Why should Property Developers crowdfund equity? As internet-based crowdfunding platforms like CrowdWithUs, Propnology and Homegrown gain traction by accumulating committed communities of investors, they are beginning to challenge traditional forms of equity for property development projects such as family offices and private equity funds.
Traditionally equity investments in property development projects have been the exclusive domain of Private Equity Funds, Family offices or individuals with sufficient wealth and expertise. Due to the time, effort and expertise required to vet and administrate each individual investment, it is unusual to find equity funders willing to invest less than £1m in a project.
Most equity investors also invest as part of a diverse portfolio of investments which further raises the overall level of capital required. Combine this with the difficulty of finding an investor interested in the specific project a developer is undertaking and the obstacles for investors and developers in finding a suitable partner to work with come clearly into focus. The risk profile of such investments means that geography, size of the project, property type and scope of development are all relevant factors.
Further problems for developers result from the time and effort involved in getting an investor on board. It is obvious where the balance of power lies in a relationship where the developer is reliant on a single investor. The developer may find an investor who is potentially interested in the project, leap the hurdles of detailed due diligence and work their way through what is often a slow process involving multiple levels of approval only to find that the investor has changed their mind.
Let’s assume the developer is able to juggle this alongside the site acquisition process without the vendor suffering deal fatigue and deciding to sell to another purchaser., They will then find themselves in a position where, if they want to proceed, they have little choice but to accept the terms on which the investor is prepared to invest. This is likely to result in a situation where the investor dictates terms to the developer while retaining ultimate control in the event that things do not proceed as anticipated.
The barrier to entry to debt funding for property development projects rests at a much lower level. Debt is typically a much larger component of a typical property development project and so the project size required for debt funding to be viable is smaller. In the aftermath of the global financial crisis, high street lenders largely exited property development lending. Their exit created space for specialist providers of senior debt and mezzanine finance to emerge. A strong and vibrant market now exists offering more competitive products than ever before.
Through a combination of senior debt and mezzanine finance or stretch senior debt – a blend of the two – it’s relatively easy to finance up to 90% of project costs and 65% of the end value of a property that is being developed. The global financial system is awash with cash due to low-interest rates, a sustained period of strong corporate profits and the injection of money into the global financial system via quantitative easing in America and Europe, so lenders are keen to deploy funds into viable projects.
While crowdfunded debt for property development is also available from funders and platforms such as CrowdProperty, Ratesetter and TheHouseCrowd, given the wide and competitive availability of senior debt and mezzanine finance, it’s hard to see why any developer should think that crowdfunding debt should be advantageous to raising senior debt or mezzanine finance from any one of the plethoras of specialist development lenders in the market.
In contrast, equity crowdfunding represents a revolution for developers. By enabling developers to raise smaller amounts of equity than has traditionally been possible and connecting developers with small scale investors seeking the level of returns traditionally only available to larger-scale investors, a new marketplace has been created. Equity Crowdfunding has democratised equity funding for property development projects, creating a win/win for developers and investors.
Equity Crowdfunding enables developers to set the terms they are willing to offer and make an FCA compliant offer to investors. Being able to do this means developers can raise whatever amount of equity might be required on terms that are attractive to both investor and developer. This creates a new paradigm for investors and developers, offering investors access to the returns offered by large scale property development projects and enabling developers to set the terms on which they are prepared to accept investment and remain in control of their project.
So, why should Property Developers crowdfund equity? It offers an FCA compliant method to raise equity for their projects and grow their business while retaining control of their projects and the terms under which the investment takes place. By releasing cash at a point in the development cycle when they are able to offer a high degree of certainty to investors as to the likely timescale of the project and return on investment, property developers can release cash to start new projects before their current projects are completed.
Our raise of £1.13m of equity on our Gloucester project via CrowdWithUs has helped blaze the trail for UK property equity crowdfunding. We are only the second UK property developer to have crowdfunded over £1m in equity. We are soon planning to launch a £4.5m raise which will be the largest ever equity raise by a UK Property Developer. The equity structure on this deal will be an innovative blend of Private and Crowdfunded equity. That structure will be another first.
We have crowdfunded a total of around £1.5m in equity for our projects in the last 12 months and plan to raise £10m in equity for new projects in 2019. If you’re interested in learning more about our experience in crowdfunding equity for our property development projects, read my article on that subject by clicking here.
If you would like to keep up to date with MELT Homes, our developments and how we raise equity for our projects follow me on Instagram, Facebook or Linked-In or visit my personal website at www.maindonald.com.