A post by John Friis, MD and founder of Watermark Homes Limited.
Property Development and Crowdfunding: A Developer’s Perspective
I recently gave a talk at a 1-day event organised by the co-founders, Atuksha and Davin Poonwassie, of the online, fundraising platform Simple Crowdfunding. My talk was entitled “Property Crowdfunding – How to get your project funded through the crowd”.
This course took place in the deliciously unique surroundings of HQS Wellington, a WW2-era Grimsby-class sloop which has been moored in the Thames since 1948. Today, it serves as a venue for corporate events, academic seminars, parties and the like.
The audience, all property professionals (predominantly developers), were treated to a series of engaging and informative talks. These concerned various aspects of the crowdfunding process. From maintaining financial compliance to an explanation of the ‘project finance stack’ to engaging with ‘the crowd’.
For my part, I shared my own experience using Simple Crowdfunding. We did this in May 2018 to raise equity for one of Watermark Homes’ developments, our 5-apartment office-to-residential conversion in Borough Green, Kent. Davin and Atuksha were kind enough to allow me to reproduce and elaborate on some of what I spoke about.
For clarity (and because I had plenty to say!), I’ve divided this post into two parts. The first part, here, focuses on the benefits of crowdfunding for property development. You can read the second part, ‘Ten Top Tips for Property Developers’ here.
What is Property Crowdfunding?
Property crowdfunding is when a large number of people (the ‘crowd’) purchase a property, or development together, usually via an online platform. Each investor in the crowd owns a small share of the property and takes on a corresponding percentage of the risk and return made from that project.
Why use Simple Crowdfunding for Property?
Firstly, property developers will be aware that engaging with one’s investors can be surprisingly time-intensive. The impact is felt most keenly at two key stages of the development process. The first is when setting up a new SPV (Special Purpose Vehicle) prior to the acquisition of the development property. The second is during the construction phase when providing one’s investors with updates on how matters are progressing.
Simple Crowdfunding takes care of these two responsibilities on the developer’s behalf. They deal with all the KYC (know your client) and AML (anti-money laundering) requirements that investors need to provide to the developer’s and the debt lender’s solicitors. They also disseminate any written or video updates that you wish to provide to your investors and provide a private online forum for any questions that your investors may have.
Secondly, the platform aids effective developer-investor interaction, particularly in the initial, formative stages of the relationship. When dealing with individual investors, discussions between the developer’s and investor’s legal representatives about the content and wording of the SPV’s shareholders agreement occasionally become unnecessarily protracted. This is minimised to a large extent when investors come onboard through the platform.
Thirdly, the platform may very well save you money.
Individual investors or firms providing private equity or second charge mezzanine finance may request that the developer provide an undertaking for their solicitor’s fees. This does not apply to investors in ‘the crowd’. Their legal fees are their responsibility.
It may also be the case that developers are able to offer a lower percentage of the expected profits or lower returns to ‘the crowd’ for a particular development project than they might otherwise do with individual investors investing larger sums of money. Obviously, this is not a given!
Fourthly, Simple Crowdfunding is a Financial Conduct Authority (FCA) authorised and regulated platform. Your investors will take comfort in the fact that the platform has this badge of regulatory approval. Similarly, developers can take reassurance in the fact that they are conducting themselves and promoting their development opportunity in an FCA-compliant manner.
5. Long-term play/Butterfly effect
Fithly, when you have one investor in a development project, and that project is successful, generating the expected returns, your investor is likely to a) reinvest and b) to tell other people about their experience. Now imagine that multiplied by 10, 20, 30 or more investors per project.
Building an investor base takes time. In this respect, an online platform can be a real blessing. Investors place their hard-earned money with people they trust and like. Then your project makes its expected profits for your ‘crowd’ and the crowd likes the way you’ve handled yourself and the project. As a consequence, the next time you want to raise some equity, your crowd will be ready and willing to come along for the ride once again.
Finally, click here to read the second part of this post, entitled ‘Ten Top Tips for Property Developers‘.