Guide
UK property crowdfunding: what is left of it
Property crowdfunding was sold on a genuinely appealing idea: buy-to-let returns without a mortgage, a tenant or a boiler. Put in a hundred pounds, own a slice of a flat in Manchester, collect a share of the rent, and sell out on a secondary market when you want your money.
The idea was fine. The exit was not.
The two models, which are not the same thing
Almost every platform in this space did one of two things, and the difference decided who got their money back.
Equity. You buy shares in a special purpose vehicle that owns a building. Your return is a share of the net rent plus a share of any capital gain when the property is sold. You are an owner. If the property is mortgaged, and most were, the mortgage lender is paid first and you get whatever is left.
Lending. You lend money secured on a property, usually to a developer, with a legal charge registered against it. Your return is interest. You are a creditor, and if it goes wrong the security is sold and lenders are paid before the owners get anything.
Marketing put both under "invest in property from 100 pounds" and quoted target returns in the same range. In a rising market the difference was invisible. In a flat market the equity investor's return was the rent minus costs minus the mortgage, which was frequently close to nothing, while the lender kept being paid interest until the borrower defaulted.
What went wrong with the equity model
Leverage cut both ways. A property bought with a 60 per cent mortgage doubles your gain on the way up and wipes out your equity on a 40 per cent fall. Most projections showed the first half of that.
The costs were larger than they looked. Stamp duty on purchase, the 3 per cent surcharge on additional properties from April 2016, letting agent fees, maintenance, void periods, platform fees on both purchase and sale. A gross yield of 6 per cent became a net return to investors of very much less.
The secondary market was the whole product, and it failed. These were five to ten year holdings with an exit that depended on another retail investor wanting to buy your shares in one specific flat. It worked while the platform was growing and new money was arriving. When growth stopped, sellers queued and did not clear. Several platforms ended up extending holding periods, suspending their markets, or moving to a managed wind-down where properties were sold one by one over years.
Valuations were marked, not traded. A share price based on a periodic valuation of the underlying property tells you what a surveyor thinks, not what anyone will pay you today.
What survived
The lending side, mostly. The platforms still open to UK retail investors are overwhelmingly secured property lenders: bridging and development finance with a first or second charge, terms of six to twenty four months, and interest paid monthly or rolled up. That model has its own failure mode, which is the valuation on the security, but it at least puts the investor ahead of the owners in the queue.
Of the equity platforms this blog wrote about between 2016 and 2019, most have closed to new retail investment, been wound down, or been acquired. Their pages are in the closed platforms section.
Questions worth asking any property platform now
- Am I a lender or an owner? If the answer takes more than one sentence, read the offer documents until it does.
- What is ahead of me? Is there a mortgage or senior debt on the property, and at what loan to value.
- How do I get out, and who is on the other side of that trade? If the answer is a secondary market, ask what happened to it the last time sentiment turned.
- Who valued the property, on what basis, and when? A desktop valuation commissioned by the borrower is not the same as an open market valuation.
- What are the total fees, on the way in, during, and on the way out?
- What happens to the property if the platform stops trading? There should be a named third party who takes over managing and selling it, and a plan you can read.
The single most useful lesson from the 2016 to 2022 period is that in property, the return is a forecast and the exit is a fact. Test the exit first.
Common questions
What is the difference between property crowdfunding and property peer to peer lending?
In lending you are a creditor: you lend against a building, you have a legal charge over it, and you rank ahead of the owners if it is sold. In equity crowdfunding you are an owner: you hold shares in a company that owns the property, you get a share of the rent and of any gain, and you rank behind every lender if it goes wrong. The advertised returns often looked similar. The outcomes when the market turned did not.
Why did so many property crowdfunding platforms close?
Three things at once. The exit route stopped working, because a secondary market for shares in a single flat only functions while somebody wants to buy. Property values stopped rising, which removed most of the projected return in the equity model. And the platforms themselves were expensive to run relative to the fees a small property portfolio could generate.
Can you still invest in UK property this way?
Yes, but mostly through lending rather than equity. Most of the platforms still open to UK retail investors are lending against property with a legal charge, rather than selling shares in individual buildings. A handful of equity platforms remain, and the exit question is the first one to ask any of them.