shares in a property investment, often for as little as £100. When the target sum for a specific project has been raised, the property is bought outright or with a mortgage, and it is then let for a fixed term.
Investors earn rental income, usually of between 3 and 8 per cent, which is paid monthly through a limited company known as a special purpose vehicle (SPV). The SPV holds all funds and serves as a client account into which dividend payments are deposited. Clients can transfer their income into their bank accounts or hold it in the SPV for future investment.
When the investment’s term is up, investors have the option to reinvest, unless the property is to be sold. If it is sold, any profit accrued from the sale is divided among investors on a pro rata basis. Investors can exit the scheme before the end of its term by selling their shares in a property on the crowdfunding platform’s secondary market. If they do this, though, they lose out on any profits that are made when the property is eventually sold.
It’s a straightforward model. Rob Weaver, investment director at crowdfunding platform Property Partner, says: ‘Crowdfunding enables investors to diversify by buying shares in several different types of property. [Crowdfunded property investment] is proving to be a high-performing and reliable asset class with a place among other investments in a diverse portfolio.’
Fees and charges
Platforms earn their money by making good investments and also by charging their clients fees. Investors usually pay a one-off upfront fee of around 5 per cent of the investment, plus ongoing fees of up to 16 per cent, which are taken from the monthly rental yield. The fees cover everything from the coordination of the purchase to mortgage arrangement, as well as the costs of securing tenants and property management. Platforms may also charge an exit or ‘profit share’ fee to cover the cost of the sale of a property.
If these charges seem a little steep, it’s worth considering the alternative. If you take the traditional route to being a buy-to-let landlord, you need to either stump up all the capital needed to buy property or bear the cost of the mortgage required in full. You will need to cover the legal, conveyancing and associated costs, vet tenants, and ensure the property conforms to health and safety regulations. You will also need to manage and maintain the property, collect rent and, when the time comes, put the property on the market, and tackle the sale and post-sale administration, which will include paying corporation and capital gains tax.
The opportunity to earn income from what is touted as a simple investment was enough to attract David Rogers to property crowdfunding following his retirement from a career in local government. He says: ‘I’ve been investing in a number of projects over the past two years. Recently, I have been drawn to investment opportunities in student accommodation because of the attractive dividend yield. I view these investments as a means of generating income, and am very satisfied with the returns I have received to date. I’ve not yet reached the end of the term, at which point property is sold, but the prospect of capital growth is enticing.’ The yield on his most recent investment is 6.13 per cent.
Risks and pitfalls
One major reason behind the property crowdfunding sector’s nascent success is that it allows platforms to buy property at a wholesale price. This helps mitigate the recent 3 per cent jump in stamp duty and the scaling back of tax relief on mortgage interest payments that hampers the traditional market.
Ray Boulger, a property expert at John Charcol, says: ‘Crowdfunding is a viable alternative to mainstream buy to let, not least because the traditional model has been hammered by the new tax rules.’
However, he adds: ‘This option hasn’t been around long enough to have weathered any really bad times, and there’s little evidence of investments achieving significant capital growth. So would-be investors should do their research before diving in.’ Property prices could stall and fail to beat inflation, while rental yields may be hit further by new government measures that heap pressure on the sector.
In addition, while property management by the crowdfunding platform may make life easier for investors, it also leaves them with no control over rents, tenants or decisions on when to sell. Periods of unoccupancy could test the robustness of the platform, as could a downturn in the residential property market.
On a practical level, getting money out of an investment before its term ends could take some time, as this would require selling any shares held on the secondary market. Even if the investment is held to its full term, it could take around three months to sell the property and release funds. Matters could be even worse if a platform goes bust, as no protection is provided by the Financial Services Compensation Scheme.
Furthermore, it’s debatable whether regulation of the sector is up to scratch. The Financial Conduct Authority is consulting on how to protect investors from losses incurred as a result of the mismanagement of funds provided to crowdfunding platforms. Some analysts fear there is scope for chancers and fraudsters to operate in this sector.
Adrian Lowcock, investment manager at Architas, warns: ‘Investing in a largely unregulated market is dangerous. If platforms come from the property development sector rather than from financial services, they could well underplay or inadequately explain the risks. As far as property crowdfunding goes, I’d say it’s a case of buyer beware.’
The secret of property crowdfunding’s success is access to a wide pool of potential investors and property developers or owners. It appeals to modest- and highnet-worth investors alike, and it offers both small and large property developers and owners access to funds that might cost more through traditional channels such as bank loans or hasty property sales.
In the early days of the sector, which were less than a decade ago, typically high-net-worth individuals bought single properties of specific types in particular regions, or institutions clubbed together to fund a new commercial centre or hospital.
Today the market is far more diverse. Larger, better-established operators are not restricting themselves in term of regional coverage. Many are employing asset managers to research new areas and property options such as student accommodation developments or new-build private and public housing developments.
Bear in mind, however, that this growing investment area involves numerous risks and should therefore not be regarded as ‘safe as houses’.
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