FOR IMMEDIATE RELEASE
We apply some clear thinking to this emerging business model
To increase investor confidence, while working within the FCA’s regulatory framework, it is apparent that there is keen interest in crowdfunding platforms (CFPs) developing their own secondary market. Traditionally, unlisted shares, in new businesses or in assets held within Special Purpose Vehicles (SPVs), are viewed as an illiquid form of investment. However, a relatively new market development has emerged.
A London based property CFP has created an active trading exchange to resell shares previously purchased through its platform. This service, which is marketed as the property version of the London Stock Exchange, is available to investors looking to liquidate their shares at any time during their 5-year investment lifecycle. In our view, given that property investment should be viewed as a medium to long-term proposition, we believe there are a number of potential issues to be considered with such models.
An active trading exchange inadvertently creates a conflict of interest, as it is not possible for the CFP to act in the best interests of both the buyer and seller. For example, when a property is listed for the first time, the CFP would typically add value by sourcing and acquiring the opportunity, below market value, offering immediate capital gains and - therefore - reducing the risk to the investor.
However, when shares are re-listed, on the secondary exchange, the selling investor will always look to maximise their return on investment, by achieving the highest price possible. Consequently, this strips away any value to the inbound investor and they are therefore effectively just buying a property at - or above - the actual market value, depending on the list price of those shares. This completely undermines the CFP’s original value proposition of acquiring investment opportunities, which would otherwise be inaccessible to those investors. The CFP essentially switches from identifying quality investment opportunities to simply offering properties, at full market value, on a fractional ownership basis, with no real buyer incentive.
In our opinion, the only real winners, in this model, are the original investors who took advantage of purchasing the original shares and the CFP, who subsequently leverages an admin fee for every resale share transacted.
While developing Propnology’s model, we considered the thorny issue surrounding illiquidity, and how to offer investors a means of exit; we also wanted to ensure that any proposed secondary market supported our contention that property investment should be viewed as a medium to long-term investment, and that investors should only look to liquidate their shares in extraordinary circumstances.
Perhaps the most important issue, in our belief, is to facilitate the best return of an investor’s original investment. A similar approach is envisaged, to that used with investment products, such as fixed-ISA and savings accounts, where an investor effectively forfeits any interest growth should they wish to liquidate before the end of a fixed investment term.
To accomplish this goal, we have created a Share Marketplace which allows investors to re-market their shares, at the original purchase price. Whilst this does not guarantee a buyer will be found, it does create an opportunity, for investors, to resell their shares and receive their original investment back early.
22 Oct 2015 07:00
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