As stock markets take a dive due to a slowdown of emerging market economies, home prices are rising, so is now a good time to consider property crowdfunding?
A relatively new phenomenon, property crowdfunding platforms are popping up and promising returns that seem to outperform other markets.
The principle is a pool of investors put some money into a crowdfunded home, which is sourced and refurbished by the platform.
The property is then sold at a profit or rented out and then sold.
The aim is to return the initial investment plus any profit from the rents and sale after the refurbishment is completed.
Cheap way to invest
Property crowdfunding is popular with many investors because of the low cost of entry – finding £500 or £1,000 to join a pooled investment is easier for many than forking out a £50,000 or more deposit plus having cash in reserve as working capital to renovate.
Like any investment, property crowdfunding comes with risks:
- No control – Investors are silent partners in the management of a property and have no say in issues like the cost of repairs but have to pick up the tab
- Exit route – As a part-owner of a home, you cannot just put the property on the market and take an offer if you want out. You either have to wait until the property is sold or have to find a buyer for your share, which is likely to be at a reduced market value
- Taking profits – Depending on the renovation costs and rents, the yields are likely to be low and any break-even on investment could take some time to materialise
- Protection – Property crowdfunding is outside of the regulatory schemes giving access to an ombudsman and financial compensation if something goes wrong. The likelihood is investors would have to take expensive legal action to settle any dispute
House Crowd, a property crowdfunding platform, recently took their offering on to BBC TV’s Dragon’s Den, looking for a £1 million cash to grow the business.
Market shake-out
The company was valued at £20 million despite turning an income of just £375,000 while showing no profit.
The Dragons criticised the venture and all declined to support the pitch.
One crowdfunding expert expects a rebalancing of the market.
Julia Groves, director of the UK Crowdfunding Association, explained more than 10,000 platforms are offering crowdfunding opportunities but too many work in the same sector.
“There are at least 10 property crowdfunding platforms,” she said. “Do we really need 10? There’s always a worry of a bubble and that crowdfunding is maturing and some will be driven out of business, leaving the more professional still operating.”
I am disappointed by Julia Groves’ hypocritical comments here. It appears she herself is only guided by personal advantage (Director of the UKCA and the Trillion Fund) rather than consistent, respectable principles. Surely the importance should be placed on whether a platform is directly authorised and regulated by the FCA? Too many platforms are trading under an AR status (and therefore not directly punishable by the FCA), or a consumer credit license, which is not even relevant. I am surprised that the Trillion Fund is not yet authorised by the FCA, choosing to operate under AR status. Perhaps she would be better off playing politics at Westminster.