Alternative finance for property

1. FINANCE An introduction to Alternative finance for property Navigating the uncharted waters of peer-to-peer lending and crowdfunding A It may be relatively new, but every year since 2012, when it had reached £267 million in the UK, it has doubled in size and was expected to have passed the £4 billion mark in 2015. That includes all types of alternative finance in all sectors, not just property. But property is the area – if we follow the trends seen in the US – expected to grow faster than any other over the coming years. Before focusing on property finance, it’s worth explaining the different types of alternative finance that’s available. Essentially, it consists of two main groups and all of the others can be attached to one or other of these two. They are peer-to- peer lending and crowdfunding. LMOST every day, I meet people who were directly affected by the financial crisis of 2008/9. In one way or another, it impacted all of us. But next acquisition, you can raise the funds you need from the crowd and share your income and the capital growth in return. It isn’t cheap money, in that it will cost more than borrowing it from a bank, but it’s money a bank is unlikely to provide and the real benefit is that you only pay returns when you’re generating income. The principle is repaid during the term or at the end of the term, just like a bank loan. Crowdfunding, on the other hand, is different. Here, investors (note I haven’t referred to them as lenders) provide funds to businesses or social causes in return for something of value. It can be a pure donation where the return is a positive emotional feeling; it can be a product – as popularised with Kickstarter and others – or, as in property and business start-ups, it can be equity where, in return, the investors receive a share of profit. While the number of people lending and investing in this way in the UK is in the hundreds of thousands, this is still a very small section of society. A recent study by NESTA found that while 58 per cent of people are aware of at least one type of platform, only 8 per cent had used one themselves, so there’s tremendous scope for growth. The picture was similar when they surveyed small businesses, with 56 per cent being unaware of their existence and only 9 per cent had approached a platform for funding. Those who had tried it did so because they expected a greater willingness to take risks and for them to be more flexible, more accessible and quicker than the banks. And, indeed, that has been my experience too. the direct connection between investors and property professionals, means that everyone benefits. Investors and savers get much higher returns and landlords and developers enjoy the accessibility, speed of decision making and the larger appetite for risk compared with the banks. The real potential, though, will only be realised when (as we have seen with Funding Circle and Business Loans) the pension funds, local authorities, other businesses and even the government realise that it’s a great way to support local house building, or to improve the supply of rental properties while generating a return and decide to make their funds available too. I suspect it’s just a matter of time. funds raised can be used. Within peer-to- peer, there are some who offer bridging loans or development loans, and others who specialise in buy-to-let mortgages. The rates available vary considerably, as do the criteria in terms of LTV and the need for personal guarantees. But it’s likely that, if you are looking to borrow money, there will be a platform serving your particular needs (subject to terms, of course). In many ways, their services are not unlike those available from the banks, except perhaps in their speed and flexibility and the way they assess risk. a small share in a property and in return, they take a share of income and they share in any capital growth over the term of the investment. Others, like CrowdLords, are two-sided platforms (similar to CrowdCube and Seedrs, which raise equity for businesses) and they exist to raise funds for developers or buy-to-let landlords looking to increase or refinance their portfolios. Developers who might look to high net worth individuals to do a joint venture with them can achieve the same thing by doing a joint venture with the crowd, who in return would receive a share of the profits. The platforms handle all the legal paperwork, corporate governance and the distribution of profits while the developers focus on what they know best. Similarly, if you’re a landlord and you don’t have the 25 per cent deposit or the funds for refurbishment for your one good thing to come from it is the birth of the Alternative Finance Market. So what about the future? There’s no doubt this is just the beginning for alternative ways of funding property. We know this from looking at the US market, which is a couple of years ahead. Over there, the top three sites among them funded more than $3bn worth of property in the last three years. And there are over 140 other property sites operating in the same markets, so we know the segment will grow. The use of technology to enable efficient lending or investing, along with Richard Bush Perhaps the more interesting platforms for property are the property crowdfunding platforms. Currently, there are two types available. The first platforms are not much use to you if you’re looking for funding, but are a great place to invest if you are attracted to buy-to-let but would rather not do it yourself, as they are one- sided platforms. These platforms, such as Property Partner, are essentially operating as property management companies. They source, buy, let and manage properties funded by the crowd. Each investor has Richard Bush is the co-founder of Crowd Lords Ltd, an equity-based crowdfunding property platform for UK residential property WHAT ARE THE OPTIONS? The different types of platform As the name suggests, peer-to-peer lending means individuals or businesses lending directly to other individuals or businesses. The best-known platforms are Zopa, which lends to individuals, and Funding Circle, which lends to businesses. But there are many others, serving different niche audiences or operating in slightly different ways. What they have in common is that the lender receives a fixed interest rate, which can be anything from 3 per cent to more than 14 per cent, usually paid monthly. Funding Circle offers commercial property loans for a broad range of needs from development finance to a buy-to-let mortgage or re-mortgage. Interest rates start at 6 per cent and are based on the risk band and the term of the loan. In reality, they tend to be between 7-12 per cent on these loans, all of which will require asset backing. Landbay specialises in buy-to-let mortgages for experienced landlords, though they do lend to first-time landlords if the interest cover is 135 per cent. At the moment, they only lend on properties in England and Wales and in areas with consistently strong rental demand. Landbay’s website says it will fund mortgages from £70,000- £500,000, provided this represents less than 80 per cent of a property’s value. If you’re an experienced landlord or developer, CrowdLords enables you to raise equity finance for either developments or for buy-to- let properties. In return for their investment, investors receive a share of the income (quarterly) and capital growth (at the end of the term) if it is a buy-to-let, and a share of the profit for a development. Developers and landlords are required to invest at least 5 per cent of the required sum. “There is no doubt this is just the beginning for alternative ways of funding property” What’s available for property? The property sites vary significantly both in what they offer, as well as in how the LANDLORD FOCUS LANDLORD FOCUS LANDLORD FOCUS LANDLORD FOCUS 36 36 37 37