Mayer Brown’s Natalie Carter explores the latest frontier in real estate financing
Crowdfunding has made its mark on many industries but it is now making headway in the UK property market. While there were suspicions that the real estate market would suffer a decline after the Brexit vote, it continues to persevere regardless of the current political uncertainty, with new crowdfunder entrants shaking things up even further.
In a nutshell, crowdfunding allows virtually anyone to use small amounts of money to invest in property and it has effectively created a more level playing field for the property investment market. While property investment is usually dominated by high-net-worth individuals and financial instructions, small investors can now invest into large properties and development projects earning them real returns on their money without them having to get involved in the day-to-day hassle of direct involvement or having to raise large amounts of money themselves. This effectively takes most (but not all) of the risk out of investing in property.
Crowdfunding in property has grown significantly in the last few years and is now a multi-billion pound industry which will only continue to grow over the next few months. Platforms such as Capital Rise, Simple Equity, Cogress and Property Partner have managed to raise millions of pounds within days to fund their investments. More and more platforms are launching, offering different opportunities such as the funding of development finance, long-term buy-to-lets and some with assured retail income. There are also platforms specialising in specific types of property, such as residential, student housing, industrial and office properties.
While the idea of being able to invest in a large property development with as little as £100 may seem exciting, it does pose wider issues for the real estate market. The majority of these platforms are reliant on volumes, so while there is no disincentive for platforms to offer investment opportunities to investors this could also lead to platforms offering riskier investment opportunities during slow periods.
Before crowdfunding took off, larger real estate developments were limited to institutional investors who had the necessary experience and the resources to do so. While crowdfunding reduces the risks associated with investing in property it doesn’t eradicate them — the risks still remain but the losses will be suffered by more individuals who might not have enough disposable income to recover.
Additionally, questions can be raised about how much information investors are given about the investments listed on crowdfunding platforms and whether this information is reliable. Some believe that crowdfunding platforms provide potential investors with as much detail about an investment opportunity as possible but others question whether the information provided is accurate especially as many crowdfunding platforms state that they have not verified the information they have provided about their investments.
Institutional investors will usually instruct solicitors to carry out extensive due diligence on properties they intend to purchase or finance however it is not clear what due diligence is being carried out for crowdfunding platforms or how much information investors are given about any issues (including legal and environmental) affecting the proposed investment.
Concerns have been raised about the lack in regulation and the Financial Conduct Authority is currently consulting on how to protect investors from potential losses incurred due to mismanagement of the funds provided to these platforms but they are yet to put any additional regulations or guidance in place which specifically applies to these platforms.
Regardless of these issues, crowdfunding provides much needed debt finance for small developers and new property entrepreneurs and it is unlikely that this trend will slow down anytime soon. Crowdfunding in property has also seen strong growth in both the US and China and is predicted to appear in other property markets across the world. As interest rates remain low, it is expected that people will try to get a better return for their money and with a little bit more regulation crowdfunders will soon establish themselves as a long-term dominant force in the UK property market.
Natalie Carter is a real estate associate at Mayer Brown International in London.