Property crowdfunding enables investors to benefit from the capital growth or regular rental incomes generated by property.
Investors collectively put funds into properties and receive returns either based on the increasing value of the development or payments from tenants. Alternatively, their collective investment is lent to parties purchasing or building a property and receive returns via interest on the debt
Because small amounts can be invested quickly and easily, and investments come with none of the responsibilities of being a landlord, it is radically different from many of the traditional models of property investment.
And, although relatively immature, it is a market which is growing rapidly among both experienced and novice investors.
The process is overseen by property crowdfunding platforms which secure investment opportunities and, in equity-based deals, divide them into shares through the creation of special purpose vehicles (SPVs) in which the asset is held.
Users on these platforms can invest large amounts - but from what can be as little as £100 - into a variety of opportunities. If their goal is to take advantage of the property’s growing value, they may receive a return when the property is sold or a fixed investment term ends. Rental-based projects offer the opportunity to receive more regular returns.
Rising appeal among millennials
While investors of all ages and levels of experience are keen to get involved, it is particularly appealing to millennials – loosely termed as anyone aged between 22 and 37.
A study by UOWN suggests millennials are more likely than any other age demographic to invest in property crowdfunding. Its research shows that 54% of people who invest in property crowdfunding are in the 18 to 30 bracket.
This compares to the 31 to 45 (25%), 46 to 60 (15%) and the over 60 (6%) brackets.
Reasons given by millennials for their interest in property crowdfunding include the chance to use it as a stepping stone to becoming a property developer. Also, many use it to boost housing deposit savings and to put inherited funds to good use.
UOWN director Shaan Ahmed told the press:
“More than any other age group, young people are seeking out alternative investments, and property crowdfunding is a simple way for them to reap the financial rewards of a property portfolio.”
Clearly such surveys are not empirical evidence, especially since different platforms may appeal to different age groups and so results could be skewed. But similar findings have been noted elsewhere, too.
Certainly, property crowdfunding is a potentially alluring proposition for the younger investor, perhaps with a limited budget.
A new avenue into property investment
Investing in properties can be one of the steadiest and most rewarding types of investing. Property prices invariably rise over the long term. Rental incomes, meanwhile, offer a way of making money intermittently, often before any sale is achieved
But until property crowdfunding arose, the barrier to enter property investment was tens of thousands of pounds. Property crowdfunding sites have made this a thing of the past.
Similarly, getting on the housing ladder can be hugely challenging in itself. Average UK house prices grew by 11.65% per year from 1997 to 2016, while wage growth has struggled to keep up in recent years.
The average UK house price, according to the Halifax in November 2018, is £227,869. With the most attractive mortgage deals available over the 20% deposit mark, significant savings are required to get on the property ladder as a first-time buyer.
For a young person to save a deposit to buy their first home – and to then have enough spare funds to become a sole investor in additional properties – is a huge ask for most.
By investing smaller sums as part of a crowd, they are able to reap the rewards of property investment without risking their financial stability.
Low interest rates in saving vehicles are also an influencing factor, and the willingness of young people to embrace financial technology (fintech) products is also fuelling the rise of property crowdfunding.
Banking, pension saving, self-employment accountancy and credit access have all been revolutionised by the advancement of fintech.
Part of the fintech revolution
Investing can also be added to this list of areas being shaped by fintech’s push for flexible, easy and on-the-go access to financial products.
Various types of investment platforms, including general crowdfunding, virtual currency trading and stocks and shares sites are multiplying in number and in terms of volume of users.
Property crowdfunding is also expanding and more and more young people seemingly want to get involved.
There may also be socially-minded reasons for young people’s attraction to this mode of investment.
The social element of investing
Research suggests the social or environmental impact of investments can be an important differentiator for young people.
For example, a recent study by Morgan Stanley found that millennial investors are twice as likely as the general investor population to invest in companies with social or environmental goals.
They are also reportedly putting twice as much money into sustainable investments as the average investor, with 86% of millennial investors stating they are “very interested” in sustainable investing.
This ethical motivation is beginning to shape property crowdfunding and may bring more young people into the market.
At the heart of the UK housing crisis is a shortage of affordable homes. Crowdfunding could theoretically help to solve this by generating the finance needed to plug this gap.
Many millennials are directly impacted by the lack of affordable homes in the UK. The easily acquired, no deposit mortgages of the pre-credit crunch days are gone, wage growth has been sluggish and house prices continue to rise, pricing many young people out of home ownership.
Property crowdfunding gives them an opportunity to play a direct role in tackling the problem by enabling more affordable housing to be built.
Earlier in 2018, ethical investment platform Abundance announced its move into the social and affordable housing industry.
Its first investment opportunity set out to raise up to £4,250,000 to fund the construction of 21 social or affordable rental homes and nine supported living flats in the Liverpool area. The secured investment pays 4.5% interest per annum, with capital returned in full on maturity. A social landlord will take over the properties upon completion, offering them to tenants unable to afford market rents. This type of project may become increasingly popular for socially-conscious millennial investors in future, as the housing crisis continues.
The great inherited wealth transfer
Also contributing to property crowdfunding engagement among young people is the mass wealth transfer from baby boomers to their cash-strapped kids.
In the US alone, some US$30 trillion of assets will be transferred from baby boomers to their heirs in the next 30 or 40 years, according to Accenture.
The contrasting fortunes of baby boomers, the richest generation, and today’s young people struggling to get on the housing ladder is seeing vast levels of inheritance wealth being transferred to offspring. And, as the recipients look to use it to secure their financial future, as well as home ownership, property crowdfunding could be a viable option.
Of course, property crowdfunding has many universal attractions for investors of any age.
Something for everyone
The scale and type of investment opportunities available on property crowdfunding platforms vary widely. The returns also differ considerably, depending on the opportunity and its performance.
The first property crowdfunded by the aforementioned UOWN, for example, was a four-bedroom semi-detached house in Leeds. As reported in the Times, 92 investors collectively raised £189,000 – an average of £2,000 each. This particular platform enabled investors to get involved with a low minimum threshold whilst targeting a six or seven percent return.
But investors can back all sorts of property projects ranging from a single house extension to skyline-defining towers of apartments.
This spectrum of choice is only going to widen as more platforms come to market, each with their own nuances. More choice means more opportunities for millennials to get involved.
The accessibility factor is also a big selling point. Users can very quickly get started, for a very small outlay, and diversify their portfolio across various platforms and property types.
New developments as the market matures could make property crowdfunding even more appealing. For example, general crowdfunding has already seen the emergence of secondary markets for shares.
Crowdfunding is a largely illiquid type of investment, meaning cashing out can only be done when a particular exit milestone is reached, such as when the property is sold.
However, secondary sale markets are gradually being introduced. These allow investors to sell their stake whenever they choose. This development may spread to property crowdfunding sites, giving young people yet another reason to get involved in this exciting new form of investing.
Millennials driving forward property crowdfunding
The availability and accessibility of property crowdfunding today makes it an investment option for almost everyone. For new to experienced investors, from investments of £100 to tens of thousands of pounds, the platforms have truly opened up property as an asset class.
But whilst this is the case, the data shows just how much the millennial generation are attracted to it. The low minimum thresholds, the ease-of-use digital platforms and the ability to make a genuine difference on the UK’s housing market all contribute to making it one of the most attractive property investment routes currently available.