Property crowdfunding: impact on market and professional services
22 February 2017
Fred Bristol looks at the appeal of property crowdfunding, where it is heading and the impact it could have on the market and professional services
Present low interest rates have meant that people saving for a deposit for a home are seeing minimal returns while paying more in rent than they would on a mortgage, a further barrier to those locked out of the property market.
There are crowdfunding platforms, however, that allow people to save for a deposit for a home through investment in property. This has 2 main benefits. First, those who want to buy in areas that could experience rapid price growth will not be left behind by the market. Second, it is possible to buy property in a number of areas outside London with yields in excess of 5% and capital values close to what it would cost to build. This means people can benefit from strong rental income rather than earning very little on their savings.
The clampdown on the UK’s 2m buy-to-let investors is likely to mean that they will need to invest in property through corporate structures. Many of these individuals would be better off doing so through property crowdfunding platforms, and it is likely that over the next few years there will be a shift towards doing so.
The demand for such platforms, coming at a time when technology is sufficiently advanced to set them up with little investment, comes both from those unable to get on the property ladder and from buy-to-let investors being squeezed by the government.
A large fixed cost in dealing with investors was having to process their investment and associated paperwork manually, including that linked with requirements such as 'know your customer' and anti-money-laundering regulations. All this can now be automated for a very small fee, around £1.50, rather than the several hundred pounds it would have cost to deal with manually as a bank might, and this makes it viable to deal with very small investments in property while having still conducted the necessary checks.
One of the largest shifts in public thinking after the credit crisis was that the so-called experts were not as good at their jobs as they had made themselves out to be. Technology has reduced the cost of the investment process and increased transparency significantly. People now prefer to decide what to invest in themselves in a transparent manner, and property crowdfunding platforms enable them to do so.
Offline blind-pool funds for retail investors and large listed funds will therefore start to become less attractive in coming years, and could in time prove an outdated model; these businesses will need to adapt or potentially die.
One of the main reasons for the huge increase in the wealth gap currently being seen is asset ownership. Property crowdfunding will allow everyone to own assets, and even if it does not lead to a closing of the gap then it could at least prevent it increasing further.
As well as financing more mainstream investments that were out of reach of many ordinary retail investors, crowdfunding is enabling the financing of less commercial but culturally and socially important investments, from local groups coming together to save valued pubs to the purchase of private land so that it can be enjoyed by the community.
Impact on professionals
Crowdfunding could actually mean that, over time, most people invest in property through online platforms rather than owning 2 or 3 buy-to-let properties, with the associated hassle. The property investment market would then become more professional, like the German model; this would benefit stakeholders and those in associated disciplines as it would mean they would be dealing only with professional landlords.
Fred Bristol is CEO of Brickowner
This feature is taken from the RICS Property journal (December 2016/January 2017)