Efforts to buy a mixed-use city block in one of the UK’s tightest, most competitive regional property markets have proved just a little too ambitious.
The crowd-pounds simply didn’t roll in fast enough on Lever Street in Manchester (see below).
Although residential property crowdfunding has begun to take off through platforms such as The House Crowd, Property Crowd and LendInvest, commercial property has been slow to go down the crowdfunding route.
But with its offer of a way into a sector that often feels too complicated for small-time investors, and its obvious appeal to overseas investors who may already have a UK buy-to-let or student bedroom, and now want to diversify, crowdfunding should prosper. Returns of 6% to 7% – roughly in line with the residential crowdfunding platforms – are predicted.
A winner, one day soon? So says James Nichols, founder of Manchester-based Transcendent Real Estate, the business behind the first £3m attempt at commercial property crowdfunding operation – and, says Nichols, soon to be behind the second. TRE hopes it can transact £25m to £30m of business in its first 18 months of operation, so about 10 individual crowd-funded buys.
But what prompted Nichols, until recently an investment partner at Paul Nichols & Co and before that an agent at WHR and Savills, to embark on this new venture? The attempt to crowdfund was born of frustration: a £20m deal brokered by Nichols fell out of bed in January, quickly followed by another of £7m.
“I thought I’d rather be acquiring assets myself and that a syndicate might work. I went to see my brother in Manhattan and saw how crowdfunding worked there and thought we’d see if it was possible for commercial property in the UK,” he says.
“TRE was an idea developed as a result of seeing excellent deals that I personally would like to invest in myself but did not have the resources to do it. Commercial real estate investment has previously been an arena open only to investors with significant equity at their disposal. Or they are closed shops – it’s a private business, you have to know the right people, and it requires high stakes to enter. TRE has lower barriers to entry, making commercial property investment more accessible.”
Investors will become part-owners of a special-purpose vehicle under a nominee: their names don’t go on the property title.
To mitigate the risk, Nichols is hoping to agree a long-term arrangement with a third party prepared to make up the difference when the crowd does not come up with cash quickly enough. “It’s a safety net, probably in return for equity in TRE,” he says. It would de-risk a venture that – in the emerging world of proptech – might otherwise alarm potential vendors, thus slowing the flow of projects for crowdfunding.
TRE is looking for properties in the £2m to £5m price range with 15-year income streams, and it is starting in Manchester. “It’s not such a competitive sector – not too big for many small individual investors, too small for the funds. If it goes well, we may open a second stream of opportunities for £5m to £10m properties,” he says.
But as the collapsed Lever Street deal shows, crowdfunding is not plain sailing.
Sam Robinson, partner at law firm Nabarro, is known as “Mr UK Crowdfunding” and has advised 30 crowdfunding platforms, including TRE. He says the challenge for commercial property crowdfunding is the complexity of the asset classes, which may limit the number of investors.
“Commercial property is not as well understood as residential property,” he says. “Crowdfunding needs lots of people to invest small sums, and the entry price is higher – £5,000 at TRE, when some residential crowdfunders start at £10 to £50.”
The aim of residential crowdfunding is to build up a large pool of potential investors, thus maximising the chance that enough of them will want to invest in the tight timescale crowdfunding involves.
As it happens, the pioneer of residential crowdfunding, The House Crowd, is also Manchester-based. Crowdfunding is something of a Manchester cottage industry, and its experience suggests TRE could prosper. In five years it has raised £26m from 7,000 registered investors.
Each has now invested an average of about £18,500, in individual slices of around £3,500, which is comparable to TRE’s ambitions. It is now crowdfunding its 200th project, a four-unit development in Alderley Edge, Cheshire, developed by a sister company.
Juliette Morgan, global technology partner at Cushman & Wakefield, says the prospects for commercial property crowdfunding are good – if unproven.
“I like that crowdfunding is democratic and open. If it means more entrants to the market, that’s good,” she says. “Today, a return of 6% to 7% from crowdfunding is a lot more attractive than leaving money in the bank, earning almost nothing.”
But Morgan also worries that exuberance could lead the crowd to overbid, trouncing better-informed rival buyers and leading to irrational inflation of prices in some well-hyped areas, and the reverse in others.
“We have a few examples of this kind of crowdfunding in New York, but there’s not a lot of evidence. It probably won’t work quite like residential crowdfunding because there are complexities in commercial property. And a big issue will be how investors get their money out before the investment matures,” she says.
In this infant sector there is, as yet, no standard approach to early escape from a crowdfunded project, although plenty of options are being trialled (see below).
Commercial property crowdfunding still needs to prove itself. As TRE moves on to its second round of funding, it will soon become apparent whether that is possible.
Lessons learned in Lever Street
With 50% funding from Nationwide, Transcendent Real Estate secured an option on 43-45 Lever Street in Manchester’s emerging Northern Quarter.
During the summer it sought crowdfunding, at an entry level of £5,000. A private investor was standing by to pick up the slack – if there was any – to complete the purchase. The 13,000 sq ft property is let to a dentist and a bakery, income is assured, and a return of around 6.5% was expected.
Unfortunately, crowdfunder interest was not strong enough and there was a delay sealing the deal with TRE’s safety-net funding partner, which meant the exclusivity agreement with the vendor was put under fatal pressure.
A TRE spokesman says: “Moving forward, TRE is in dialogue to bring a funding partner into the business so that it has cash ready to acquire assets. Once it has acquired them, it then funds them back via the platform. This way TRE will have full control and 100% certainty on delivery of investments.”
Proptech: the new fintech?
Firms such as TRE are not pure property businesses. They have two income streams – from property management and from the value of their platform.
The House Crowd founding director Frazer Fearnhead says: “We started thinking we were a property company using technology to build a portfolio, but we realised the real value of the business was the platform’s ability to raise money.
“We don’t charge our investors fees – we charge fees to the developers whose projects we crowdfund – and then there’s a 10% of revenue fee for property management. But the 170 properties we manage are not the long-term future of the business, which lies in the fundraising platform.”
When you want out
What happens when you don’t want to be part of the crowd? The short answer is that making an early exit from a crowdfunded investment may be hard to do.
Most crowdfunding operations are buy-and-hold propositions of between three and five years. But some crowdfunders offer secondary markets so investors can sell on their interest before maturity as part of a matched-bargain service. Others have a minimum three-year equity investment, after which there is an annual vote by investors to cash it in, or keep it. Some have both or other combinations of exit arrangements.
Nabarro’s Sam Robinson says: “Liquidity is always an issue for property investment. Most crowdfunding platforms allow for exit events or liquidity events – shareholder votes of some kind – but usually the only option is to exit collectively, all investors at once.”
Insiders say that investors who want their money back quickly should probably think twice about property investment of any kind – whether that is crowdfunding or more traditional routes.
