Property remains one of the most popular investment markets for many, but with rising house prices and stricter regulation, crowdfunding could be a game-changer.
A growing number of companies are offering property equity crowdfunding as an option for investors who want to invest in bricks and mortar without ownership or management responsibilities.
Investors can buy shares in individual properties, alongside other investors, and achieve returns through a share of the monthly rental income, and through capital appreciation if the value of the property goes up.
It offers a way of investing in the property market, which is still an attractive option for many, while enabling investors to diversify – investments can be as low as £250 in some cases, so an investor can own shares in a wider range of properties and access multiple regional markets.
A wide appeal
With the average deposit required to buy a property in the UK now higher than ever (some put the figure at around £33,000 on average), crowdfunding could enable first-time buyers to dip a toe into the property market without having to stump up a large amount of money upfront.
Some buy-to-let landlords could also turn to the schemes as they look for other options after the recent series of tax changes and financing restrictions.
One property crowdfunding website, CapitalRise, has a testimonial from first-time buyer Annabelle: “I invested in CapitalRise because my money was earning nothing in the bank and I decided to take a more active role in saving for my future, especially for a deposit for a house. Everybody wants to get on the property ladder – the earlier the better – but when you earn around £30,000 per annum like me, it’s virtually impossible in London.”
CapitalRise offers the chance for investors to raise money for prime property developments in London and the south-east, and then reap the rewards once the properties are sold. It promises returns of between 10% and 18% per year – one past project, Strand Chambers, boasts forecast annual returns of 11.5% and an expected total return of 23% over 23 months – all for a minimum investment of just £1,000.
Other websites, such as The House Crowd, promise more modest returns of 8% to 12%, which is still significantly higher than what you could achieve with most savings accounts.
What’s the catch?
As with any investment, including property, the value can go down as well as up. If the property value goes down, so does the value of your investment, although this can be mitigated by the rental income you’re achieving from the tenant – if there is one.
Like any buy-to-let investment, if the property has a period when it isn’t occupied, for whatever reason, there must be a cushion to take the hit from the financial loss.
Because property is a traditionally illiquid market, investors must be in it for the long haul. This can apply to crowdfunding investments, too – if you suddenly need your money back, you might have to wait for the property development your investment is in to be completed and sold.
Some crowdfunding platforms are more flexible. With Property Partner, for example, each buy-to-let is owned by a limited company, so investors buy shares in the limited company that owns the property they want to invest in, and they receive dividends from the rental profit. If an investor wants their cash back, shares can be sold on a secondary market.
Karen Barrett, founder of Unbiased, advises caution despite the obvious attraction of the promised high returns.
“Property values can and do fall, and these platforms do not solve the liquidity problem with bricks and mortar,” she says. “You might not be able to sell your shares until the property is sold, and you still face the landlord’s headache: 100% occupancy is very hard to achieve and, if the rent doesn’t cover the overheads, you won’t see the high returns.”
Despite a recent slowdown, property prices are expected to rise by an average of 14.2% between 2018 and 2022, according to Savills, with the north largely expected to outperform London, so it will still be a tempting market for many.
The number of sites offering property crowdfunding is growing, and now there is even an app – Minarah – allowing users to easily put money into equity crowdfunding projects across the UK property market.
This could lead to a rise in millennials taking up the option, as it becomes a more accessible and less intimidating arena. It offers projects from new-builds to renovations, while also providing users with a wealth of information enabling them to feel they are making a more informed decision.
Ali Ash, CEO at Acepreneur Media, says: “Millennials are a growing demographic with increasing buying power in the UK. They can now look forward to sowing the seeds to real investments, nourishing them, developing and watching them grow.”