Crowdfunding: A significant opportunity for investors, but choose your partners and projects wisely

Summary

  • New forms of on-line investment, such as crowdfunding and peer-to-peer (P2P) allow investors with as little as £100 to invest in one of the most attractive European real estate markets
  • In 2015, crowdfunding and P2P lenders registered continued growth and record transactions volume. These markets are booming in size and can deliver attractive returns, but their complexity should also be taken into consideration
  • Real estate crowdfunding (“REC”) campaigns can carry concentration risk and, as with all businesses, picking partners who are rigorous and thoughtful about risk is important
  • Secondary markets for positions in RECs are unproven in down markets, and investors may not be able to exit positions easily, if at all

Property has long been one of the UK’s most attractive investments, giving investors the possibility to generate a stable and consistent income. However, the recent increase in stamp duty for Buy-to-Let investments, the soaring purchase prices of the last few years and growing market competition is making it more and more challenging for first-time property investors (or first time home buyers) to get a foothold in the market. As a result, alternative types of investment vehicles have emerged, such us crowdfunding and peer-to-peer (P2P) lending platforms.
These platforms have given access to the “man on the street” to be able to invest directly into individual property investments via a platform or by lending to property entrepreneurs through bridging and development loans. However, it must be said that the quality of the platforms varies enormously and the level of diligence undertaken in the underwriting of transactions varies greatly between each provider.

New real estate frontier

As reported in recent research carried out by the University of Cambridge, the UK Alternative Finance sector is worth over £3.2bn, up 84% from last year. Low interest rates are often cited as a driver of this. In this regard, more than 1m people invested or lent via online alternative finance platforms in the UK, with the real estate market capturing more than £700m in debt and equity investments in 2015. As the alternative finance market grows in size, it is important to understand how these new forms of investment and lending work.

Crowdfunding is the practice of funding a project by raising money from a wide number of individuals, in the majority of cases via an online platform. This is usually equity based, where people invest in an early stage project or company in exchange for an equity stake. In the case of real estate investment, the platform typically offers a share in an income producing property or portfolio of properties, or even profit from a residential development. The investor receives regular dividends from the rental income and benefits from price rises. However, if house prices fall, the investor’s capital is negatively affected. Furthermore, investors are also exposed to periods in which the property is vacant as well as management and maintenance expenses, although this would be the case with direct buy-to-let investments as well. Returns on offer range from 6% to 20% depending on the risk profile.

P2P involves lending money to individuals or companies, with investors receiving in return regular interest on the capital lent. The loan is typically secured by way of a first charge over the property, a debenture and/or guarantee from the company involved and the directors. This gives the investor some protection should the borrower fail to repay. P2P platforms generally match lenders (retail investors) and borrowers. Many platforms have loans underwritten by in-house equity or high net worth individuals (or a syndicate of these). Returns range from 5% to over 12%, although the credit ratings of the higher return loans would be considered lower than junk, if ratable at all. We would seriously caution investors on some of these high rate property platforms.

In both cases, the investor’s capital is at risk and it can be difficult to sell the investment if the investor wants his or her money back before the term agreed with the platform. Most recently, some platforms have set up secondary ‘exchanges’, where investors can sell their investment to others, depending on market demand, with the risk of incurring undervalued sales.

In this new market space, unusual ventures are emerging. Practitioners talk about potential business collaborations between the housing portal Zoopla (www.zoopla.co.uk) and the lending platform Landbay (www.landbay.co.uk), with the former gaining access into the property investing environment. In particular, Zoopla will allow its customers to invest as little as £100 into the UK property market. Zoopla users will be able to fund buy-to-let mortgages via Landbay and earn interest on their contributions. It is hoped Zoopla’s brand and scale will enable the partnership to grow quickly and develop a considerable level of scale.

Avamore Perspective

The size and growth of indirect property investments through crowdfunding and P2P, as well as the many new entrants and partnerships in the market, have the potential to re-shape the property market as we know it today.  There are plenty of opportunities out there for online investments, but there are no ‘free-meals’. Among others, we believe that a deep knowledge of the product you are investing in and solid research about the online platform you are using would be prudent. We work with a number of platforms ourselves who we have a high regard for, but not all REC platforms are created equal.

In terms of risk, the biggest one is platform fraud or malpractice. A recent study asked platforms what they saw as the biggest risks in these booming markets. Ranking highest was the potential of a collapse of a platform due to malpractice, which was seen as a high risk to growth by 57% of surveyed platforms. In 2014, the Financial Conduct Authority (FCA) introduced regulation of peer-to-peer lending and equity-based crowdfunding, which after a period of transition, should become fully effective in 2017. It will be interesting to monitor how potential changes will protect investors and how the overall market will react and we will continue to report on this in further articles.

Our firm’s view is mixed on REC platforms. The better run platforms are, generally speaking, reasonable places for retail investors to invest. The badly run lending platforms will unfortunately perish over the next 18 months as opportunities sold to investors as rock solid will unwind on the back of questionable credit/investment decisions as the impacts of Brexit start to take hold.

As with all investments, picking your partner is as important as picking the underlying investments.

About Avamore Capital: 

Avamore Capital is a special situations lender that provides loans to property traders, property developers, property investors, and other property entrepreneurs. Loan sizes are between £0.5m and £5m with larger loans possible in conjunction with its partners. Avamore Capital provides a flexible approach, quick feedback and very fast drawdown, subject to due diligence.

For further information please visit www.avamorecapital.com or contact Rocco Versace at rv@avamorecapital.com.

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