Crowdfunding And Peer-To-Peer For SIPP And SSAS
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We're delighted to present an article written by Ryan Weeks, originally published on AltFi, the world’s leading news site for the fast growing alternative finance space, which includes and crowdfunding, peer-to-peer lending, marketplace lending and invoice funding
This particular fellow loved the idea of buying into property ownership on the cheap (for as little as £10 on some platforms), and was brash in his assertion that property is a typically safe investment. How very British of him.
Ryan Weeks, Editor of AltFi
What To Consider When Investing In Real Estate Equity
I recently learnt that a close friend – one who, incidentally, knows next to nothing about alternative finance – was considering putting some money into Property Partner *. This particular fellow loved the idea of buying into property ownership on the cheap (for as little as £10 on some platforms), and was brash in his assertion that property is a typically safe investment. How very British of him.
The real estate equity crowdfunding space, to date something of a sleeping giant, has enormous potential. Although the likes of Funding Circle and RateSetter are doing their utmost (quite successfully, I might add) to glamorise SME/consumer debt investment, such channels lack the raw magnetism of property ownership.
If we believe that real estate crowdfunding has the potential for mass appeal, what then are the risks that prospective investors ought to be aware of?
Let’s hone in on an existing deal. St David’s Lodge is currently live on the Property Partner platform. There’s room for £1.2m of equity investment. But how does it all work?
Property Partner is authorised and regulated by the FCA. Investors are able to participate in deals on the platform for a minimum investment amount of just £50, for a one-off 2 per cent fee. The St David’s Lodge deal pays a dividend yield of 3.01 per cent, and carries a 120.07p price per share. 10.5 per cent (+VAT) of the rental income is deducted by Property Partner in order to cover the costs of advertising, letting and management. The dividends that are paid to investors are calculated as the gross rent collected from tenants, minus the various property-related costs. Dividends are paid monthly. By investing, you are acquiring a small slice of equity in the property – and you have the chance of benefiting from capital appreciation. Property Partner deals are generally funded by hundreds of investors – thousands in some cases.
The platform provides investors with a weight of pre-investment information. There are 12 photos of the St David’s Lodge property. You can access floor plans and a map of the area. There’s an illustrative total returns graph, with more granular financial information, reports and data available if you’re registered with the platform. Most helpfully, there’s an exact breakdown of what the £1.2m goes towards: ie. how it is split across the purchase price, stamp duty, legal and professional fees, furnishings, etc. You can see a solicitor’s report and a surveyor’s report. The platform makes House Price Index data readily accessible in graph format. In general the level of disclosure is excellent.
To be clear, the fundraising target on a Property Partner deal is a blend of the purchase price (which is supported by a chartered surveyor’s physical inspection and valuation), plus all third party purchase costs and other costs, minus the cost (in some cases) of a mortgage – which we’ll come onto. Valuation updates are published on the 5th of every month. Investors have access to an information dashboard, which they’ll be able to use in order to stay abreast of latest valuations, dividends received, forecasted dividends, gains or losses on the value of the property and total returns.
A key point for investors to consider is track record. Property Partner – arguably the leader in the real estate equity crowdfunding space – has financed 147 properties over the course of a year. But it’s only been around for 12 months, and as such it’s very difficult to ascertain how the platform might fare in tougher market conditions. The same might be said for its peers.
To give Property Partner its dues, the platform clearly outlines the key risks of investing – and these risks are broadly applicable to its competitors too. The first major risk is that the value of your investment may decline. As an equity investor, you stand the chance of benefiting from an uplift in the value of the property that you’ve invested in. But of course you also share in the downside risk. There’s a number of problems that could crop up. The resolution of a plumbing issue with a property, for example, would have to be funded using future rental income – which of course eats into an investor’s bottom line.
Property Partner has an active secondary market. Around 50 million shares, worth approximately £3.5m, have changed hands via the exchange. So the promise of liquidity is there. But as the Property Partner website itself explains, liquidity is not guaranteed. There has to be a willing buyer. The platform provides “5-yearly exit protection”, meaning that all investors are offered the chance to sell out of their investments at market value once five years removed from the point of investment. Bear in mind, however, the following caveat: “Even at this point, the timing and ability to exit will depend on completion of a transaction to sell the underlying property. This transaction could take several months.” The platform does not charge any resale fees.
“Variable income”, as Property Partner defines it, is another key risk area. The platform relies upon third parties to provide an estimate of the gross rental income that will be delivered by properties. But the reality may be that lower rates of rent end up being secured, or indeed that rent is ebbed away in order to cover for unforeseen circumstances. If, for example, a fire were to occur at a Property Partner property, and was not covered by insurance, then the platform reserves the right to obtain a loan (secured against the property) in order to rectify the damage. That loan would then be paid off using future rental income.
The final major risk consideration, according to the platform at least, relates to the instance of disposal. Imagine that the property you’ve invested in is damaged by flooding. It may well be the case that Property Partner then chooses to simply dispose of the property, returning net proceeds to investors. In a stressed scenario, it’s unlikely that those proceeds will be equal to the value of the initial investment.
But there are other risks to consider.
The St David’s Lodge property is 50 per cent “geared”. In other words, half of the purchase price of £2.25m has been covered by a mortgage. Investors that enter into the deal will be buying into a leveraged position. That means that both the potential upside and the downside risk are accentuated. Investors must understand that they are subordinate to the mortgage provider. If something goes wrong with St David’s Lodge, it’s the outstanding sum of the £1.125m mortgage that will be repaid first and foremost.
Every property that has been funded by the platform is separately ring-fenced from the assets and liabilities of Property Partner. Client funds are also segregated, and all money held in a Property Partner account would be paid back to investors if the platform were to enter into financial distress. Were the company itself to go under, we understand that an alternative manager “could” be appointed to continue to manage the outstanding portfolio.
That’s but a brief summary of what investors ought to be thinking about when sizing up an investment in a platform like Property Partner. The proposition is unquestionably compelling, but rather than succumbing to overenthusiasm, a “look before you leap” approach is advised.
Bearing in mind the above – which is admittedly a fair bit to consider – does the 3.01 per cent dividend yield represent good value for money?
Rupert Taylor, CEO of AltFi Data, weighed in:
Investors will undoubtedly be attracted to this product by the prospect of continued property price appreciation. In that context it is worth observing that the available yield is a good indication of the valuation of the underlying asset class. A 3 per cent yield would indicate that the asset class is at the upper end of the historic valuation range. Over the past 20 years UK rental yields have ranged between 3 per cent and 8 per cent. This would suggest that the scope for on-going capital appreciation may be limited. Indeed it may indicate that at some point there is a risk that capital values fall. For the lower risk investor who is more attracted to income alone it is worth noting that other property lending platforms offer secured yields of around 7 per cent against well under-pinned LTV’s – but of course without the risk or reward of exposure to capital values.
I’ve steered fairly clear of macroeconomic risk in this column – focusing instead on the structure of the Property Partner platform.
Here, however, AltFi Founder and the FT’s “Adventurous Investor” columnist David Stevenson, offered his thoughts:
Whatever the structure of any investment such as this, one has to eventually return to what we boring investment types call the ‘asset class characteristics’: ie. the blend of risks, and potential returns that goes with any “genre” of investment. Or to put it another way, what are the answers to the following three questions:
1. How am I being properly rewarded for the level of risk?
2. What are the chances of me getting back what I invested?
3. What are other alternatives that might provide a better investment?
The answers to each of these questions lurk within a general discussion about the South East England residential real estate asset class. Let's start with question 1. Am I being rewarded adequately for my risk? I would suggest that there is a fair amount of risk here. There’s the leverage to contend with – leverage helps juice up the upside but it also accelerates the downside. There’s operational considerations which are simply the fact that you might suffer diminished income from voids. But most importantly there is a decent chance that much of the property in the South East is simply over priced and due a decent price fall. I think that even housing markets can’t escape economic fundamentals and South East property looks to be priced to perfection in an area where we might see rising interest rates. More to the point I can’t see too much upside in the future. But for taking all those risks you are rewarded with a measly 3 per cent plus the possibility of some capital upside.
I think you also need to detach your analysis of risk and return and ask whether you will actually get your money back: ie. what is the risk of absolute capital loss. With this investment I think you stand a better than average chance of getting your money back in full BUT the chances of an absolute loss (arguably a small one) are not insignificant.
For me though the killer question is the last one – how does this potential return stack up against the alternatives. 3 per cent annual income plus some geared (50 per cent) upside sounds distinctly underwhelming when compared for instance to investing in London stock market listed real estate investment trusts. These put their investors’ money into commercial real estate. The average yields on these vehicles are well above 4 per cent, leverage is also usually built into the structure, and you have an easy-to-access investment vehicle that can be sold in a flash… or maybe a click! So for me there are simply better alternatives than this.
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Crowdfunding And Peer-To-Peer Risk Warning
When a platform has been assessed and approved by a SIPP or SSAS operator, this does not imply that any loan or investment opportunity is endorsed in any way. A SIPP or SSAS operator's due diligence review is limited to ensuring the processes and procedures of the platform are in line with both FCA and HMRC principles. It's entirely your responsibility for carrying out your own due diligence on any loan or investment opportunity before agreeing to lend or invest your pension money on a platform. As a SIPP or SSAS operator will continually review platforms from a regulatory perspective, it's possible for a platform to become 'unapproved' if something changes.
With peer-to-peer lending, your capital is at risk if you lend to individuals and businesses. You may lose some or all of the capital lent if the borrower defaults and is unable to meet its liabilities. Historic loan default rates are not necessarily indicative of future default rates. In addition, lending is an illiquid investment, which means you may not be able to access the capital you lend for the duration of the loan period, even if the platform offers a secondary market. Investing in any business involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdfunding is generally targeted at investors who are sufficiently sophisticated to understand the risks and make their own investment decisions, based on their knowledge, experience and financial capacity. Neither crowdfunding nor peer-to-peer lending is covered by the Financial Services Compensation Scheme. The tax treatment of your investment is dependent on your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of crowdfunding investment or peer-to-peer lending, you should consult a suitably qualified independent financial adviser.