How is crowdfunding affecting the property sector?
Crowdfunding is playing an increasingly important role in all parts of modern life, none more so than the property sector.
In its modern, online form, it’s been going strong since about 2003, but it’s only in recent years that it’s really started to grow in prominence.
It’s predicted by some to be worth more than $110 billion by 2021, while the World Bank Crowdfunding Report suggests the crowdfunding industry will hit ‘a more modest’ $93 billion by 2025.
What is crowdfunding?
Crowdfunding is not a new concept – it’s been used throughout the ages to help fund projects and the construction of iconic buildings, including medieval cathedrals and the Statue of Liberty.
It’s the process of securing capital from a wide range of investors to help fund a project. This could be funds for a new tech start-up, a music album or, increasingly, investment in property.
There have been many examples in recent years of investors pooling together to purchase homes, with low entry levels helping to ensure that property investment is open to a wider audience than ever before.
How big is crowdfunding in the property sector?
Crowdfunding platforms such as Property Partner, The House Crowd, Property Crowd, Property Moose and CrowdLords all aim to make investing in property as simple as possible.
Some are aimed at professional investors; others aren’t – with certain platforms allowing investors to invest a small amount of money and then share in the profits proportionately.
Property Partner has raised more than £500,000 for a London flat in just over half an hour – with investments registered at a rate of £242 a second – while the same firm was also responsible for the world’s quickest ever crowdfund in 2015 when it funded the purchase of 42 flats in a converted mill in just 643 seconds.
Other examples include:
- Estate agency Nested raising £36 million in funding.
- LettingsSupermarket.com raising nearly £250,000 on Crowdcube.
- Online agency Vesper Homes securing a £100,000 investment.
- A French castle purchased by 1,000 investors for £736,283.
What are the benefits?
With traditional banks and lenders now much stricter, alternative investment avenues are becoming more popular.
Also, with a range of recent changes to the buy-to-let sector, those looking to invest might prefer the prospect of property equity crowdfunding. This allows investors to buy shares in properties along with other investors and, whilst this spreads the risk, it also means lower profits.
Crowdfunding allows investors to target returns in two ways: through capital gains, if the value of the property increases; and through a share in monthly rental income from the tenants who rent the property that investors have invested in. The ability to diversify is much, much greater.
What are the risks?
Of course, property investment is never without risk. And not all crowdfunding ventures are successful. Here are a few possible downsides:
- The value of an investment – and any income derived from it – can slide as well as rise. Investors are not guaranteed to get back what they’ve put in.
- Property prices can fall very suddenly and the value of an investment will fall with it.
- Accessing and exiting investment can be tricky, with property typically an illiquid market.
- Given the number of investors involved, individuals are unlikely to have much control or say over the developments they have invested in, and must trust the developer or management company to look after the property adequately.
While more people investing in property is good news for letting agents – as this will mean more properties to manage and look after – you should always look to inform landlords and investors that crowdfunding, like anything else, has upsides and downsides.
How can letting agents utilise crowdfunding?
Crowdfunding also represents an excellent way for letting agents to expand their business, with the ability to raise money much more quickly than you would be able to through traditional means.
You may be looking to open new offices, expand your team or take more properties on to your books – and an injection of funding could help to achieve this and support short, medium and long-term growth.
Caution is needed, though, as raising the required funds isn’t always easy and crowdfunding isn’t without its risks or pitfalls. You would need to be realistic about how much you want to raise and work with a reputable platform to raise it.
Remember to seek advice
Before making an investment decision, it’s recommended that you do your research and seek independent advice.