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Your 3-Point Guide to Equity-Based Property Crowdfunding

Updated on February 3, 2015
Crowdfunding opens up the option of property investment to the smaller UK investor
Crowdfunding opens up the option of property investment to the smaller UK investor

Investing to address the demand for rented accommodation in the UK

Now that bank savings offer paltry returns and the criteria for lending have become much more stringent and inflexible than they have been for many years, many investors are looking for alternative ways to become involved in property investment.
Using the power of property crowdfunding in order to pool funds with other investors in order that the risk might be spread is now a viable and indeed mainstream alternative method for investing in property assets in the UK where there is an ongoing shortage of quality residential housing. It seems that property crowdfunded investments in the UK are here to stay.
There are two main forms of property crowdfunding generally available; equity based investments and debt based investments but this article concentrates on equity based options as they are characterised by ownership rather than being debt based.

When choosing an equity-based crowdfunding option there are a number of different platforms available to choose from so what should the shrewd investor concentrate on? Here are three of the main points to look out for:

1 – The Quality of the Underlying Assets

What types of property does the crowdfunding platform you are considering vet and purchase on behalf of its investors? Is it new build property in city centre locations, apartments built by the most trusted developers in the business or are they distressed refurbishment schemes located in economically challenged parts of the country?

Bear in mind that the claims you may see indicating higher returns on refurbishment projects are based on the need for many factors falling into place at just the right time and there is no guarantee that this will happen.

Property prices are largely driven by demand and demand is fuelled by scarcity. Exiting from a development is usually much more difficult in out of town developments. It’s worth asking yourself, when considering a property, “would I like to live here?” The quality of the assets you are investing in is a key factor when making a decision and should never be overlooked in the search for higher returns.

2 - Regulation.

Equity crowdfunding platforms are required to operate under the regulations of the Financial Conduct Authority, (FCA), in the United Kingdom with the best protection being offered if the crowdfunding company is an appointed representative of an organisation that is authorised and regulated by the FCA.

What this means in practice is that the investor’s funds will be held in safe keeping by the authorised firm until the amount that is required has been reached. In addition, this arrangement means that the crowdfunding platform in question has to substantiate and verify any claims it may make in its investment memorandums because these are financial promotions and must be presented in a way that is clear, fair, and not misleading.

Furthermore, any potential investors have to demonstrate that they clearly and fully understand the investment proposition and that they consider it to be appropriate for them. It’s worth doing a bit of research on the selected firm that will be overseeing your intended platform’s compliance with FCA regulations. Consider their track record and the total value of all investments that they have launched on their clients behalf.

Always be wary of regulatory shortcuts, could it be that your proposed crowdfunding platform is participating in equity crowdfunding whilst actually just trying to “check the block” on regulation with an interim permission for a process such as P2PL, (peer to peer lending) which does not fully describe the actual activity that they are engaged in.

It is an expensive business to become, and remain, an appointed representative so the costs of doing so must be passed on to the investor in one way or another but it is often worth paying a little extra in return for added security.

3 - Customer service

As obvious as it should be, this is often overlooked by many crowdfunding platforms who seem to think that they simply have to post an investment opportunity online and investors will be knocking down their doors in order to invest without the facility of being able to talk to someone in order to better understand the proposed investment.

Make sure that the crowdfunder you are considering has a contact number prominently displayed on their website. If it doesn’t, make sure that a knowledgeable professional is available to get back to you promptly to explain the investment and address concerns that you may have.

Good quality, attentive and well informed customer service could be regarded as a dying art these days. Ensure that you invest with a property crowdfunder that fully respects your investment and the potential risk that it represents to you, taking the time to have an honest conversation with you, about your plans to invest.

In Conclusion

Always buy quality and stay safe by making ensuring that your proposed property crowdfunding platform is regulated in a serious way. If you are unable to get someone on the telephone to discuss the investment that is being offered on a website or elsewhere, always think twice before you part with your hard earned money.

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