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Alternative Finance and Property Development

Alternative Finance and Property Development
February 20, 2020 Hugo Fairey

This week we look at how investors and alternative finance platforms like Brickowner are changing the way property developers are raising capital for their projects.

The term “alternative finance” refers to a specific phenomenon that has taken hold of the UK’s finance sector – that is, the arrangement and deployment of investment by consumers to businesses outside of traditional institutions. Within property, examples of this include, investors aggregating smaller sums via a platform to provide funding to property developers for their builds. Investors then receive a share of the profit when the build is completed and sold.

House building and the decline of smaller property developers

Thirty years ago, small or medium sized developers built four in ten new homes in the UK but now face dwindling opportunities due to the financial crisis, complicated public procurement processes and competition from major housebuilders. As a result, these developers now build only one in eight homes. A report from 2017 found that over the past 25 years, the number of operating small or medium sized property developers has been diminished by a dramatic 80%. Since 2008, accessing the capital required to finance residential developments has become a much more onerous process and consequently, traditional lenders are increasingly reluctant to approve funding.

Alongside a growing population, this has contributed significantly to the current housing crisis. A backlog of latent demand in residential property has created a shortfall of up to 2.3 million homes over the last 20 years leading to significant market demand for the construction of new-build properties.

Small and medium sized developers hold the key to solving this crisis by ensuring that adequate accommodation is added to the market. According to research conducted by the Home Builders Federation (HBF) in 2017, reviving the number of smaller developers to 2010 levels could increase output by 11,000 homes a year. Furthermore, returning to 2007’s levels could see 25,000 more homes built each year.

A Funding Solution

To reach their full potential, smaller sized developers need to have access to the capital required to pursue development opportunities. They can do this by looking beyond mainstream lenders and taking advantage of the range of alternative finance options now available to them.

The main advantage of capital from alternative finance companies relative to traditional banks, is that they tend to be run by smaller, more specialist teams. As a result, they are more nimble and can consider prospective projects on a case-by-case by basis. The property sector is defined by difference; all projects have their respective costs, risks, benefits and opportunities, so this is undoubtedly a strength when comparing to banking’s “one size fits all” approach.

The benefits that platforms, such as Brickowner, offer to investors is to unlock a potential investment market that has been overlooked by the traditional banks for too long. In the past investing in property could involve convoluted arrangements, across a large number of parties all wanting a share of fees. By removing the bureaucracy and intermediaries using tech, platforms disintermediate the process, potentially increasing returns that then can be passed onto investors.

The alternative finance industry has created a triple win: for smaller developers who now have a new way of accessing funding, for investors who can now invest in property simply and easily, and by building more homes, the effects of the housing crisis can start to be alleviated. As ever, investors should bear in mind the key risks of taking part in this type of investment.