Is property development the new buy-to-let?

Previously irresistible to many property market investors, buy-to-let has lost its sheen. Additional stamp duty on second homes, harsh cuts to landlord tax reliefs (such as interest payments) and the general difficulty of acquiring a mortgage has seen thousands of even seasoned landlords leave the sector in recent times.

 Is property development the new buy-to-let?

property development could find favour with investors

It is no surprise really, given the challenges with being a landlord even in the best of times. Many have had the experience of having to deal with a long void period and no rental income coming. In addition, sometimes it can be a real roll of the dice when it comes to tenants, whether that is late rent payment or general property damage.

Many investors who opt to remain in property are rethinking their strategies and concentrating on development opportunities instead, due to lower forecast house price growth. It makes sense; since there is a greater value realisation potential in construction, rather than depending primarily on rental yields or market appreciation to obtain returns from property.

There is an ethical dimension too, since new large-scale developments in areas where there is a housing deficit will help with the current shortage in supply. At the same time, helping to support mid-sized property developers and house-builders provides employment for many individuals in the housing trade.

The downside, of course, is that an entire development is out of the financial reach of most investors, while joint ventures and other partnership opportunities are generally restricted to high net worth and institutional investors. And this is where investment platforms come in, and crowdfunding may be the answer.

Easier access and faster cycles can result in better returns

Crowdfunding is democratising the property industry by allowing investors to put in as little as £10 on their platform, however with most usually opt to invest much more per project and hope to benefit from impressive returns.

Time is another advantage, because the investment opportunity is geared towards a development rather than buy-to-let, the life of the investment is the length of time it takes for the construction to be completed and the units to be sold. With buy-to-let you are generally looking at a longer period for returns to be realised.

Crowdfunding is a hassle-free strategy

Another advantage of the crowdfunding model is the passive funding aspect where investors are relieved from the stress of having to take part in managing the project or, in the case of conventional buy-to-let, carrying out landlord duties or typically paying an estate agent fees to do so.

This passive strategy makes perfect sense considering the typical investor in a crowdfunding property project is a professional whose day job is demanding enough and does not allow them the space or time to become involved in what is typically a complex project requiring detailed day-to-day management.

Leading platforms put in place a robust due diligence process & project evaluation criteria, another reason to invest with them instead of working directly with a developer. Crowdfunding investors do not simply hand over their funds and wait until their returns are made available to them. Investors can monitor both the on-going construction work and how their property portfolio is performing by logging in to a portal for regular updates.

Crowdfunding as a means of diversifying

Rather than tie-up available funds on just one project, the low entry prices involved in becoming a shareholder of a crowdfunding property development project means there always is the opportunity to diversify by project, time or location. It is possible to spread investment over several platforms for instance, and in doing so minimise any potential risk. This understandably proves extremely attractive to both first-time investors dabbling in the property market, as well as experienced investors in crowdfunding.

Crowdfunding investments – the demand is there

It is abundantly clear that there is a desperate need for homes for individuals, couples and families in the UK today. This is likely to be the case for the foreseeable future while the government concentrates its necessary efforts on Brexit negotiations.

Property crowdfunding platforms have grown in popularity in recent years (see for example HomeGrown, which specialises in property development crowdfunding) due to the appeal of the low costs, high projected returns and hassle-free investments. And after the success of buy-to-let crowdfunding over the last few years it now appears property development crowdfunding could be the next big thing.

 

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