The recent proliferation of property-focused alternative finance platforms has been widely documented – but could this string of new entrants have a sting in the tail?
A new report from the Royal Institution of Chartered Surveyors claims that the equity crowdfunding for property platforms in particular could cause a liquidity shock to the housing market – resulting in increased house price volatility. This is all dependent on the platforms' success, of course. But the market growing so rapidly, and property is establishing itself as perhaps the most dynamic sub-sector of that market. The RICS has speculated that equity crowdfunders could inject as much as £50 billion into housing over the next 5 years.
Josh Miller, a senior economist at the RICS, explained:
“This sector, rather than the banking system, may well be the source of the next liquidity shock to the housing market. In this sense, the next boom could be equity, rather than debt driven.”
But are these concerns justified? Whilst property is undeniably a hotspot within the alternative finance space at the moment – it’s the debt-based outfits that have been making the headlines. In the UK, LendInvest, Wellesley and Assetz Capital post consistently dizzying growth rates and monthly loan origination figures – as is shown by the Liberum AltFi Index. These platforms specialize in buy-to-let mortgages and property development bridging loans. So why is it the potential impact of the equity crowdfunders that has caught the RICS attention?
It’s all to do with their unique capacity to offer property ownership to investors. Lenders on the Wellesley , LendInvest or Assetz platforms need only be concerned about the value of the property attached to any given loan if things go wrong. They don’t see any of the upside if the property appreciates in value. We caught up with Andrew Gardiner, Co-Founder of the Property Moose platform, back in May. At the time Andrew described the benefits of property investment through an equity instrument:
“Debt investments will provide a fixed level of return (the interest rate). Our equity investments allow investors to share in all of the returns on offer (including rent and capital) pro rata to their percentage investment. Of course, this also means that equity investors share the risks. But, as we hand pick all of our investments in house and complete full due diligence (which includes a RICS valuation on the vast majority of properties), we believe that investing in a Property Moose property carries potentially less risk than lending a third party developer money over a peer-2-peer platform.”
There are a number of early-stage UK operators already – including Property Moose, Mayfair & Morgan, Crowdahouse and The House Crowd. But these platforms have yet to make a significant impact – not one of them yet possesses the 0.1% market share necessary to be factored into the Liberum AltFi Volume Index. There are some significantly larger, similarly structured platforms over in the US – like Realty Mogul, which has facilitated over $36m of debt and equity investments into property.
It’s too soon to tell whether the RICS’ qualms about a liquidity shock are justified. We’ll return to this issue once the UK's equity-based property funders start to gain some traction.