7 March 2016

An easy way up the property ladder?

In June 2015, Juliet Edmondson asked a sensitive and topical question on this blog: does every Englishman really need a castle? Since the summer, issues circling it have surfaced repeatedly in the press: rising house prices, a housing shortage, the trials of generation rent and government attempts to dampen the residential market with cuts to tax reliefs and hikes on SDLT.  Never before, it seems, has the property ladder (at least in parts of the country) been more treacherous, or its first rungs set so high.

As Juliet noted, renting professionally managed flats long-term seems like the best option available to many younger occupiers.  However a step-stool up to the property ladder has emerged lately for those still dreaming of a castle, or even of several: buy-to-let crowdfunding.

Crowdfunding, which began as a way to fund pet projects and blossomed into a conduit for investing in business generally, has boomed. In 2014 the UK loan-based sector was almost three times its 2013 size. By 2015 online buy-to-let platforms had joined the party: spotting a gap in the market, they began offering small shares in flats and houses, an apparently low-risk investment with (at least in places) high-yield potential.

The prospect of buying to let hassle-free and getting a toe on the property ladder proved predictably seductive. With no requirement to stump up for a deposit or become a landlord, and the chance to spread problem tenants and empty spells across properties, the investment is popular with many hoping successive gains will bring forward the day they can buy property for themselves. A flat in Surrey was snapped up by 126 users in 35 minutes, and the sector boasts serious players (one firm is backed by a co-founder of Betfair).

Moreover when platforms are authorised by the Financial Conduct Authority (FCA) (as they must be to cater to most investors) they are subject to reassuring, recently clarified conduct rules. So is there a catch?

A residential property fund on AIM which crowdfunded some of its capital is now in liquidation after rental income failed to cover its set-up costs. But – though yields and, for that matter, tax changes are legitimate concerns – this was a peculiar case.

Aside from the risk of scams, the obvious issue for now is cost: up-front fees for the platforms of up to 5% are common, and they can take up to 15% of the rent (for management) and sometimes a still greater cut of profits on sale. Many also reserve the right to borrow against properties when rent doesn't cover costs, affecting the value of the investors' shares.

But the greatest challenge is the difficulty investors can face when they want to leave and cash in their gains. Unless a house or flat is about to be sold, anyone wanting to realise his investment will have to offer it (usually shares in a holding company) to other investors. Some platforms help match sellers to buyers, but liquidity is rarely guaranteed.

What's more, the spirit at least of a law forbidding the offer of shares in private companies to the public is routinely ignored with impunity and the FCA's approach is relatively relaxed. This approach seems unlikely to last if a spate of scandals or misfortunes befalls the sector.

Standing back, it's also hard not to wonder how healthy all this is at a time when residential prices, especially in London and the southeast, are still so high. Is a country of lifelong tenants with small shares in each other's flats the kind of property-owning democracy governments want to see? 

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