The rise of property crowdfunding
It was illegal to operate the business model in the USA before the ‘JOBS’ Act was passed in April 2012 which made crowdfunding lawful in the States (and even today there is still a high net worth qualification criteria where people have to earn over $200,000).
In the UK it was also believed to be illegal due to the regulations surrounding Collective Investment Schemes. However by creating a legal structure that made use of a few narrow exemptions in the Financial Services and Markets Act, The House Crowd was able to start trading in March 2012 and became the first property crowdfunding platform in the world. The Fundrise platform in the USA followed shortly afterwards.
Since that time, the regulators have relaxed the rules and all types of crowdfunding platforms have flourished, with the property sector experiencing the single most impressive growth. In just a few short years there are now property crowdfunding platforms in countries as diverse as France, Italy, Egypt, Singapore and the Middle East.
According to Massolution’s research into property crowdfunding, the property crowdfunding niche is currently raising $2.5bn a year and is forecast to multiply 100 fold to reach over $250bn by 2020 [Source: Massolution CF-RE 2015]
This growth is partly due to the relaxing of regulations that have allowed crowdfunding to expand as it was believed it would help stimulate the economy and as a consequence of people’s dissatisfaction with banks and other institutions.
In the UK, all crowdfunding platforms must be authorised by the FCA and have to undergo a thorough due diligence process to assess suitability so that the public can be assured they are dealing with a legitimate well run company.
In the UK, The UK Crowdfunding industry has grown from £267m in 2012 to £666m in 2013 to £1.74bn in 2014. [Source: Nesta and University of Cambridge Survey November 2014]
It is estimated that in the UK in 2016 the peer-to-peer market will generate around £5bn and grow to £36B within a decade. [Source: Research and Markets UK Market Peer to Peer Lending Facts and Figures 2015]
Improvements to technology have also boosted the level of growth. Web platforms have allowed property developers and investors to access a much broader audience, to gain attention for their projects and raise investment outside of the traditional circle of friends, family or the banks and to do so very quickly. A platform can sometimes raise hundreds of thousands of pounds for a developer in the space of a few hours rather than waiting weeks or months for a bank to grant them a loan.
By using small amounts of money from a large pool of smaller investors, crowdfunding has become highly accessible and provides huge benefits for investors, property developers and landlords.
It is not possible to predict the future but what seems clear is that property crowdfunding will be on a very steep growth trajectory for the next few years at least.