Property crowdfunding is becoming an ever more popular way to buy into bricks and mortar. But think carefully before putting your money in.
Many people put their money into residential property, particularly buy-to-let. But with increased stamp duty on second homes and fewer tax breaks for buy-to-let landlords, that has become less attractive. Another way of putting money into property is through real-estate investment trusts (Reits), which own commercial property assets. But the rise of peer-to-peer (P2P) lending has opened the sector to a new audience, offering potential returns in excess of the typical 5%-6% of a traditional Reit.
The biggest platforms are LendInvest, which makes bridging and development loans and has lent out some £1.4bn, according to AltFi Data, which collates information on the P2P finance sector. Landbay offers buy-to-let mortgages and has lent out £166m, while Lendy, which finances development loans and property purchases, has made more than £400m of loans.
Virtual buy-to-let
Equity-based crowdfunding is perhaps the closest thing to traditional buy-to-let investments – you buy a share in a property (usually via a “special purpose vehicle” – a company set up for that purpose) and the property is let out. You receive a share of the rental income in return, plus any profit if the property is sold. Examples include Yielders, Uown and Property Partner. A benefit of equity crowdfunding is its wide reach – it can be used to invest in line with Islamic finance principles; because income comes from rent rather than interest payments, the products are sharia-compliant.
Debt crowdfunding
Debt crowdfunding is probably the most common form of property crowdfunding today. Investors lend money, often in the form of a secured bridging or development loan, to a property developer, which builds or renovates the property and repays the investment. Many platforms secure loans on the assets, which in theory should provide some protection if the developer goes bust, although it might not be easy to sell a half-finished development in Wolverhampton, for example – and certainly not for the full price.
With property price appreciation dwindling in the capital, many platforms concentrate on the provinces, where the potential for capital growth is higher. For example, the House Crowd funds developments mainly in the north of England, and indeed builds properties itself via its House Crowd Developments arm. Another platform, the Blend Network, finances developments mainly in Northern Ireland, taking a first charge on a borrower’s assets. But when the slowdown does reach the rest of the country, you could end up out of pocket.
P2P pitfalls
One feature of P2P is that you can pick a specific property to invest in. The flip side to this is that you are making a decision on very specific local markets where you may have little or no knowledge. How familiar are you with the residential market in Chorley, for instance?
Also, consider the illiquidity of P2P compared to Reits. Platforms may have a secondary market, but it could take a very long time to sell your investment, assuming you can find a buyer. Reits have the advantage of being traded on the stock exchange, and can be disposed of quickly if necessary.
Finally, if you really want to spice things up, it will soon be possible to take fractional ownership of property using blockchain. Several start-ups are now working on platforms that will allow property owners to “tokenise” their property, and sell those tokens to investors. But if you’re not ready for the risks of P2P crowdfunding, you’re certainly not ready for that.
News bytes… the Winklevii launch a new cryptocurrency
► A cryptocurrency backed by high-profile entrepreneurs Cameron and Tyler Winklevoss (dubbed the “Winklevii”) has been approved by the New York Department of Financial Services. The Gemini dollar is pegged 1:1 to the US dollar. That makes it a stablecoin, a cryptocurrency pegged to a stable asset. Traditional cryptocurrencies such as bitcoin frequently swing by more than $1,000 a day, making everyday transactions impractical. The hope is that stablecoins won’t suffer from this volatility, allowing users to transact in confidence. Another new stablecoin, Paxos, has also just been launched. Others include Tether, the market leader; MakerDAO; and Basis. Gemini is built on the Ethereum network, and the US dollar deposits backing the currency will be regularly audited. Some stablecoins have been criticised for a lack of transparency.
► Digital challenger bank Starling has launched the UK’s first “banking-as-a-platform” offering, reports the Fintech Times. Starling’s API will allow businesses to plug into Starling’s systems and use its banking licence to offer products such as debit cards, current and savings accounts under their own brands. So in effect, customers will be opening Starling accounts under partner brands. The bank’s first partnership is with savings-account marketplace Raisin UK, enabling it to open customer accounts and take deposits. Starling has also introduced personal loans and will allow customers with an overdraft of up to £2,000 to turn that into a personal loan at a lower interest rate, typically of around 11.5%. It has also launched a personal account for 16- and 17-year-olds, which offers all the features of its standard current account except access to loans and overdrafts.
► ASX, Australia’s main stockmarket operator, has said it will delay its switch to blockchain technology by six months, reports Reuters. ASX said last year that it would replace CHESS, its current registry, settlement and clearing system, with distributed-ledger technology, streamlining operations and saving $23bn a year. It would be the world’s first securities exchange to adopt blockchain technology. ASX needs more time for development and testing. It has been working on the new system since 2016.