You’re in your local restaurant after work having a relaxing meal and your waiter asks whether you’d be interested in investing in a property with him and the other diners. What would you say? Chances are you’d tell him to serve the coffees, then pay the bill and leave.
But this scenario is exactly what is happening every day on the internet. With the advent of crowdfunding, peer-to-peer lending and the potential access to large sums of money through pension freedom many clients are being tempted to invest in property through a growing number of internet-based companies without really knowing much about those who run such companies, the other members of the “crowd” or whether or not the underlying property investment is sound.
The first rule of property investment is that the value of residential and commercial property can go up or down; even the best managed and funded property developments or investments can fail. It is vital to make sure that you obtain the necessary impartial legal and financial due diligence before investing any of your hard-earned money. Just because the banks and financial institutions have had a bad press over the past few years doesn’t necessarily mean that they aren’t still the best place to invest subject, of course, to taking truly independent financial advice.
Many crowdfunding platforms have dozens of investors who may only invest a few hundred pounds. However, as the sector grows it is anticipated that investors will lend or invest increasing sums and the danger is that the investment could turn out to be in a high risk, unregulated scheme.
This whole investment landscape is changing rapidly, having grown from a handful of crowdfunding platforms in 2012. Today, there are hundreds of schemes and much is expected of the Financial Conduct Authority (FCA) regarding the advice it should provide for consumers and what protection should exist for such investors. Rules were brought in by the FCA in April 2014 regarding the regulation of the sector, which whilst laudable are still evolving and in the meantime the general public is being tempted by persuasive advertisements: For more information about the FCA and crowdfunding click here.
One way of operators avoiding regulation by the FCA is by investors being certified as high net worth individuals by their financial advisers thus allowing them to contract with otherwise unregulated entities. Whilst it is quite understandable that individual investors want to share the returns from property investing which would otherwise be out of their reach – due to the high price of real estate particularly in London and the South East – it is essential that before any sizeable investment is made independent legal/accountancy/tax and financial investment advice is sought.
And, don’t think that the authorities are rushing to provide individuals with co-ordinated protection – the Land Registry recently confirmed that they have to register sales of plots within land banking schemes if all the necessary legal formalities have been met for that sale. They cannot refuse to process applications even if they suspect that the seller has been operating an illegal collective investment scheme or misrepresented the value of the land sold! The FCA does not itself intervene in land sales although it estimated that land banking schemes have cost UK investors as much as £200m and yet the key land regulator seems to be washing its hands of playing any active role in protecting potential investors.
Don’t just take my word for it: Goncalo de Vasconcelos co–founder of Syndicate Room a well known crowdfunding platform was quoted in The Times on 3 March 2015: ”Equity crowdfunding can be a beautiful thing, but it has to be sustainable – and that means investors making money in the medium- to long-term. Otherwise, it’s just hype and the sector will be dead in three years’ time” The writing is on the wall: if you are tempted to invest in one of the plethora of property schemes that are currently on the market make sure you do your homework first, but remember that if it looks too good to be true…
EXPERT VIEW: Marcus Reilly, MD of ifa.1 Limited, Nottingham | website
When considering investing in a crowdfunding platform, investors need to ask themselves how liquid is the investment opportunity and how easy is it to get their money back.
No matter how good the investment property looks, or how positive the yield (share of rental income), there may be no other investors willing to buy their shares when they want to sell.
This is a real concern and should be seriously considered before a single penny is invested; and, don’t think that these problems are just limited to unregulated platforms. A major UK life insurance company got into trouble a few years ago when one of their property funds turned out to be nowhere near as liquid as investors first thought. A similar fund invested in a number of freeholds, which also ran into problems of illiquidity when a relatively small number of investors wanted to withdraw their funds and there were no buyers; the scheme was subsequently suspended.
Those looking to invest in property may be much better off by investing in regulated property funds, which offer a degree of protection, that would be much better diversified and have shares or units that can be sold much more easily. The additional benefit is that such schemes may also be more tax efficient.
The bottom line is that whatever investment opportunity is being considered it is essential to get as much advice as possible from both regulated financial advisors as well as from the legal profession who can advise on the underlying legalities of such investments.