Crowdfunding is the latest en-vogue investment. Before the financial crises everyone seemed to be investing in real estate, both at home and abroad. The rapid increase in capital value that real estate in the UK saw over the 10 years or so leading up to 2008 attracted the attention of an army of retail investors looking to get in on the action. As well as investing at home in the UK many investors who had either missed the boat or hoped to repeat the trick looked to emerging markets that they hoped would follow the same pattern that the UK had and invested in property overseas.
And it has to be said, barring those who have come a cropper at home or abroad for one reason or another, more often than not due to not doing enough research, property investment has historically tended to be a worthwhile investment. Buying a property is however a large investment and for all those other than the seriously wealthy is likely to be a serious financial commitment with a lot riding on its success.
Crowdfunding is getting a lot of media attention at the moment and is the in thing in alternative investment. TV shows such as Dragons’ Den have popularised the concept of the Angel Investor. Angel Investment is providing investment capital to new or growing companies to fund their development in exchange for an equity stake. You will normally need at least £25k to £50k in disposable cash to consider an angel investment. Any guide to investing in the stock exchange you read will tell you about how high risk investing in AIM shares is. Companies listed on the AIM exchange in London are still multi-million valued companies with usually at least a few years trading history.
Companies seeking angel investment are usually either brand-new or almost brand-new companies pitching their idea for investment. However risky buying AIM shares is, investing in brand new companies as an angel investor is ten times riskier. With high risk does though come the possibility of high reward. People buy shares in AIM listed companies because the ones they get right can be big winners and they trust their judgement enough to believe they will pick enough of the ‘right’ ones to compensate the inevitable flops.
Crowdfunding is pretty much one stage beyond investing in AIM shares. It’s angel investment so companies are pretty much at the earliest stage possible. This means that the upside if they succeed could be significant but the chances of them doing so are not great with so many variables involved. However, crowdfunding allows private investors to build a portfolio of small investments in such companies. Rather than risking their £25k on an investment in one company, they can spread that risk by investing 25k in 5 or 10 or even 50 companies with the hope that enough of the companies invested in become serious businesses and they make a good profit. Dragons’ Den without needing the wealth of a Dragon to get involved.
A new company, Property Moose, which perhaps fittingly raised investment capital via crowdfunding platform Crowd Cube, combines both the crowdfunding model with property investment. The principle is that private investors can invest from as little as £500 in a particular piece of real estate. For each individual piece of property a separate limited company is formed from which each investor is allocated shares in correspondence to their level of investment.
The advantage is that theoretically private retail investors can build a property portfolio for a much smaller financial commitment than buying one property as well as spreading risk over a selection of properties.
The most obvious issue that such a model raises is liquidity. Property investment is in any case not the most liquid form of investment. Even in a strong property market turning a bricks and mortar asset into cash takes a little time and you probably wouldn’t want to rely on being able to do so in less than a few months. How do you exit a property investment in which you only own shares in a limited company that owns the property? Basically, you can’t, unless the company is sold or it sells the property and is then liquidated and the cash divided amongst the shareholders.
The former restricts the number of potential buyers of the property because they must be willing to buy the company vehicle, and the latter involves obvious admin time and some cost. And most importantly, everyone must sell, or no-one. You can’t decide when you want to exit.
Property Moose have made an attempt to address this obvious issue by creating an exchange which allows the individual shareholdings in different properties to be sold. While this is in theory a good idea it does at this stage seem optimistic to hope that this marketplace will develop well enough to offer investors any true liquidity and reliably flexible exit strategy. If the model really takes off it might, but it would seem a little bit of a long shot to be relied upon.
While the company’s website explains how investors can buy into a property, in its ‘How Does it Work’ section, the exit strategy, other than the internal marketplace described, is not really covered. Also, the company makes its money by taking a 5% of any funds raised via the platform. It then also takes a 2.5% fee on any transactions made via the share exchange platform. If we presume this is split between the buyer and seller, this adds up to 6.25% in charges. Standard estate agency fees are between 1% and 2% and met by the seller, which means there is a cost associated with the service that means the investment would have to be more profitable than buying a whole property by the traditional route in order to be offset. Property Moose also makes 15% on any profit realised by the investors on sale.
Balancing that the company does state that it carefully selects the properties offered to investors via the platform:
_“…due to the volume of properties we acquire, we are able to negotiate significant discounts with developers – all of which are passed on to you, our investors.
Every property we display is hand selected by our investment team due to its potential as a market leading investment – so good, that we put our own money behind each property and invest, alongside you, through our own investment vehicle.”_
Property Moose is definitely an interesting concept and marries the pre-crises media investment darling of property with crowdfunding, the latest trend. It will be interesting to see how the particular business develops, as well as crowdfunded property investment as a more general investment opportunity.