Property crowdfunding: trading on a British obsession
Crowdfunding promises to “democratise” the property market, says Sarah Moore. But high fees mean poor investment returns.
Crowdfunding promises to "democratise" the property market but high fees mean poor investment returns.
At first glance, the idea of property crowdfunding looks reasonable. The appeal is clear make money by owning a stake in a property, without having to save up for two decades or cater to the whims of your tenants. Here's roughly how it works. As an investor, you buy a share in a company that owns the house. Investors get a share of the rental payments and any capital gains when the house is sold. So far, so good. But this is a sector where you really have to read the small print.
Firstly, the advertised returns from crowdfunding companies are based on a lot of assumptions. For example, Property Partner advertises an estimated annual total return of 7.4%, made up of 3.3% net rental income and 4.2% capital-value growth. The returns are calculated on the basis that the property is fully tenanted for the duration of ownership (barring a two-week void buffer); that you hold the investment for a decent period of time ("to the extent that the annualised impact of the initial transaction fee becomes immaterial"); and of course that the house rises in value.
Next, there are set-up costs and ongoing fees. Property crowdfunding platform UOWN emphasises the idea of "democratising" the property market, "rattling the cage of property investment" and putting potential profit "back in the hands of the 99%, not just the privileged few". But this crusade doesn't come cheap. UOWN charges an initial fee of 2%, plus an annual charge of 0.5%.
There are third-party management fees of 10% plus VAT on the rent collected, and the costs associated with buying the property (including stamp duty and a contribution to a "repairs provision" fund) are factored into the price of the shares (ie, you pay them too). Rival Property Moose's upfront fee on crowdfunded buy-to-let investments is 5%, with similar management charges.
Of course, investing in buy-to-let in the traditional manner also comes with fees and hassle, but with crowdfunding you are effectively inserting yet another agent between you and the end-tenant, which simply means adding another layer of costs. It's an expensive way to invest, compared with buying a simple index tracking fund that invests in the stockmarket, for example.
Finally, there's the small matter of what happens when it comes to sell. UOWN offers a secondary market in other words, if you want to sell your shares, you'll have to do so via UOWN. The company aims to sell your shares within three weeks, but it cannot guarantee to do so. With other firms there is a fixed term after which you can vote, along with the other owners, on whether to retain the property or sell it. With The House Crowd, the company appointed to manage the SPV will take 10% of the net profit made on the sale, while Property Moose takes 15%.
In short, residential crowdfunding offers the chance to invest in a highly illiquid, thinly diversified asset (you're buying one house at a time and there aren't a wide range on these sites so far), with expensive management fees. It trades on the British obsession with property, but won't take you any closer to owning your own home. And this is all regardless of whether or not now is a good time to be investing in UK property. In all, we see no good reason to add this to your portfolio.