Crowd funding is revolutionising start-up funding. Now, consumers can directly finance the projects that mean something to them, rather than waiting for a publisher, or a manufacturer or a bank. “Fabulous”, I hear you say! Well, yes, I suppose it is. Thousands of products have come to market thanks to crowd funding; everything from video games to decks of cards to rock gigs. This surely is a brave new world in which power is pulled away from the banks and emptied it into the hands of the people.
The similarities between funding the construction of a building and the manufacture of a product are plain to see. However, there has been a recent shift into the group purchasing of residential property investments. Property portfolios are a time-honoured business model, tried and tested, they form a significant pillar of the property market but differs substantially from the comparatively simple process of product creation.
The global recession was triggered by of the collapse of the housing market in the USA. The banks were rating high risk borrowers as low risk borrowers because the grant of a loan meant a bonus in their pocket. Then, all of a sudden, the rate of default sky-rocketed.
In a nutshell; the reason for the crash was that Banks lost sight of the long term plan, in favour of the short term gain. Although I hesitate to endorse more red-tape around the property market, without substantial and effective regulation around this type of funding, we run the risk that the funding platforms will take longer and longer odds in pursuit of higher and higher profits.
At the moment the FCA plays no role in the regulation of the crowd-funded property investment market, which staggers me. We need regulation and we need it fast.
That’s why he predicts that a number of these equity platforms will be the first to fall when the property market starts to go sour, which might stop the nascent property crowdfunding market dead in its tracks. “When crowdfunding platforms start falling, it could take 10 years for retail investors to regain trust in the sector,” he cautions.