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Property crowdfunding: should you become a virtual landlord?

Property crowdfunding is becoming an ever more popular way to buy into bricks and mortar. But think carefully before putting your money in.

Many people put their money into residential property, particularly buy-to-let. But with increased stamp duty on second homes and fewer tax breaks for buy-to-let landlords, that has become less attractive. Another way of putting money into property is through real-estate investment trusts (Reits), which own commercial property assets. But the rise of peer-to-peer (P2P) lending has opened the sector to a new audience, offering potential returns in excess of the typical 5%-6% of a traditional Reit.

The biggest platforms are LendInvest, which makes bridging and development loans and has lent out some £1.4bn, according to AltFi Data, which collates information on the P2P finance sector. Landbay offers buy-to-let mortgages and has lent out £166m, while Lendy, which finances development loans and property purchases, has made more than £400m of loans.

Virtual buy-to-let

Equity-based crowdfunding is perhaps the closest thing to traditional buy-to-let investments – you buy a share in a property (usually via a “special purpose vehicle” – a company set up for that purpose) and the property is let out. You receive a share of the rental income in return, plus any profit if the property is sold. Examples include Yielders, Uown and Property Partner. A benefit of equity crowdfunding is its wide reach – it can be used to invest in line with Islamic finance principles; because income comes from rent rather than interest payments, the products are sharia-compliant.

Debt crowdfunding

Debt crowdfunding is probably the most common form of property crowdfunding today. Investors lend money, often in the form of a secured bridging or development loan, to a property developer, which builds or renovates the property and repays the investment. Many platforms secure loans on the assets, which in theory should provide some protection if the developer goes bust, although it might not be easy to sell a half-finished development in Wolverhampton, for example – and certainly not for the full price.

With property price appreciation dwindling in the capital, many platforms concentrate on the provinces, where the potential for capital growth is higher. For example, the House Crowd funds developments mainly in the north of England, and indeed builds properties itself via its House Crowd Developments arm. Another platform, the Blend Network, finances developments mainly in Northern Ireland, taking a first charge on a borrower’s assets. But when the slowdown does reach the rest of the country, you could end up out of pocket.

P2P pitfalls

One feature of P2P is that you can pick a specific property to invest in. The flip side to this is that you are making a decision on very specific local markets where you may have little or no knowledge. How familiar are you with the residential market in Chorley, for instance?

Also, consider the illiquidity of P2P compared to Reits. Platforms may have a secondary market, but it could take a very long time to sell your investment, assuming you can find a buyer. Reits have the advantage of being traded on the stock exchange, and can be disposed of quickly if necessary.

Finally, if you really want to spice things up, it will soon be possible to take fractional ownership of property using blockchain. Several start-ups are now working on platforms that will allow property owners to “tokenise” their property, and sell those tokens to investors. But if you’re not ready for the risks of P2P crowdfunding, you’re certainly not ready for that.

Source: Residential Landlord

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Housing development boosted by crowdfunding efforts

A housing development in Greater Manchester has secured a cash injection of more than £1m through a crowdfunding platform.

The House Crowd was founded in 2012 by Frazer Fearnhead and Suhail Nawaz. It was the first property crowdfunding platform in the world and has helped give rise to the industry.

Over a period of 24 hours, £1.3m was raised with the majority going towards the Egyptian Mill Development in Lees, which comprises 41 houses and 15 apartments. House Crowd Developments – which is part of the House Crowd Group of companies – is behind the initiative.

The rest of the balance – £98,000 – was invested in the House Crowd’s Innovative Finance ISA, which allows individuals to use their annual ISA allowance to lend funds through property investment, while receiving the benefits of tax-free interest.

Fearnhead said: “Raising £1m in a single day is not just a confidence boost for The House Crowd and the service that we offer, but also for housing developments in the North West. The numbers don’t lie – there is clearly a big appetite amongst retail investors for property development financing and peer to peer secured lending, which is exactly what we offer.

“It’s important that we keep up this momentum to continue helping solve two of the major problems within our society – the lack of quality housing and people’s difficulties in saving their money.

“If we can continue building much needed housing, whilst providing our members with a reliable way to build a nest egg for their retirement, then we are serving our purpose.”

Source: Insider Media

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The Crowdfunding Trend – Threat or Opportunity?

Crowdfunding was previously only an approach for start-ups to get up on their feet, but the method is now showing potential for established companies to shift their strategy and encourage positive and profitable change. Lauren Razavi analyses the potential of crowdfunding as both a disruptive threat and an opportunity for established companies.

Crowdfunding has been gaining more and more ground in recent years, especially among European consumers. It might seem like a trend embraced only by start-ups desperate for cash, but in reality crowdfunding is quickly becoming a useful tool to recruit and maintain an enthusiastic client base for companies across multiple industries.

We live in a world in which failure to adapt to technological advances can spell destruction for a company. But is crowdfunding a dangerous threat that start-ups will use to disrupt industry, or an opportunity for established players to make profitable changes to their process?

Alternative Finance 101

A report by CrowdfundingHub.eu identified four major types of crowdfunding:

  • Donation Based crowdfunding relies on the charity of the customer base, with little to no anticipated reward. The biggest risk is that the company won’t raise the funds they need to deliver on their promises – in which case, they are responsible for either returning the donations or funnelling them into an acceptable project.
  • Reward Based crowdfunding provides security to the investor by giving them a sample of the finished product. This will satisfy most consumers, who aren’t looking for a share of the profits but simply to support an idea they find compelling. However, this type of crowdfunding requires the company to actually have a sample product they can ship, which means that the initial funds will have to come from another source.
  • Equity Based crowdfunding is similar to traditional investment methods in that the backer will receive a stake in the company, and possibly even some control over the final product. The primary issue with this type of crowdfunding is that in Europe the company will be subject to the regulations and policies of the European Banking Authority.
  • Peer-to-Peer Lending is also similar to traditional financing – the backer will provide funds on the understanding that those funds will be paid back with interest at some point in the future. In some countries such as Italy and Belgium, peer-to-peer lending is prohibited, and there are various other restrictions in place across Europe.Each type of crowdfunding has its own pros and cons, but a major advantage of all of them is that they are more accessible to less established companies who may not be able to guarantee a consistent return on investment.

Industry Disruption

There are some concerns that the rise of crowdfunding will cause major disruption across industries. According to the world bank, 2016 saw more money raised from crowdfunding than from venture capital.

That’s bad news for investment managers – instead of paying costly legal and management fees, big investors are now choosing to cut out the middleman and interact directly with the companies they feel best align with their interests. As more and more platforms choose to cater to specific industries, investors are better able to make decisions for themselves, instead of relying on financial experts who charge fees for their knowledge.

The unregulated nature of the crowdfunding sector is also a cause for concern. In Europe, regulators have struggled to harmonise the challenges that  crowdfunding brings with existing financial practice. In Finland, for example, there is no requirement for crowdfunders to have an MiFID licence, which means that companies who have obtained a licence are more strictly regulated than their unlicensed competitors. Other nations have been quicker to adapt – in France and the UK existing legislation has been brought smoothly up to date to be compatible with crowdfunding.

However, it can’t be denied crowdfunding is bringing in some much needed changes, especially in European markets. Traditional investors tended towards funding large, trusted companies during the financial crisis, which meant that many small to medium businesses were lagging behind in capital investment. Crowdfunding means that general consumers can now invest in local, small to medium businesses from their smartphones – and that means that those same struggling companies are able to gather the funds they need to compete in the big leagues.

Power to the People

Easy access to the internet and the simplicity of digital payment options is the driving force behind the crowdfunding boom. Europeans are demanding a more transparent financial market, and right now it seems as though crowdfunding is answering that demand. The European Crowdfunding Network hosts articles on its website guiding companies through everything from designing compelling incentives to identifying the motivations of their funders. Crowdfunding means that companies are connected to their consumer base more closely than ever. Whether that’s a curse or a blessing depends on the company’s willingness to engage with their backers.

The rise of crowdfunding presents a golden opportunity for established companies to reconnect with their audience and test the waters before fully committing to a project. Your funders will eventually become your customer base. They know exactly what they’re looking for in a project, and they are more than happy to talk about it. When you engage with your audience on this level you’re essentially bringing them on board as co-creators – and their advice can be more helpful than you’d think. Your funders might not be the most seasoned market analysts, but they can be valuable mentors and smart beta testers.

One of the major advantages is that it combines financing and marketing in one easy package. Your funders will be your biggest cheerleaders – they know every feature of your product, every drawback, every brilliant innovation. Some of them will be marketing professionals themselves. Some of them will be experts in their field who are desperate to share this helpful new tech with their colleagues. All of them will be guaranteed customers by the time your product hits the shelves.

Whether it is a threat or an opportunity for your company depends on your willingness to embrace change. Those who have so far failed to adapt to the crowdfunding trend are already suffering repercussions, but those who have taken the time to adjust their methods and bring them in line with the trend are finding that crowdfunding isn’t so scary after all – in fact, if you play your cards right, it can be an important tool for your business going forwards.

Source: Eureka

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Investing in property the crowdfunding way: Is it really worth it?

If you were to ask people in the UK whether they would like to invest in property, most would say a resounding yes.

However, investing in property today is an expensive business – tens of thousands of pounds are needed for a deposit, and that’s before figuring out whether the rental income could cover the interest for a buy-to-let mortgage.

And let’s not mention the effort required to let, manage and stay the right side of all the regulation that has cropped up recently targeting landlords.

This is where property crowdfunding sites profess to be the future: invest in property from as little as £50 and they do all the work for a fee, including sourcing the properties, finding the tenants and providing management services.

The most popular sites are Property Partner and The House Crowd – with Property Moose (the first to be fully regulated) and Bricklane (the first to offer a property ISA account) providing a supporting cast.

But how successful is property crowdfunding as an investment, compared, say, with premium bonds and cash ISAS, which remain the most popular places for Brits to store their money – if you don’t count our own homes as an investment?

The numbers are staggering – 25m people have savings with premium bond provider NS&I and there is a combined £585bn held in ISA accounts.

So naturally we should judge the success of property crowdfunding websites – and their promise to democratise property investing – by the amount invested.

Here are all the websites we could find data on:

Property Partner – £107.8m of property invested in (£2.7m income earned)

The House Crowd – £74.5m (£16.7m income earned)

Property Moose – £13m

Bricklane – £8m

There were several other websites that are open to investors but were seemingly too small to divulge how much they have invested in and therefore were difficult to rank: Brickvest, Yielders, Crowdwithus, Crowdlords, Uown, Crowd2let, Capitalrise and Propertycrowd.

The combined c. £200m accumulated by property crowdfunding websites over the past few years is at best disappointing.

This isn’t the panacea of investing we were promised by endless articles on the topic of property crowdfunding.

Looking at posts on forums like Moneysavingexpert, many of the comments focus on the small amount of income after fees.

And in this climate of lower property price growth, income is all you can truly rely on when it comes to property investment.

Articles in the FT also point to the risks of investing for property price appreciation rather than for secure income.

Maybe that’s the problem: most people associate buy-to-let with runaway house prices – but that is something that few people believe in today.

Source: Property Industry Eye

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An introduction to crowdfunding

Crowdfunding is an increasingly popular alternative method of raising finance. But what is crowdfunding? In this article we explain how crowdfunding works, the risks and rewards and the UK regulation.

What is crowdfunding?

Crowdfunding is the practice of raising money from a large number of individuals for the purposes of financing a project, venture, business or cause. Traditionally, crowdfunding has been carried out via subscriptions, benefit events and door-to-door fundraising. However, today the term is typically associated with raising money through website platforms, which allows crowdfunding to reach a larger pool of potential funders.

How does crowdfunding work?

Crowdfunding usually takes place on a light-touch online platform rather than through banks, charities or stock exchanges. The business or individual seeking finance will typically produce a pitch for their business, project or venture, which is then uploaded to the online platform with the aim of attracting as many loans, contributions and investments as possible. Websites such as KickstarterSeedrs and Crowdcube are examples of the available online platforms, which enable project initiators to reach a pool of thousands, if not millions, of potential funders.

What are the different types of crowdfunding?

Crowdfunding can broadly be split into four main categories:

  1. Loan-based: also known as peer-to-peer lending (P2P), this involves individuals lending to businesses or other individuals in return for interest payments and a repayment of capital over time.
  2. Investment-based: individuals invest directly or indirectly in new or established businesses by buying investments such as shares, debt securities or units in an investment scheme.
  3. Donation-based: people give money to individuals, organisations or enterprises they want to support, with no expectation of any return on their investment.
  4. Pre-payment or rewards-based: individuals give money to receive a reward, product or service (for example, concert tickets, artwork, a new product etc.).

In addition, less-common forms of crowdfunding exist whereby funders invest in order to receive, for example, software value tokens (see A guide to initial coin offerings) or a share of the compensation from the results of litigation.

Crowdfunding examples

Crowdfunding’s success is not just limited to industry – it has been used to successfully raise funds for a range of not-for-profit organisations and charitable causes. Children’s charity, Kids Company, successfully raised over £100,000 in under two months in 2014/15 with their campaign on the platform Crowdfunder. In 2016, crowdfunding campaigns raised £12.3 million on the platform JustGiving, a platform for online charitable donations.

That said, businesses are also benefiting from crowdfunding initiatives. Starting in 2007 as a two-man partnership, BrewDog successfully crowdfunded their way (using an equity-based platform) through year-on-year growth to become an international company valued at circa £1 billion in 2017. Perkbox, a cloud-based employee perks and engagement platform for businesses, raised circa £4.3 million with its campaign on Seedrs. Finally, in 2016 Crowdcube raised circa £6.7 million, effectively making the crowdfunding platform its own biggest success story.

How is crowdfunding regulated?

In the UK only certain crowdfunding activities are regulated. Donation-based and rewards-based crowdfunding are not regulated, whereas firms carrying on activities associated with loan-based or investment-based crowdfunding may require FCA authorisation under the Financial Services and Markets Act 2000 (FSMA). Accordingly, what follows is a high-level summary of the regulation of both loan-based and investment-based crowdfunding in the UK.

Loan-based crowdfunding

The platforms

In 2013, with loan-based crowdfunding becoming an increasingly popular means of raising money and recognising that it was difficult to regulate the practice under existing regulatory provisions, the FCA took the step of adding a new activity, at article 36H, to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO).

Under article 36H of the RAO, loan-based crowdfunding became regulated as the “activity of operating an electronic system in relation to lending“. Under this provision, online platforms facilitating loan-based crowdfunding between two individuals or between individuals and businesses will be carrying on a regulated activity and will, therefore, require FCA authorisation (unless certain exemptions, such as for charities or appointed representatives apply).

Regulated platforms will be required under the FCA rules to comply with certain consumer protections around the clear disclosure of information and the protection of customer funds.

The participants

Generally speaking, where the borrower is an individual (or a partnership or unincorporated body of individuals), and the investor is lending in the course of a business, the terms upon which the loan is made may constitute a regulated credit agreement and consequently be subject to the full requirements of the Consumer Credit Act 1974 (CCA). The investor will then need appropriate FCA authorisations for the provision of consumer credit and will be required to comply with the relevant rules in the FCA Handbook (CONC in particular). To help with this, the FCA has published a webpage, which provides a useful summary of the key provisions of the FCA Handbook that apply to loan-based crowdfunding firms.

Where the investor is not acting in the course of business, so that the agreement is a non-commercial agreement under the CCA the investor will not require FCA authorisation. There are, however, additional obligations on the operators of the platforms in CONC to help protect consumers from some of the risks associated with these non-commercial agreements.

Participants acting by way of business should also take care not to inadvertently carry out other regulated activities when crowdfunding. In this context, the FCA has warned that businesses which borrow through a crowdfunding platform with a view to lending this to other individuals may be carrying out the regulated activity of accepting deposits – which will require additional authorisation.

Investment-based crowdfunding

The FCA regards investment-based crowdfunding as a high-risk investment activity, with the potential for capital losses. This is likely due to the fact that the instruments traded on such investment-based crowdfunding platforms are non-readily realisable securities that are not listed on regulated stock markets and are instead traded over the internet and via other means.

The platforms

Unlike the bespoke regulatory rules for loan-based crowdfunding, activities associated with investment-based crowdfunding platforms typically fall under the existing rules, including article 25 of the RAO which covers both arranging deals in investments and making arrangements with a view to participating in deals in investments. Accordingly, online platforms facilitating investment-based crowdfunding are likely to be carrying on a regulated activity and therefore require FCA authorisation.

While the FCA has not published a webpage summarising the FCA Handbook provisions applicable to investment-based crowdfunding, it is thought that many of the provisions applicable to loan-based crowdfunding will be relevant to investment-based crowdfunding.

The FCA introduced further rules around financial promotions applicable to firms operating investment-based crowdfunding platforms in 2014. As a result, such firms may only make direct offer financial promotions to retail clients if such clients either:

  • have taken regulated advice
  • are high net worth or sophisticated investors (as defined in the COBS provisions of the FCA Handbook)
  • have confirmed that they will invest less than 10% of their net assets in the relevant investment.

Regulated platform operators must also be able to assess whether retail clients understand the risks involved with investing if they do not take regulated advice – the FCA expects this to be done as part of the online registration process for the platform.

The participants

Businesses buying and selling investments through crowdfunding platforms should take care not to accidentally fall within the UK’s regulated activities and financial promotions regime. In particular, businesses contemplating raising equity finance via investment-based crowdfunding platforms should be careful not to fall foul of the restriction on offers to the public under section 755 of the Companies Act 2006. For more information on the implications of this legislation on investment-based crowdfunding, see our previous article Crowdfunding: restriction on ‘offers to the public’.

How is regulation likely to change/develop in the future?

In December 2016, the FCA published a feedback statement (FS16/13) in response to their previous call for input to the post-implementation of their crowdfunding rules. Following the publication of the feedback statement, the FCA has indicated that it intends to consult on, among other things, additional requirements relating to wind-down plans, cross-investment of loans on different loan-based crowdfunding platforms and mortgage lending standards where the investor is not lending by way of business.

In addition, the FCA has raised concerns regarding the quality of communications with potential investors on loan-based and investment-based crowdfunding platforms. Accordingly, it intends to consult on more prescriptive rules in respect of financial promotions and the content and timing of disclosures.

What is the UKFCA code of conduct?

The UK Crowdfunding Association (UKCFA) is a self-regulatory body that was set up in 2013 with the purpose of promoting the interests of crowdfunding platforms, their investors, and clients. Members of the UKCFA are required to agree to the code of conduct which, among other things, promotes and implements transparency, security, appropriate safeguards and compliance with applicable laws and regulations.

What are the benefits of crowdfunding?

Investors

  • Involvement – investors may find it rewarding to be involved in the development of a specific business, project, venture or cause. Crowdfunding enables potential funders to choose how they invest their money more freely.
  • Returns – crowdfunding may offer investors higher returns than those available from other, more traditional, financial products.
  • Costs – by obviating the need for various intermediaries such as brokers, investors may receive benefits via reduced search and transaction costs.

Borrowers

  • Accessibility – crowdfunding enables borrowers to access finance where it may not necessarily have been available to them from banks or other institutional lenders.
  • Numbers – crowdfunding enables individuals and businesses to receive finance from a potentially unlimited pool of investors and with relatively low associated access costs.
  • Exposure – raising finance via crowdfunding provides borrowers with significant exposure may help to raise the borrower’s profile and provides them with free access to market feedback.

What are the risks of crowdfunding?

Investors

  • Information asymmetry – potential funders may face the problem of information asymmetry and find that they lack the ability to conduct proper due diligence on the borrower.
  • FSCS – investment via crowdfunding platforms does not provide the investor with any access to the government’s Financial Services Compensation Scheme, which may leave the investor with no access to compensation in the event that the borrower becomes insolvent.
  • Liquidity – due to the lack of any established secondary market for crowdfunded investments, investors may find it difficult, if not impossible, to cash-out their investment.
  • Start-ups – many borrowers on crowdfunding platforms are start-ups or businesses in the early stages of their development. There is a significant risk that the borrower business will fail, resulting in a capital loss to the investor.
  • Shares – it is unlikely that shares issued on crowdfunding platforms will carry any associated voting rights or rights to dividends for the investor. In addition, the value of any investment many be significantly diluted if more shares are issued.

Borrowers

  • Reputation – whether through lack of experience or time-pressures, borrowers may fail to achieve their proposed goals set out in their initial pitch. This may result in irreversible reputational damage to their business and the borrower’s public support.
  • Intellectual Property – in order to receive public backing, borrowers may find that they have to make a trade-off between producing a detailed and thorough initial pitch and exposing designs or products that have not yet been properly protected.
  • Management – successful crowdfunding campaigns may result in a borrower having to manage a large number of investor’s expectations, demands and investments. Without the appropriate resources, borrowers may struggle to successfully carry out this task.

Source: Lexology

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The UK is leading the way in crowdfunding and P2P lending as the rest of Europe plays catch-up, says University of Cambridge data

The UK has helped to prompt a boom in European crowdfunding and peer-to-peer (P2P) lending, according to new research from the University of Cambridge’s Judge Business School.

While the UK remained the largest alternative finance market in Europe by far, at €5.6bn (£4.9bn), the rest of Europe began to play catch-up as it grew its own market by 101 per cent, the data from the university’s Centre for Alternative Finance showed.

Though this meant the UK lost market share, senior research manager Tania Ziegler said it was a positive story for the country which was showing signs of consolidation in a maturing market.

“Europe is growing from a much lower base so you are going to see much more rapid growth,” Ziegler said.

“It’s slower growth in the UK but that’s because we have seen consolidation, and the platforms that are active are very strong incumbents. It isn’t much of a worry because it’s a case of Europe catching up.”

Ziegler added that the UK “has been ahead because of innovation and a regulatory regime that has allowed innovation to grow”, which other countries are beginning to learn from.

France came second after the EU in the size of its online alternative finance market at €444m, followed by Germany and the Netherlands. Some of the more surprising rankings included Finland at number four and Georgia at number seven.

Excluding the UK, Estonia ranked first for alternative finance volume per capita for the second year in a row, at €63, followed by Monaco and Georgia.

P2P consumer lending accounted for the largest portion of alternative finance in Europe at 34 per cent, followed by P2P business lending, invoice trading, equity-based crowdfunding and reward-based crowdfunding.

Source: City A.M.