Despite the property crowdfunding industry being somewhat of a new revelation within the UK, this popular investment type has proven to be a thriving alternative to other indirect investment strategies, such as real estate investment trusts (REITs) or investments in shares within listed property companies. As is common with any type of investment process, there are aspects that each investor must consider. For this reason, property investment crowdfunding has become a regulated process in the UK, in order to safeguard investors and fundraisers alike.
In this article, we shall explore the property crowdfunding industry and observe some of the key characteristics which are important to be aware of when considering making crowdfunding investments.
Investments made through property crowdfunding opportunities are regulated in the UK by the Financial Conduct Authority (FCA) and are a regulated activity in the UK as per the Financial Services and Markets Act 2000. Investment transactions made must be permitted by the Financial Services Authority irrespective of whether they are done so through online or offline channels.
In March 2014, the FCA (previously referred to as ‘FSA’) presented new rules to regulate crowdfunding. The purpose of these new regulations are to improve the development of the industry whilst trying to:
- Enhance the appeal of crowdfunding to both investors and fundraisers.
- Improve the protection of investors by ensuring full transparency and the availability of essential information.
- To improve the shape of the financial system within the UK.
- To further promote positive competition across the industry.
Property crowdfunding as a sector has proven to possess the largest growth across the entirety of the crowdfunding industry compared with many alternatives. Fundraisers have the opportunity to open up investment prospects to members of the public or small-scale investors in order to raise the capital required for property developments. Investing in property crowdfunding opportunities allows a selection of individuals to invest in property deals collectively, which may otherwise be out of reach individually, due to a lack of a sufficient amount of capital available. This process allows investors to share the rewards in direct correlation to their investment amount, whilst diversifying the risk which often accompanies investments, as opposed to one person taking all the risk. Property crowdfunding can prove to be a more flexible investment strategy due to the estimates of each property’s value being readily available.
It is important to evaluate the level of appropriateness of each investor within each investment opportunity, as is found with any form of financial investment strategy. This is because of FCA regulations, meaning property crowdfunding platforms are required by law to assess each investor as part of the ‘investor readiness’ portion of the signup process, which generally consists of a group of questions provided by the platform. The purpose of this is to ensure each individual holds the correct capabilities as well as a sufficient risk appetite.
Before you begin to invest in live projects, you will first be required to undergo and successfully complete these aspects of the signup process. It’s advised that you thoroughly review the information on the platform’s website prior to undergoing any signup tests in order to establish what your investment budget will be, as well as knowing and understanding any risks involved. This can be done so by reviewing the platform’s risk warning as well as the FAQs. By doing so you will be able to ensure you fully comprehend the questions succinctly and reduce the potential for any hidden surprises along the way.