What You Need to Know About Those 'Crowdfund Your Way to Owning Property' Schemes
Companies are helping young people get a financial stake in property, which sounds like a good thing – but these are the risks.
Someone moving house. Photo: VICE
Remarking that millennials will never own their homes has almost become a cliche, it's talked about so much. But for a good reason: most of them won't! They're mostly destined to continue forking out a fortune for a flat-share in an "upcoming" part of town, where their landlord will continue to raise the rent every time a new Santander bike terminal is installed nearby.
However, it seems that elusive dream might be edging closer to reality, as 18 to 34-year-olds try their hands at property ownership via crowdfunding platforms such as Property Partner and Shojin Property Partners – the second of which has seen a 20 percent jump in millennials investing since the business launched last year.
These platforms work by pooling together smaller amounts of cash than your average deposit – usually around £5,000, although some sites go as low as £100 – to invest in a property through a crowdfunding platform. Once the property is sold or rented out, the returns are shared between investors.
True, this won't buy you an actual home, but it does throw up an interesting question: with the housing market closed off to so many young people in the UK, could this be an alternative way in?
I put this to 20-year-old student Nikita Shah, who invested her £5,000 of savings into a property with Shojin.
"Right now, property is such a big issue; so many young people are trying to save up for houses," she says. "Realistically, they're not going to be able to afford anything any time soon, so they're going to have to rent, which means they’re not going to be able to save up to buy a place. The main purpose for me investing in property development is because of the higher returns and hopefully one day being able to save enough or generate enough to buy a place of my own, preferably when I'm not 40 years old."
Clearly, not everyone has £5,000 of savings lying around – but with an average deposit in London around the £90,000 mark, you can see why people with a propensity for saving a little each month might be tempted to invest in one of these schemes, rather than keep on waiting another decade or two, hoping that prices don't rise as exponentially as they have for the last ten years.
The finance group Market Financial Solutions recently surveyed 2,000 UK adults, and found that one in five people have used the likes of crowdfunding to buy property since 2007, jumping up to nearly a third among those aged 18 to 34.
Musing about this peak in interest from millennials, chief executive Paresh Raja tells me, "Property crowdfunding might be an alien concept to older generations, but the ability to pool money together to buy a home and share the returns can be an enticing proposition to those who are struggling to raise a deposit."
That said, Raja does red flag a pretty significant risk attached to jumping into property crowdfunding; one that would-be investors should bear in mind: "Property crowdfunding platforms claim high rates of return, and this can be tempting for those seeking to make a quick profit on their investment. The reality, however, is that the real estate market is cyclical in nature and property crowdfunding has not been around long enough to have dealt with significant economic shocks, like recessions and house price falls."
There are other risks to consider too, says Sam Spurrell, who runs financial planning company Hatch: "Liquidity could be an issue. If you save money in an account, you can take it out whenever you need it for a deposit or emergency, but with crowdfunding you can't always get your money out easily, and if you do you may have to take a low price."
In other words, if everything goes to shit in a 2008-style apocalyptic market crash, you could be left with your pants down.
For Nikita, though, the potential to reap much higher returns compared with leaving her money in the bank was a no-brainer, so she invested it in a development project. This is much riskier, because you're betting on a number of things coming off, like the scheme getting planning consent, or it being built on time and to-spec, which many projects aren't. Mind you, if it all goes to plan she could earn between 18 to 35 percent a year on her investment, compared with an average UK bank interest of no more than 1 percent.
For the risk-adverse, there are comparatively safer investments on offer through these sites, such as buy-to-let schemes, where you share on the rental stream without the hassle of being a landlord. Or mini bonds, where you spread your risk across a bunch of properties, rather than just one, and get a fixed return.
This is what 18-year-old Piar Kahai did, investing £5,000 of birthday money and general savings to help him eventually pay off his student debt.
"I was given 10 percent return per annum [on my investment], so £500 a year, which is better than it sitting around in the bank," he says. "I don't need that money in the short-term, so I can cash out in two years and pay off some of my tuition fees or use it for living expenses."
Again, when it comes to being being gifted large sums of money, Piar is obviously in the minority. But there are young people out there who are sensible with their money, who actually put away a bit after every paycheque – you might be one of them! – and, risks aside, there are some interesting opportunities out there for young people to take advantage of.
As Nikita puts it: "Mostly, people aren't aware of how to invest their money in my generation. They're becoming more aware of it, but it'll be a slow process. Maybe eventually people will start to realise they can do a lot more with their money."