If you fancy becoming a mini-Donald Trump – perhaps minus the dubious hairstyle – then buying into London’s lucrative real estate market no longer has to be a pipedream.
Crowdfunding as a form of investment, or peer-to-peer (P2P) lending in another guise, is taking the market by storm. Operators proliferate – Lendinvest, Wellesley, Funding Circle, Property Crowd, Relendex and Property Moose, co-founded by none other than James Cadbury of chocolate family fame, to name but a few.
The market is witnessing 100% year-on-year growth as it morphs from one-off funding for a curious gizmo into an alternative method of ongoing investment. And the London property market is beginning to feel the effects.
For a start, it’s highly accessible. Investors can put in as little as £5 or £10 but, more typically, people are “risk happy” investing between £5,000 and £10,000.
Generally, crowdfunding tends to involve buying equity while P2P involves support via finance loans. Each company has its own business model, but for those signing up, lending money for up to five years and receiving a 5-6% return on investment is not an uncommon scenario.
What unites them all is the power of the internet, with online access to property investments in London and beyond.
That crowdfunding enables investors to lend directly to individuals and small companies, bypassing major lenders, makes property development in London, with its high cost base, more attainable for those with more modestly sized projects.
But the method has pros and cons for such developers – more finance options to make a dream project come true, but sometimes a more expensive way to borrow, says Michael McDowell, consultant with Sapphire Capital Partners.
Many are convinced crowdfunding will remain a lending platform for smaller-scale projects in the capital. Andrew Tyler, partner with Knight Frank, says: “I can’t see the crowd getting together to fund a £100m project. Besides, at the larger end, there are already tried and tested mechanisms that work.”
Just over 70% of banks and insurance companies and 75% of other non-bank lenders are willing to lend more than £100m. But 80% of non-bank lenders, or ‘shadow lenders’, will not lend £5m or less. So there is a shortage of “small-ticket lending”, says William Newsom, head of valuation at Savills.
Crowdfunding and P2P can be perceived as “lending as a last resort”, he says.
“That is the cynical view, but there is an element of truth in it. It is a market of private individuals who have cash to invest and are looking around for opportunities to earn higher interest and this process is marrying them with people who are in a desperate situation because they have been turned down by other lenders. And, yes, ill-considered developments could happen as a result.”
It is London’s residential market – from buy-to-let renovations to more recent examples of new build – that is so far proving the main beneficiary of the crowdfunding explosion.
“London is leading the way because of scale,” says Ed Neild, head of strategy for EMEA corporate solutions at Colliers International. “When it comes to commercial real estate projects, the barriers to investing in central London are staggering. Getting a building up with the deep pockets of banks is hard enough, so to be able to raise the quantum amount of cash needed through crowdfunding would be too far-fetched.”
But for the capital’s residential market, Neild says: “It’s a means by which someone with money sitting in an ISA has the opportunity to put it into a pooled fund which is invested in property to give a better return.” He admits that on the “dark side” of London’s housing market, strong competition for stock may see much of it gobbled up. But as a positive, it could kick-start more development in the capital.
Voltaire Financial, which focuses heavily on London and the South East, acts as an intermediary in sourcing the right form of lending for a project. Andrew Hosford, the firm’s director, sees speed as a “trump card” for crowdfunding and believes it could encourage more London schemes to come forward, especially from developers that rely on debt to compete.
P2P lender Funding Circle has helped 15 small housing developers across London to build 45 properties. Luke Jooste, the firm’s head of real estate finance, believes such funding will help the capital to meet its housing commitments. Medina Capital Investments has borrowed £890,000 from more than 5,000 people through Funding Circle to help it build two family homes in Kew, west London, and managing director Nidal Al-Khail describes the financing route as “phenomenal”.
Wellesley & Co can be found promoting its P2P funding to a “crowd” of an altogether different kind by advertising during televised football matches.
The company has enjoyed a rapid rise to become one of the country’s most active lenders. It comprises two parts – Wellesley & Co is the vehicle into which P2P investors place their funds and Wellesley Finance sources the loans for the P2P lending. Lenders share in the security of all the loans made – not just one loan.
The company operates countrywide, but Andrew Moffat, director of property lending, says that because London and the South East equate to two-thirds of the value of the UK property market, inevitably much of its activity is in and around the capital. “In Zones 2 to 6 we are very happy,” says Moffat, but the firm shows caution in central London “as it is highly priced and less liquid at present”, he adds.
To date, Wellesley has funded mainly residential property projects. There is a £4m apartment and retail development in Teddington, and others in St John’s Wood, Harrow and Bethnal Green.
Crowdfunding is also making inroads into the commercial market. Relendex, for example, lends to a mixed portfolio of income-earning office, retail and industrial properties and Sapphire Capital Partners with Grow VC is launching Crowdcitee to lend to commercial developers.
So is all this proof that crowdfunding is taking hold? Voltaire’s Hosford is in no doubt: “Definitely, absolutely.”
