Is there a shift from Business Crowdfunding to Property Crowdfunding?

By Richard Bush on Friday 19 February 2016

Alternative Lending

Earlier this week, the University of Cambridge and Nesta released the 2015 UK Alternative Finance Industry Report, a very comprehensive analysis of the whole industry. Flicking through the graphs and commentary something stood out as being different to last year’s report.  It’s something that I’m sure many people won’t notice but to me it was very significant. In this year’s report, I’m glad to say, both P2P lending for property and Equity based property crowdfunding have been accounted for separately from P2P lending and crowdfunding for businesses generally.

 

Admittedly, the most significant number is the level of P2P Lending to property, which reached £609m last year. That’s almost 20% of the entire Alternative Finance market and as much as the previous years’ total P2P Lending to consumers. On top of that, Equity Crowdfunding for Property reached £86.58m which was more than all the business crowdfunding transactions in 2014. I believe these trends will continue and in years to come, property will dominate alternative finance both for lending as well as equity based investing.

 

We need to understand that lending is different across asset classes, therefore lending for property, will have specific differences to lending for other assets. Partly because the numbers involved tend to be larger and perhaps more importantly, there is an asset that has a true value and it’s an asset that appreciates over time. It’s also an asset that we are all familiar and comfortable with and that gives us a sense of security.

 

This is probably more important when comparing property crowdfunding with business crowdfunding. Much has been written recently about the ‘unrealistic’ valuations being used for start-up crowdfunding, which when combined with the expected failure rate of start-ups, makes people nervous about the sustainability of that model. My own concern is that property crowdfunding will be tainted with the same brush, when in truth, the reality is they are very different and property crowdfunding appeals to a much wider investor audience for different reasons.

 

It’s true that there are many similarities between Start-up Crowdfunding and Property Crowdfunding;

  • the investors in both receive shares in limited companies in return for their investments
  • they both carry significant risks but offer the potential of very attractive returns
  • they are each investments in other people’s ability to deliver, either entrepreneurs or property professionals, or sometimes both

 

However, when you look closer, there are enough differences that they should indeed be seen as different classes of investment. With Start-up Crowdfunding:

  • it’s an open ended investment – in fact CrowdCube has only seen two exits since they started in 2011 whereas with Property Crowdfunding, it is almost always a fixed term investment so investors know when they will get their money back
  • the valuation and therefore the cost of the equity is typically based on speculation of future value, or the perceived strength of an idea whereas with Property Crowdfunding the valuation is based on a RICS valuation
  • you don’t expect to receive a Dividend because profits are reinvested in the growth of the business whereas with Property Crowdfunding you know from the outset what the Dividend is projected to be, assuming all goes well
  • if the start-up fails (and only time will tell how many will) you lose your entire investment whereas with property, depending on the leverage, there is an underlying asset that might mean you get some of your money back

 

Only time will tell whether we are seeing a shift from Start-up Crowdfunding to Property Crowdfunding or whether the two will thrive alongside each other serving a different purpose for different audiences. The homogeneity of both would be akin to the way P2P lending plays a different role to crowdfunding and appeals to different investors for different reasons.

 

I believe they should and that they will, but I would feel more comfortable if there was a way to make the differences clearer and better understood to the more undiscerning investor. Identifying property crowdfunding as a separate class in reports like the Nesta report is a good start, but these reports are mainly read by those of us within the industry, when really it requires commentary and debate within the wider media to highlight the differences to potential investors.

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