Growing interest in property crowdfunding under new models

The Financial Markets Authority says there has been a growing interest in property crowdfunding with promoters proposing various business models, including the scheme offering Kiwis a new way to enter the housing market by buying shares in a house share company.

The Ownery is offering people the chance to grow their savings through the housing market because many, particularly younger Kiwis, face an uphill battle trying to save for a deposit as the median price in Auckland edges toward $1 million and banks require minimum deposits.

It clips the ticket on the investments by charging those buying shares an up-front entry fee of 4-5% of the amount they put in (set at a minimum $500), and the co-founders' associate company, Houseshare Management Ltd, will manage the properties, charging an annual management fee of up to 1.5% of the property’s value.

The business model is similar to residential equity crowdfunding but doesn't require The Ownery to have a crowdfunding licence. Rather, each company has to put out a product disclosure statement (PDS) that requires Financial Markets Authority approval.

The regulator won’t disclose specific details on any of the various models being proposed at this stage.

Another company, Property Mogul, has previously said it is looking at setting up a crowdfunding model for buying property but is yet to make a formal application for a licence to the market regulator. It may yet opt for another business model, it says.

One of the sticking points for licensed property crowdfunding is that the platform can't offer property from people associated with it under a so-called “non-association test.”

The FMA hasn't yet received a PDS from The Ownery which is yet to purchase its first house under the house sharing concept.

"These offers will be regulated offers under the Financial Markets Conduct Act which mean there are various obligations relating to the form of the offer information and conduct of the offeror, the FMA says.

Given the recent interest in property crowdfunding, the FMA has provided a draft information sheet to industry participants for comment, which outlines what features participants should include into crowdfunding services that fall outside the eligibility criteria for a licensed crowdfunding service.

The regulator's intention is to save time and effort for participants and itself before going public with a business model that doesn't meet the rules.

The information sheet says management of the investment property is a key component of property crowdfunding and if the service includes an association between the service provider and the property manager for all offers, it won't meet the non-association test.

Service providers should ensure any property investment offer allows shareholders to retain key voting rights over the investment and for shareholders to retain control over the property manager and the terms of the property management agreement, the FMA says.

The Ownery's business model is based on house sharing businesses in the UK and US. Each company will own only one house and shareholders can exit anytime by selling their shares with no fee charged unless the shares are sold to a third party. Shareholders can request the house share companies buy their shares at existing published value and share valuations will be updated monthly based on QV data and twice-yearly from a registered valuer.

The value of owners' savings will move in step with the housing market, whether it goes up or down. If property prices do fall, no additional funds will be required by shareholders but debt will be used to cover any short-term shortfall covered until the property can be sold and any proceeds distributed to shareholders.

No bank debt will be used by house share companies to purchase the houses but each constitution will allow borrowing of up to 20% of the property's value for buying back shares of those exiting and other big ticket items not covered by insurance.

(BusinessDesk)