Property experts are warning that buy to let crowdfunding is a huge risk for investors as the market develops.
In a special paper, the Council of Mortgage Lenders (CML) gives a list of reasons why property investors should steer away from crowdfunding opportunities.
However, the CML, which is the trade body for banks and building societies lending buy to let mortgages does have a vested interest in steering potential investors away from an alternative means of funding and investment.
The report also highlights that property crowdfunders could see their returns diminished by tax and management bills tied to their investment – like corporation tax on chargeable gains on disposal of a property, the cost of repairs and tax on rental profits.
In an analysis, the CML explains:
- No one knows how crowdfunding will work in a downturn because the phenomenon has emerged during an upturn in the market
- Investors ploughing cash into a limited company running an investment platform need to consider what happens to their money if the firm falls into financial troubles or goes into administration
- The effect of crowdfunding on property markets is also unknown – and a recent report from the Royal Institution of Chartered Surveyors warned large-scale crowdfunding could make the UK property market unstable
Because many property crowdfunded investments are hands-off, somewhere a manager or administrator will also be taking a fee, reducing yields even further – and yields will depend on how well managers do their jobs and the size of their fees.
“Crowdfunding is a small market in comparison to the buy to let market,” said a CML spokesman.
“It’s easy to see the attractions for less well-off investors who cannot afford the deposit to buy a property but do have enough cash to buy a smaller share in one.
“Crowdfunding offers investors new opportunities, but they do come with some risks and the market is likely to be tested if house prices fall off and people want to take their cash out.“
The spokesman emphasised that investors should make sure they have an exit route if they need their cash back.
The Financial Conduct Authority (FCA), which regulates investment in the UK, is due to open a consultation on crowdfunding soon.
The FCA says crowdfunding regulation is needed to protect consumers as the market has grown by 170% to £1.3 billion in just 12 months.