Being at the forefront of a new investment niche is no easy business. It took the world’s first peer-to-peer lending platform Zopa over five years to top the £100m mark in cumulative loan originations. That milestone coincided with the emergence of its first real competitors – Funding Circle and RateSetter. The peer-to-peer consumer and small business lending sectors are now well on their way to “established” status. Real estate crowdfunding, on the other hand, is not.
This segment of the market has struggled to scale at the same rate as its cousins in the wider world of online investment. It’s indicative, for instance, that the Liberum AltFi Volume Index UK has not – to date – tracked real estate equity crowdfunding volumes; there simply hasn’t been the volume. More indicative perhaps is the fact that Crowdahouse – which launched in 2012 as the first mover in the real estate crowdfunding space – switched codes from equity to debt in August 2015. Nobody in the UK seemed quite able to nail the model.
Until suddenly, in March 2015, news broke of a £5.25m Series A investment round for Property Partner – led by Index Ventures, no less. Property Partner has since gone on to clinch a £16m Series B – comprised of £12.9m in equity (led by Octopus Ventures) and £3m in venture debt (courtesy of Silicon Valley Bank). iZettle investors Dawn Capital also participated in the round, with Partner Josh Bell joining the Property Partner board as an observer. The platform has seen a little over £33m invested across its primary and secondary markets to date, and has over 7,500 investors signed up.
In a nutshell, Property Partner allows you to invest in property cheaply and efficiently. Investors are exposed to fluctuations in the value of the underlying property while also standing to earn income in the form of a rental dividend yield. The minimum investment amount of £50 allows investors to build a diversified portfolio of assets, spread across multiple geographies within the UK. While the platform stresses that liquidity cannot be guaranteed, investors can in theory sell out of their holdings at the touch of a button via the platform’s dynamic secondary market, which has already seen a relatively high level of trading.
Property Partner is at the forefront of one of alternative finance’s most exciting niches. The opportunity is tremendous, due largely to the undeniable mass appeal of property ownership. But the risks – for both the platform and its investors – are all the more pronounced. With that in mind, I caught up with Founder and CEO Daniel Gandesha to get a better handle on the platform, on the investment proposition and on his thoughts on the alternative finance market.
The investment proposition
First off, Daniel gave a good overview of the investment proposition:
“We believe Property Partner is a more efficient way of investing compared to direct investment. Unlike with a fund, you can still take your view as you would with direct investing, and we think that’s absolutely key. Yet you get some extra benefits on top. You can invest as much or as little as you want. You can build a diversified portfolio across multiple assets far more easily than if you were investing directly. But also you can diversify over time. You can invest through the cycle. If you were investing directly, you might put all of your eggs in one basket and buy one minute to midnight, peak before the crash – and you don’t know. What you do know is that this asset class will see cycles, which is different to say, a loan product – which is a fixed income product. This is a total returns product.”
Allowing investors to take their own view on the market is pivotal to the Property Partner model. In the early days of the platform, everybody bought London – which is a typically lower yielding area, but one which is attractive in terms of capital appreciation. These days the platform is sourcing a lot of properties on cross-rail routes. These offer yields that are generally higher than, say, prime central London, but that are still low in relation to properties that are outside of London.
The choosiness of its investors has allowed Property Partner to identify some distinct trends within its investor base. Changes to Stamp Duty Land Tax (SDLT) and the looming threat of Brexit has caused the platform’s investors to shift their focus towards more yield-focused investment opportunities. “In times of uncertainty, investors want things that they can touch and feel,” said Gandesha. “But again, people still want a blend.” The Property Partner boss explained that the platform is currently running at a rhythm of launching one property a week. If the company launchs two yield-heavy opportunities in a row, it'll often see strong demand for a London property.
But whilst he’s convinced that Property Partner represents a better investment proposition than direct investment, Daniel conceded that the platform is not without its disadvantages. The main downside to Property Partner is the lack of control: “You have to be willing to hold for five years. If you’re not willing to hold, then there’s not a guarantee that you can sell in between,” said Gandesha. “By contrast if you’re investing directly, you could wake up on any given day and be reasonably certain that in at least 6 months you could sell the property. We can’t guarantee that to you.”
On the other hand, Property Partner investors could sell out of their holdings a great deal faster than direct investors, but Gandesha preached caution: “Liquidity is a false friend. We’d much rather manage expectations down, rather than up.” To date, Property Partner investors have taken an average of just over six days to sell out of their investments on the secondary market.
I was especially keen to gauge Gandesha’s thoughts on the complexity of property as an asset class, and to what extent he believes investors need to understand the asset class prior to investing. He explained: “Are you taking risk on the asset class, yes or no? Yes, you’re absolutely taking risk on the asset class. If you are not positive on the story for UK residential, then that should absolutely factor into your thinking.” Daniel believes that Property Partner serves to enhance the proposition for investors, but that doesn’t change the nature of the underlying assets.
However, he rejects the idea that you have to be an expert in property in order justify investment: “Do you need to understand the asset class intimately in order to use our product? No. I don’t think you do. I believe we do a fantastic job of sourcing high quality residential property, and would I prefer to invest on my own – as a direct investor with no experience in residential property – or would I prefer to leverage the experience of Property Partner? For me it’s a very simple answer.”
On the subject of leveraging expertise, Gandesha uses the term “property investment plus plus”. If an individual investor in property chooses to go direct, he or she tends to have very little purchasing power and often even less expertise. Property Partner, on the other hand, is now buying, on average, an entire investment block each and every week. “That gives us a lot of power in the market,” said Gandesha. Property Partner is currently buying properties at an average discount of 10%. For investors, the yield stays the same, but the cost of acquisition is lower, and thus the yield is enhanced. Gandesha says that investors are thus getting access to “a stronger underlying asset class.”
In terms of expertise, Gandesha worries that individual investors might well miss things. What’s the ongoing operating expenditure of a particular asset? How easy will it be to tenant? What if market conditions change? What if a car parking space that was included in the purchase price is taken away down the line, and has to be rented? These were but a few of the scenarios he referenced.
But the unavoidable asterisk to Property Partner’s perceived advantages is that the platform must provide investors with a sufficiently high degree of that old industry watchword: transparency.
Gandesha has spent a lot of time speaking to Funding Circle boss Samir Desai and Zopa’s former CEO Giles Andrews (CBE and MBE respectively), so it’s no surprise that transparency has been a key consideration for the platform. Daniel sees performance data and disclosure around the volatility of returns and the associated risks of investment as paramount. That’s why he hired Mark Weedon as Head of Institutional Development in March of this year. Mark led the residential index at IPD for five years prior to joining the platform – charting the asset class’s performance for an audience of professional investors. Gandesha also recognises the need for context: “We need to be able to communicate how our performance compares to the asset class.” But Property Partner is more complicated than a simple yield product. The platform has to show investors which assets they’ve bought, the valuation at the point of purchase as opposed to the present valuation, and how the yield component compares with what was promised to them. “You don’t even need to have parted with your email address to get that information on our website,” says Daniel. Investors can access a download of the platform’s entire property investment portfolio. They can access third party independent valuations from RICS surveyors (properties are valued every quarter). They can see return on a portfolio basis and how that return compares to the market.
Daniel also sees value in transparency at the corporate level. He thinks it’s as important as it is useful to be open with specialist third party observers and enthusiastic, first-adopter investors, believing that in-depth coverage in the media and on specialist forums helps to build credibility. Gandesha also pointed to the benefits of having had institutional investors (like Octopus and Index) crawling all over the business: “Our investors take comfort from the fact that we can do a £16m Series B. We’ve got a formal board that meets regularly, governance procedures, a general counsel with 20 years experience, a high calibre CFO.”
But does Gandesha subscribe to the notion that transparency – both at the portfolio and corporate level – is a worthy substitute for monetary skin-in-the-game?“Again, we’ve had the benefit of learning from others here,” said Daniel. “We’ve also got something that aligns our interests much more deeply – but we don’t intend to do it for the long term.” That something is balance sheet risk.
Property Partner is now regularly buying entire investment blocks in a highly competitive market, and they’re generally buying those blocks at a discount. “How could we do that if we couldn’t provide any certainty to the seller that we’re going to transact, and that the deal isn’t going to just fall over?” Asked Gandesha. “There comes a tipping point when we have that trust that we will follow through with transactions. Up to now, we haven’t believed that we can negotiate sensible deals for investors without giving certainty; how we give that certainty is that we’re a cash buyer.”
For now, Property Partner exchanges on a property prior to that property landing on the platform. The company negotiates a price, handles all the legal work, commissions a third party valuation, exchanges, and pays a 10% deposit from its balance sheet. It then holds back sufficient capital to underwrite the capital raise in full. In the instance of, say, a £2m fundraise that is 50% geared, Property Partner will be ready to foot the bill for the full £1m if necessary. The platform would part with £200k as a deposit, which sits with solicitors. If the deal were to fall through, the vendor could keep the money. Then the deal lands on the platform and investors are free to pile in. If the fundraise isn’t fully funded, Property Partner steps in. “We therefore have absolute certainty that this transaction is going to happen. We look and feel like a super experienced cash buyer.”
But the long-term plan is for Property Partner to transition into a pure intermediary model. Daniel believes the current model to be too capital intensive to conduct at scale. He’s keen to transition, but first he needs a high level of trust – both with investors and with vendors.
For now, Property Partner has but one product: UK residential property investment. But the platform is now thinking about two new expansion areas on the product side, and Daniel talked me through his thoughts on each of these.
First on the agenda is a shared ownership product. Many people in the UK today rent while they save up for a deposit, and the cost of renting is higher than the cost of a mortgage. “Structurally, it feels like that’s solvable.” Said Daniel. “We should be able to put those people on the property ladder sooner, because they can afford the mortgage payments, they just don’t have the deposit. So how do we solve that? We’re doing a lot of work in the background to see whether we can solve that problem and get people who are good credit risks – who you’d be happy to lend to if you were a mortgage provider – on the ladder now, rather than in five years time. We believe that anyone who wants to buy should be able to buy. If they’re going to be able to afford it in the future, why not accelerate that process for them?”
The second project being sized up by the platform is a commercial property product. The extent to which this move has been considered is, for me, indicative of the highly conservative style of development that has been adopted by the platform. “If we were to launch commercial property on our platform tomorrow, it would fund immediately,” said Daniel. “What we’re not comfortable with is how we would make that interact with our secondary platform. Commercial property is very different to residential property. If you take what’s happened to BHS as an example. Imagine that we owned a whole bunch of BHS stores and suddenly in the background there’s a pre-pack administration deal coming down the track. What do we do? Do we suddenly halt trading? What if some people find out about that before others? How do we deal with that? If it sits empty, you have to pay rents anyway – whose going to do that?”
Gandesha conceded that the platform is yet to find solutions for all of these problems. His fear is that investors would buy commercial property on the platform in pursuit of yield, without fully understanding the risks of their investments. He explained: “I think it’s really important within fintech that we assume that our investors are savvy. But we also need to be mindful of the fact that people sometimes don’t understand the underlying risks behind yield.” Prior to any branching out into commercial property, the company would hire a “high calibre” commercial property individual, mindful of the fact that it’s an asset class in which a lot of things can go wrong. Daniel says that he’s trying to ensure that Property Partner maintains a good balance between commercial opportunity and operational prudence.
Also important in the striking of that balance is the question of how suitable the Property Partner investment proposition is for institutional investors. Could that happen? “We think so, but what we need to be mindful of at the moment is that we’re a little bit sub-scale,” said Daniel. “But what’s our proposition?” Daniel thinks that the platform has the credibility. The company’s Director of Property Robert Weaver previously ran a £500m residential fund, and was global director of residential property at RBS. But the scale isn’t there yet.
But besides the issue of deployment, Gandesha also sees potential complications arising from the need to balance the interests of both institutional and retail investors. How, for example, would an institutional investor that had made a £10m, one-off investment, sell out of that investment on the platform? Selling in small chunks to retail investors on the secondary market simply wouldn’t work. Gandesha pointed to institutional investors having the right to call the sale of a property at any time, but asked how retail investors would react to that, and whether the institution would have the best interests of those retail investors at heart. These are again challenges that Property Partner is yet to overcome.
“You can build a long term relationship with retail investors,” said Gandesha. “With an institution, the head count could change and it might not be a long term relationship. They might just change the asset class that they’re interested in overnight and all of a sudden they want to exit and they’re gone. That’s quite difficult to run a business around. What if we’re over-reliant on a few institutions and then they turn off the tap? What becomes of our outstanding commitments to buy properties? We’re also very mindful of and we can benefit from the experience of those that have gone before us. We want institutions, we want them in a way that works very cohesively with retail investors and that’s transparent and that everyone’s happy with. We want to make sure that we don’t have concentration risk.”
The bottom line
When transcribing the interview with Gandesha, I was struck by the sheer number of questions that he asked about the Property Partner business model (far more than I managed!). This for me is an apt reflection of why Property Partner is, for now, blazing the trail in real estate equity crowdfunding. The company has managed to turn the fact that the real estate crowdfunding niche is underdeveloped to its advantage – building up its proposition in a way that seeks to preempt the stumbling blocks that have tripped some of the major players in the wider world of alternative finance. That’s not to say, of course, that Property Partner won’t stumble along the way, but the platform holds a clear lead in the UK's real estate equity crowdfunding space for now. Gandesha closed the interview by saying: “It’s all about the long game and building a well balanced business that’s executing for the long term, rather than the short term.”